Deducting Your Home Office
Many self-employed taxpayers use the deduction for having an office for business in their home. They’ve used Form 8829, Office in Home, to figure their deduction, based on the square footage of their home, the percentage of the structure that’s used for business purposes, and other criteria.
And while that formula has worked for many taxpayers, for others it’s been overkill. So the IRS has a much simpler option for figuring a home office deduction.
A Faster, Easier Deduction
The official IRS name for the new method is the safe harbor method. It grants a standard deduction of $5 per square foot of the home used for business purposes – up to a maximum of 300 square feet, or a $1,500 max deduction.
To use the safe harbor method on your 1040.com return, just select it at the bottom of our Form 8829 screen.
Home Office Details to Remember
You can choose either the simplified calculation or the regular method for any tax year. Not sure which to use? Consult IRS Publication 587, Business Use of Your Home, for more information.
But: Once you pick a method for the Office in Home calculation, you can’t change it later for the same tax year. And the IRS cautions that if you use the simple option one year, then go back to the regular method, you’ll need to calculate the depreciation deduction for the following year using the appropriate optional depreciation table. That's true whether or not you used an optional depreciation table for the first year the property was used for business.
Using Form 8829
Form 8829, Office in Home, considers all the factors the IRS uses in the standard deduction computation. There are a few twists and turns you need to know about, so here's a short guided tour.
At the top of the screen are some general instructions about the shorter safe harbor method of calculating the deduction. Whichever method you use – safe harbor or the expense method – the area of the home for which expenses are deducted must be used as the principal place of business for the trade or business, or as the place where you meet and deal with patients, clients or customers in the normal course of the trade or business.
In Part I – Part of Home Used for Business, enter the square footage in the home that’s used exclusively for business; another field asks for the total square footage of the home. If you select the safe harbor method, you’re done! We'll calculate the deduction from your entries.
If you click “No” to safe harbor, another question appears: Is the business a daycare facility? Click No, and the standard expense fields for the 8829 appear. Click Yes, and daycare-specific fields become available. With a daycare facility, you also have to give the total hours the facility was used in the home. You can also claim areas of the home that were used only partially for daycare instead of exclusively.
The Allowable Deduction
Part II of Form 8829 gets to your actual expenses. Here, enter your direct and indirect expenses for:
- Casualty losses
- Deductible mortgage interest
- Real estate taxes
- Excess mortgage interest
- Repairs and maintenance
- Other expenses
Direct expenses are just for your office, and indirect expenses are for keeping up and running your entire home, both the business and personal parts. Once the business use percentage of your home is calculated from your square footage entries, that percentage will be multiplied against your indirect expenses, so you'll get a prorated deduction for them.
Part III of the form is used if you are depreciating your home – but only your home. If your return is depreciating any other assets – such as a car, for example – you should leave Part III blank and use Form 4562 instead.