Back to Basics Part XXX – Form 8829 Expenses for Business Use of Your Home

Originally published in the Cedar Street Times

December 25, 2015

Merry Christmas!

My vision of Santa’s workshop is that it is built into his home at the North Pole.  Being that it is quite chilly there, why would you want to leave the warmth of one building to go to another?  It is also highly unlikely that he would need a separate office “in-town” at the North Pole.  Betting on the idea that it is built into his home, he would certainly seem eligible for a home office deduction.

Whether or not he would use the Form 8829 – Expenses for Business Use of Your Home would depend on his legal structure, however.  Is he Santa Claus, sole proprietor?  Is it Santa Claus, Inc. of which he is a greater than 2% shareholder employee?  Or maybe it is Santa’s Workshop, LLC?  If it is an LLC, it is possible it could be a Single Member LLC if the North Pole has community property laws.  If that is the case, Santa and Mrs. Claus would be treated as one member and the entity disregarded for federal tax purposes.  Well, I suppose that is for Santa and the IRS to worry about!  Maybe we should focus on you instead…

If you use part of your home for business purposes, you may be able to claim a home office deduction using Form 8829 – Expenses for Business Use of Your Home.  The space must be used exclusively and regularly for business purposes and it must be your principal business location – meaning that it must be the main place where managerial activities occur for your business, and you have no other space where substantial managerial activities occur.

You can claim this deduction as a sole proprietor, but also as an employee, if your employer expects you to maintain an office in your home and provides no other fixed location for you to work.  It is best if this type of arrangement is spelled out in your employment agreement.

The Form 8829 is used specifically for sole proprietors filing a Schedule C.  If  you are an employee claiming a home office deduction, or a partner, or if you are filing in conjunction with a Schedule F for a farm, you must use the “Worksheet to Figure the Deduction for Business Use of Your Home” in Publication 587 to calculate the expenses instead.  It essentially accomplishes the same purpose, except whereas the Form 8829 is filed with the returns, the worksheet is not.

The Form 8829 and the worksheet in Publication 587 focus on calculating a deduction based on actual expenses.  There is a relatively new simplified method also.  It allows you to deduct a flat $5 per square foot up to a maximum of $1,500 a year.

We will now spend some time focusing on the Form 8829 itself.  If you would like to read a more in-depth analysis on the home office deduction discussed above, I wrote a three part series on this topic on July 26, August 9, and August 23 of 2013.  You can find them on my website at:

https://blog.tlongcpa.com/2013/07/26/home-office-new-option-for-2013/

Part I of the Form 8829 determines the business percentage you will use to apply to the home office expenses you incur.  You divide the business use square footage by the total square footage to determine the percentage that will be applied to the expenses.

Home daycare providers have special rules as they are allowed to use the space for both personal use and work use.  They have an additional calculation in Part I where they divide the total hours for the year that the space was used for daycare services, by the total number of hours in the year.  This percentage is then multiplied by the square footage percentage to finally arrive at the reduced percentage to apply to the expenses.

Part II of the Form 8829 is where you will list all your expenses of maintaining your home, such as property taxes, mortgage interest, insurance, utilities, repairs, etc.  The direct column is for expenses that were 100 percent deductible and should not have the business use percentage applied.  Perhaps you repainted your home office only.  This would be an example of a direct expense.  If you had painted the entire house, then you would list it under indirect expense.  The business use percentage would then limit your deduction to the relative portion of the home used for business.

A home office deduction is generally not allowed to create a loss on your schedule C with the exception of the portion related to real property taxes and mortgage interest since they would have been deductible on Schedule A anyway.  If the other operating expenses of your home office create a loss, that loss is suspended and carried over to future years.  Part II has additional lines to handle any carried over losses from prior years as well.  The amount of deduction from the bottom of Part II carries over to your Schedule C for deduction on that form.

Part III handles the depreciation expense on your home – basically its wear and tear over time.  Depreciation is a use-it-or-lose-it concept, so you are better off taking it if eligible.  Some tax preparers incorrectly advise people not to take depreciation expense on their home in order to avoid tax recapture problems when they sell.  What they are failing to grasp is that recapture is based on depreciation that was “allowed or allowable.”  So even if you do not take the depreciation expense when you were entitled to it, you have to treat it as if you did take it when you sell, and you would still be subject to any of the same recapture taxes.  Part III is a feeder calculation back into the depreciation expense line in Part II.

Part IV is essentially the final summary of any carryovers available for the next year.

If you have questions about other schedules or forms in your tax returns, prior articles in our Back to Basics series on personal tax returns are republished on my website at www.tlongcpa.com/blog .

Travis H. Long, CPA, Inc. is located at 706-B Forest Avenue, PG, 93950 and focuses on trust, estate, individual, and business taxation. Travis can be reached at 831-333-1041.

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