If you have a small business, you know that taxes can make up a large portion of expenses. That’s why it’s crucial to take advantage of every tax deduction you qualify for. If you use a portion of your home as your principle place of business, you can deduct certain expenses from your taxable income. That means becoming familiar with Form 8829.
You’re able to deduct a portion of home expenses if you use your home exclusively and regularly for administrative or management activities, or if you have no other fixed location for business. Administrative and management activities includes billing, record-keeping, ordering supplies, scheduling appointments, and forwarding orders or writing reports. You are not disqualified from taking deductions if you have some other company do some of these tasks—for example, if you outsource your billing—or if you conduct some of these tasks from an unfixed location, such as a car or hotel room. You’re also not disqualified if you perform minimal business tasks outside your home, such as meeting with clients. You may also deduct costs associated with space used to store inventory.
We’re going to give a quick introduction to what sorts of deductible expenses you can record on the form, but this isn’t a form you want to mess up. Missing an allowable deduction can mean spending too many dollars in taxes. Claiming a deduction you don’t legally qualify for can mean paying penalties and back taxes down the road. That said, a simple tax situation may not pose much of a problem. So, if there’s any doubt, consult a pro.
Form 8829 is used to claim deductions for the portions of your home used exclusively for business. Here’s some basic information you’ll need:
- Your name
- Social Security number
- The square footage of your house
- Square footage of the portion used exclusively for business.
If your business is a daycare and a portion of your home is not exclusively used for business, you’ll also need to know the number of days the space was used for daycare during the year and the number of hours used per day. Form 8829 will use this information to lead you through figuring out your business percentage, the percentage of home expenses that you may deduct from your business revenue. So, if you use 25% of the square footage of your home for administration and storage, you can deduct 25% of the allowable expenses.
There are several other tax forms you’ll want to have handy. These include your Schedule 3, Schedule D or Form 4797, your Form 8829 from the previous year, and Form 4684. There’s also a host of information you’ll need about your home expenses. You’ll want to have all of these amounts handy:
- Casualty losses
- Deductible mortgage interest
- Real estate taxes
- Excess mortgage interest
- Insurance, rent
- Repairs and maintenance
- Any other operating expenses.
You’ll also need your home’s value and the value of the land included in that number. You’ll use the smaller number of your home’s adjusted basis or its fair market value. Form 8829 will help you figure out the depreciation value you may claim depending on what month you began using your home for business purposes.
With all this information gathered, Form 8829 will lead you through the process of figuring out your deduction. This involves a number of comparisons, additions, and subtractions. For a lay tax filer, that process can be tricky and distracting. Again, if there’s any doubt, consult a pro to calculate the legally allowable deduction for the business use of your home. As you can see, the deduction relies on a large amount of data about your home. Paying an accountant or tax attorney might cost a pretty penny, but it’s usually worth it for peace of mind. Besides, in most cases it’s a deductible expense.
But with any tax matters, consult a tax professional to make sure you’re properly handling this deduction.
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