Form 8829 is the form used by sole proprietors to calculate and report Expenses for Business Use of Home (aka “The Home Office Deduction“).
Step 2: Fill-in your name and SSN.
Step 3: Fill-in “Part I – Part of Your Home Used for Business”
(Click to enlarge.)
- On Line 1, enter the total square footage that you use regularly and exclusively for your business. [Note: When they say "exslusively" here, they really mean exclusively. If you use the space for anything else, you can't count it for your Home Office Deduction.]
- On Line 2, enter the total square footage of your home.
- Divide the square feet used for business by the total square feet of your home, and enter the resulting percentage on Line 3. Also, as long as your business is not a Daycare facility, skip to Line 7, and enter the same percentage that you entered on Line 3. This percentage is the “Business Percentage” of your home. It will be used later in the calculations for determining how much of certain expenses you’ll be able to deduct.
Step 4: Fill-in “Part II – Figure Your Allowable Deduction”
- On Line 8, enter the total profit from your business. (This can be taken from Line 29 of Schedule C.)
- For lines 8-35, simply follow the instructions printed on the form. It may not intuitively make sense while you’re filling it out, but here’s what’s happening:
- In column A, you’re entering and totaling all the expenses that relate only to the business-use portion of your home. (For instance, if you repainted your home office, the costs for the paint job would go here.)
- In column B, you’re entering costs that relate to your entire home (rent, home mortgage interest, homeowners’ insurance, ultilities, etc.). Then you end up multiplying all of these “indirect expenses” by the Business Percentage of your home (from Line 7), thus giving you the portion of these expenses that relates to your home office.
Step 5: Fill-in “Part III – Depreciation of Your Home”
If you own your home, you can include an expense known as depreciation in your Home Office Deduction. Here’s how it’s calculated:
- On Line 36, enter the smaller of the home’s fair market value or it’s adjusted cost basis (the amount you paid for it, minus any amount that you’ve already deducted as depreciation in prior years).
- On Line 37, enter the value of the land that your home is located on.
- Subtract Line 37 from Line 36. The difference (entered on Line 38) is known as the basis for the building.
- Multiply Line 38 by Line 7 (Business Percentage of Home). Enter the product on Line 39. This is known as the Business Basis of Building. This is the amount that you will be allowed to deduct, spread out over a period of several years.
- For Line 40, you’ll enter the percentage of the Business Basis of the Building that you’re allowed to deduct this year. (See the chart on Page 3 of the instructions.)
- Multiply Line 40 by Line 39. This is the amount of depreciation for your home that you can include in your Home Office Deduction this year. (Also enter this amount on Line 29.)
Step 6: Fill-in “Part IV – Carryover of Unallowed Expenses”
Every year, your Home Office Deduction is limited to your profit from your business. If your expenses for the business use of your home exceed the profit from your business, you’ll have to fill out Part IV of Form 8829. (What ends up happening is that the remaining expenses end up being carried forward, and you can add them to your Home Office Deduction in the following year.)
Step 7: Go Outside and Play.