What is IRS Form 8829: Expenses for Business Use of Your Home
One of the many benefits of working at home is that you can deduct legitimate expenses from your taxes. The downside is that since home office tax deductions are so easily abused, the Internal Revenue Service (IRS) tends to scrutinize them more closely than other parts of your tax return. However, if you are able to substantiate your home office deductions, you shouldn't be afraid to claim them. IRS Form 8829 helps you determine what you can and cannot claim.
Key Takeaways
- IRS Form 8829 is used to claim expenses for the business use of your home.
- To qualify for the deduction, the area you use for work in your home usually has to be your principal place of business, and you can only deduct expenses for the portions of your home that are exclusively used for business.
- Expenses, such as insurance, rent, utilities, and home depreciation, can typically be deducted.
- Form 8829 has four parts used for calculating the business percentage of our home, allowable expenses, deductible depreciation, and any disallowed expenses that can be carried over to the next tax year.
Defining your home office location
Just because you work at home doesn't mean you can write off all the power and water bills in your house. The IRS has very precise language regarding what expenses are allowed for a home office tax deduction:
- First, the area you use for work in your home must be your principal place of business.
- Next, you can only deduct expenses for the portions of your home that are exclusively used for business.
- You can't work for four hours in your kitchen and deduct your new refrigerator, for instance.
- You must have a dedicated area that you only use for business, and only expenses generated by that area can be used on Form 8829.
Legitimate business expenses
Any expenses you deduct has to be directly related to your business. Typical allowable expenses are similar to those allowed for office-based businesses. Common deductions include:
- insurance
- rent
- utilities
- repairs and maintenance
- home depreciation
- deductible mortgage interest
However, your deduction is limited to the percentage of your home that is dedicated exclusively to your business. For example, if only 10% of the square footage of your house is reserved exclusively for business use, you can only use 10% of your home expenses as a business deduction.
TurboTax Tip:
The home office tax deduction can have some audit risk if the dedicated area for business use is not clearly defined, and certain expenses can’t be used if you have a loss from your home-based business.
Using IRS Form 8829
- Part I of Form 8829: You calculate the part of your home used for business. For most businesses, you simply divide the square footage used for your business by the total square footage of your house. If you run a daycare facility in your home in an area that's not exclusively used for the business, you'll have to make further adjustments.
- Part II: You list your total business income along with your deductible expenses. Follow the form's instructions and you end up with the total allowable expenses for the business use of your home.
- Part III: This part is where you calculate the depreciation of the business portion of your home. You'll have to consult the instructions on the form to determine your allowable depreciation percentage.
- Part IV: In the final section, you determine any disallowed expense amount that can be carried over to the next tax year.
Audit Risks and deduction limitations
The home office tax deduction is easy to claim but can be hard to defend. Many working Americans, even those who do legitimately work at home, do not have a specific, exclusive area that is used solely for business. For example, one taxpayer claimed a hallway and bathroom as part of his home office but had this deduction denied since his children occasionally used the bathroom.
Another thing to note is that certain expenses can only be used to the extent of your business income. If you have a loss from your home-based business, you can only deduct certain home office expenses.
With TurboTax Live Business, get unlimited expert help while you do your taxes, or let a tax expert file completely for you, start to finish. Our small business tax experts are always up to date with the latest tax laws and will ensure you get every credit and deduction possible, so you can put more money back into your business. Small business owners get access to unlimited, year-round advice and answers at no extra cost and a 100% Accurate, Expert Approved guarantee.