Due to the worldwide pandemic, the trend of working from your own house or apartment has increased. You do not only save time on getting to work and traveling, but you may also get other bonuses. It can be good for your taxes, as you can deduct some costs.
To do this, you need to understand whether your workplace fits the definition and how to correctly fill out the necessary documentation. You will require Form 8829. Its full name is Expenses for Business Use of Your Home. It is served together in Schedule C.
The Revenue Service scrutinizes all requirements for tax deductions due to home office use, especially now that requests are on the rise. It should be known that the concept of the home office has its own definition, and not every table with a laptop will fit it.
There are two conditions that must be met when naming a location as your office:
What do these broad concepts mean?
Exclusivity in this matter means that you own either a separate room for your job or there is a clear division of zones. There is no clear definition of the boundaries of this exclusivity, but if this space is utilized not only by you or not only for work purposes, then it will not be recognized as exclusive.
You should work from home regularly, it can be various days of the week, but namely, always three times a week.
For instance, you are a psychologist, and you see clients three times a week at your home. This will be considered a home office.
Regularity does not mean that you can entirely work at home. You may have other places, but the main one should be in the home office. The main place is considered to be where most of the management and organizational processes take place.
Such processes may include:
Let’s give an illustration:
You are a manicure specialist, and you only accept people in a special room in the salon. But you plan sessions, go through training, watch special courses at home. So you can consider the home office principal place of work and get the deduction. It is significant that most of the administrative processes take place there all the time.
There are two different types of costs that you can deduct: indirect and direct.
Indirect costs are those that apply to the entire house, and a certain percentage must be calculated that applies to the home office. These may include:
The fraction that you can deduct is limited to the area occupied by the office. If the work area is 15% of the home, then you can only charge 15% of each indirect cost as a deduction.
Direct costs are easier. These are costs that only apply to the workplace. For example, buying an office chair or a computer from which you will only perform work tasks. These costs can be deducted in full.
Several Rules to Deduct Your Expenses
You must have a positive net income to deduct expenses. Thus, you cannot add to your losses by serving your home office.
Your deduction cannot exceed your net income. Let’s say your net income for the reporting period was $ 10000 and costs were $ 11000. You can deduct only $ 10000.
Let’s move on to completing the form. For your convenience, we recommend filling out the document using our form-building software. With its help, you can easily and quickly fill out the document without missing the necessary lines.
Other IRS Forms for Self-employed
Since the pandemic started, there have been some changes to IRS forms that correspond to the new realities of the working environment. Learn whether other IRS forms have changed recently.
Practice our instructions to fill out the application without too much difficulty.
Write your name and the number of social security on the space provided.
Indicate which part of the house is utilized as a home workplace
Applying a single measure of area (let’s say square feet), enter the square of your workplace in point 1. In line 2, write the whole square to get the percentage of the space allocated for your business.
If your business is not a daycare, then just duplicate the number from point 3 to point 7.
Continue to fill in Part 1 if your company is a daycare
In this case, you will go a bit deeper into the calculations. Let’s show with an example how to do this. If your daycare is running 9 hours 250 days a year, you need to multiply 250 by 9. You get 2250 hours. Enter this number in line 4. If during the year you always use your place as a daycare facility, then write down 8760 in line 5. But if you did not start using it as a daycare facility immediately or, for example, stopped it, then you need to multiply the number of days by 24 hours. For example, multiply 300 by 24 and get 7200 and write it on line 5.
Next, we divide the indicator from line 4 by the indicator in line 5, and the result is multiplied by the percentage in line 6, and we get the business percentage.
Enter the amount of profit
You can use the number you entered in Schedule C. If there is additional gain or loss from the home workplace, add or subtract it from this number and write it down in point 8.
If, in addition to your home workplace, you do part of the job elsewhere, then divide the number according to the rate of time you spend in your home office.
Start entering expenses
Next, we move on to listing costs. As we mentioned above, there are direct and indirect costs. Be careful to enter the costs into the correct column. Enter the amounts of the full expenses without reducing them.
Add up your first costs
In line 12, you need to get the sum of costs that you wrote above. If you had indirect expenses listed, then in line 13, you must enter the result that you will get from multiplying line 12 by the percentage indicated in line 7. This will give you the sum of expenses that relate specifically to your home office.
Sum up expenses
Next, you need to add both types of expenses; for this, add the numbers from lines 12 and 13.
Subtract the resulting amount from the number specified in line 8. If you get a negative value or 0, then enter “0”.
Keep adding expenses
Enter costs in the table, remembering to ensure that direct and indirect ones are entered in the appropriate column.
On line 23, get the sum in each type. Indirect expenses again need to be multiplied by the percentage specified in point 7.
Indicate last year’s operating expenses
Use the number shown on last year’s form in line 43.
In the next three lines, you just need to make the calculations indicated in the instructions.
Calculate excess casualty
If you also had additional excess home losses specified in line 9, then in this paragraph, you must multiply the excess amount by the percentage from paragraph 7.
Continue making calculations
Transfer numbers and calculations by following clear instructions. Do not forget to pay attention to the explanations for some of the lines.
Get the number of eligible costs for commercial use of the home
We pass to the final point of the second part of the form, in which we get the number of allowable expenses. To do this, subtract the number specified in line 35 from the number in line 34.
Calculate home depreciation
On the next lines, you will calculate the allowable depreciation percentage.
You need to know the following information to fill in these lines correctly:
the cost of your home on the first day of starting work from the home and its market price;
the price and fair market value of the land on the first day of your home place office. Lines 37 and 38 indicate lower figures. Applying the instructions for lines 41 and 42, enter the depreciation percentage and get depreciation allowable.
Carryover some of the costs to the coming year
If your costs have exceeded the allowable limit, then you can take the opportunity to transfer part of the costs to the coming year. If you get a “0” on lines 43 and 44, you have no carryover costs.
This form is not a difficult paper that is intimidating at first. If you follow the guidance, you will have no difficulty in filling it out and getting a deduction.