A Guide to Form 8829 Expenses for Business Use of Your Home
What does the American dream mean to you? For some it's buying a house, having kids, or getting married. For others it's sending the in-laws on a permanent vacation. But for another 10 million it's about working for yourself, on your own time, and your own schedule.
A whopping 70% of all full-time workers want to be self-employed. And that compares poorly to the 7% who can actually make the claim. But did you know one of the easiest and most advantageous ways to start a business is to set it up at your home?
Think about it, if you can use part of your house for business purposes, you'll save money on your mortgage, rent, and utilities. You'll also be able to stay with the kids and avoid costly childcare. If you have the drive, determination, and smarts to pull off a home-based business, you'll save a ton of money.
One of the hurdles many face is trying to figure out how to claim all the expenses associated with a home-based biz. The who, what, when, and how can intimidate most fledgling entrepreneurs. Well, we're going to clear that up right now, with a breakdown of Form 8829 AKA Expenses for Business Use of Your Home.
On Line 1 you need to figure out how much square footage you're going to allocate to your business. But it has to be reasonable, you can't say you're going to use 1000 sq. feet as your office when your whole house is only 1400. On Line 2 enter the total area of your home. Now divide Line 1 by Line 2 and enter the percentage on Line 3. If you're not planning on using your house as a daycare, carry Line 3 forward to Line 7.
But if you want to start a daycare (and God help ya), you'll need to figure out how many hours you're going to use the space to contain all those little bundles of joy. On Line 4 multiply the days used by the hours used per day. Then enter 8760 hours on Line 5 (the total amount of hours in a given year). Then divide hours used on Line 4 by the total hours in a year on Line 5 and enter the amount on Line 6. When set, figure out your business percentage by multiplying Line 6 by Line 3 and entering it on Line 7.
On Line 8 enter the amount from your Profit or Loss from Business Form (Schedule C line 29) plus any net loss or gain shown on your Capital Gains or Losses Form (Schedule D). Your business made money right? Don't worry, even if it didn't, you still get to write off the expenses.
And now you're getting into the meat of the form. Here, you'll notice 2 columns called direct and indirect expenses. A direct expense includes any repairs, painting, etc. you made to the rooms where you conducted business. Indirect expenses refer to the costs incurred in running and maintaining the whole house. Just be sure to enter 100% of your indirect expenses in column B.
Line 9 is looking for losses, 10 for deductible mortgage interest and 11 for any real estate taxes. When you've gathered that data add up lines 9, 10, and 11 and enter the total on Line 12. Then multiply Line 12 by Line 7 and enter the total on Line 13. Now add Lines 12 and 13 and enter that total on Line14. Finish this part by subtracting Line 14 from Line 8 and putting the total on Line 15.
Lines 16 through 21 is slated for direct and indirect expenses pertaining to: insurance, rent, repairs, utilities, and any other operating expenses that you haven't yet recorded. So once you've got all that together enter the total on Line 22 and multiply it by Line 7. If you had any carryover of operating expenses from last year, enter it on Line 24. Now add Lines 22, 23, and 24 and place the total on Line 25.
On Line 26 enter the smaller of Line 25 or Line 15. To get the limit on excess losses and depreciation subtract Line 26 from Line 15 and put it on Line 27. Lines 28, 29, and 30 are looking for excess losses from this year and last year as well as the depreciation of the space in your home. When set, add them up and enter the total on Line 31. Then enter the smaller of Line 27 and Line 31 on Line 32.
When you're ready add Lines 14, 26, and 32 and put the total on Line 33. If you had any type of loss recorded on Lines 14 or 32 enter it on Line 34. Now subtract Line 34 from Line 33 to get your deductable expenses and enter it on Line 35. Since this is the end result of this part of the form, you'll also need to enter it on Schedule C Line 30.
Part 3 is a quick and dirty way to depreciate the business space in your house. Start by entering the smaller of your home's fair market value or adjusted basis. Then enter the value of the land on 36. To find out how much just your building/house is worth subtract Line 37 from Line 36 and put the total on Line 38. Now multiply Line 38 by Line 7 to figure the business basis of the dwelling.
On Line 40, you need to enter the depreciation percentage, which is based on what month you started using your house for business. Just check the instructions, for a month-by-month breakdown. When you've got the number, multiply Line 39 by Line 40 to get your allowable depreciation. Enter it on Line 41 and on Line 29.
If you've gone over the current year's limit for expenses and depreciation (and you need to carry over an amount into next year) Lines 42 and 43 are for you. Just know limits are impacted by the profit or loss of your business and how much of your home it occupies.
There's No Place Like Home
If you're one of the 98 million full-time American workers who want to be self-employed, know the tax advantages of a legitimate home-based business are phenomenal. So break away from your TV, your bar, Xbox, or any other favorite time waster and create something that's uniquely yours. You'll be glad you did.
