Home Office Deduction: Simplified Method or Form 8829

Do I qualify for the home office deduction as self-employed?

You may qualify when part of your home is used regularly and exclusively for your self-employed business, and that space is also your principal place of business, a place where you meet clients in person, or a separate building (Publication 587; Tax Topic 509). The IRS calls this the business use of your home. The same tests apply to both ways of figuring the amount: the simplified method, a flat rate per square foot, or Form 8829, your actual home costs. You can choose again each year. A "home" can be a house, apartment or condominium, and includes structures on the property such as a detached studio.

What makes a case not simple: the space is also used by family, guests or a W-2 job; your business profit is small or a loss, because the income limit can cut the deduction; the business started, ended or moved during the year, so only the part of the year with qualifying use counts; you used more than one home; or you plan to sell the home or left the office off earlier returns.

Gather: the square feet of the office and of the whole home, the rent or mortgage statement and the home's bills, the date the space began to qualify, the purchase paperwork if you own, and last year's return.

Can I write off a home office if I have both a W-2 job and 1099 income?

You may deduct a home office for your self-employed work if that work passes the tests above. On your federal return, the W-2 job adds no deduction for the same space; your state may differ. The IRS flowchart and the Form 8829 instructions rule out a deduction for space used as an employee, and 26 U.S.C. 67(h) bars miscellaneous itemized deductions, which include unreimbursed employee expenses, for every year after 2017. Publication 529 lists the few narrow groups, such as Armed Forces reservists and qualified performing artists, who can still deduct them.

• The side business is tested on its own. Publication 587 says one office can serve more than one trade or business, each tested separately, but not activities unrelated to a trade or business. It does not say how W-2 work in the same room counts toward exclusive use. A room used for both jobs is a question of facts to settle before you claim.
• Only the side business's income counts toward the limit. The cap is figured from the business's own income on Schedule C, not your W-2 wages.
• A W-2 with the "Statutory employee" box checked is reported on Schedule C (Schedule C instructions). Publication 587 does not say whether the employee bar applies to it, so settle that before you claim.

If the W-2 comes from your own S corporation, the company can repay home costs instead: see reimbursing owner expenses.

Does a room my family or guests also use still count?

A room you also use for family or guests does not qualify, because any personal use of the area fails the exclusive-use test (Publication 587).

A smaller area can qualify if it is separately identifiable and used only for the business, such as a defined desk area in a larger room. A dining table fails, and so does a guest bedroom or den that family or guests also use. Only two uses escape the exclusive-use rule, each with its own conditions: storing inventory or product samples you sell when the home is the business's only fixed location, and home daycare (see home daycare and the time-space percentage).

If the space fails, business furniture and equipment can still be depreciated or expensed whether or not the space qualifies (Publication 587). A phone or internet bill is a separate split: see mixed-use expenses.

How does the simplified method work, and what do I give up?

The simplified method multiplies the office's square feet by $5, counting at most 300 square feet, so it allows at most $1,500 before the income limit (Revenue Procedure 2013-13; Schedule C instructions). It replaces the calculation and proof of actual costs.

1. Measure the office, up to the limit, and multiply by the rate.
2. Compare the result with the income limit (the business's income from the space, explained below) and use the smaller number.
3. Enter it on Schedule C, line 30, with the home's and the office's square feet in the extra entry spaces. No Form 8829 is filed for that home.

The cap covers all your own qualifying businesses in that home, and your choice applies to all of them. Someone else who shares the home and has a qualifying business of their own makes a separate election with a separate cap; the same square feet cannot be counted twice, so divide shared space reasonably. With two homes in the year, you can use the method for only one (Publication 587).

If the space qualified for only part of the year, or the office size changed, the area is averaged over 12 months, and a month with fewer than 15 days of qualifying use counts as zero (Publication 587).

The method gives up:

• Actual home costs such as rent, utilities, insurance and repairs. Business expenses unrelated to the home, such as supplies and equipment, stay deductible.
• Depreciation on the home (deducting part of its cost over many years). It is treated as zero for the year.
• A business share of mortgage interest and real estate taxes. These stay personal and help only if you itemize (list deductions on Schedule A instead of taking the standard deduction).
• Any amount cut by the income limit. It cannot be carried forward.

How does Form 8829 work: which costs, and how is the percentage figured?

Form 8829 deducts the business share of the home's actual costs. The business percentage is the office area divided by the home's total area, or another reasonable method such as rooms used divided by total rooms when the rooms are about equal (Publication 587). The total on line 36 goes to Schedule C, line 30 (Form 8829 instructions).

• Part-year use: only costs from the part of the year the space qualified count.
• Depreciation for owners: an owner deducts depreciation on the business part of the building, not the land, figured on the smaller of its adjusted basis or its value when business use began, straight line over 39 years for a home newly put to business use. Homes used for business in earlier years keep the method used before (Publication 587).
• Mortgage interest and real estate taxes: an itemizer moves the business share off Schedule A onto Form 8829. With the standard deduction, the business share is deductible only through Form 8829 (instructions).

File one Form 8829 for each home used in the business. If the home served more than one business, split line 36 among them on a reasonable basis (Form 8829 instructions).

Simplified method or Form 8829: which is better, and can I switch?

Neither wins every time, so figure both before filing. Either way the deduction lowers the Schedule C profit that income tax and self-employment tax are figured on (Schedule C instructions). You may switch from year to year without IRS consent (Revenue Procedure 2013-13).

A quick test for an office of 300 square feet or less: divide the home's yearly costs (plus depreciation, if you own) by its total square feet. If the answer is more than $5, Form 8829 gives the larger figure before the income limit. An itemizer can leave mortgage interest and real estate taxes out of the test, because the simplified method keeps them on Schedule A. Form 8829 moves their business share to Schedule C, where it can also lower self-employment tax, so leaving them out can understate Form 8829. For a larger office, the cap makes Form 8829 more likely to be larger.

Using the simplified method on a timely filed original return is the election, and it is irrevocable for that year, so decide before you file. Simplified years do not reduce the home's basis (the cost used to figure gain when you sell); if you return to Form 8829, depreciation resumes using the IRS table for the home's year of service (Publication 587).

Is the deduction limited by my business income, and what carries over?

The home office deduction is limited by your business income under both methods. The simplified amount, and under Form 8829 the costs that exist only because of the office (rent, utilities, insurance, repairs, depreciation), cannot exceed the gross income from the business use of the home, less the business's other expenses (26 U.S.C. 280A(c)(5); Publication 587). On Schedule C the starting point is the profit before the home office deduction, line 29.

• Simplified method: an amount cut by the limit is lost. Carryovers from earlier Form 8829 years cannot be used in a simplified year and wait for the next year you use Form 8829 (Schedule C instructions).
• Form 8829: the cut amount carries to the next year you use actual expenses and is subject to that year's limit, whether or not you still live in the same home (Form 8829 instructions).

Form 8829 applies the limit in a set order. An itemizer's business share of mortgage interest and real estate taxes is allowed first, even above the business income, because it is deductible without the office. Operating costs come next and depreciation last, so depreciation is the cost most likely to be pushed to a later year. With the standard deduction, those two costs are among the operating costs the limit can cut. If part of the business income comes from somewhere other than your home, only the part earned from the home office counts.

I rent my home: does that change anything?

Renting your home does not change who qualifies: renters follow the same tests as owners (Publication 587). Only the amounts differ:

• Form 8829: the business percentage of the rent you pay (line 19), plus other indirect costs such as utilities and renter's insurance. A renter has no depreciation on the building.
• Simplified method: the rate times the area. Rent is not deducted separately.

Rent is often the largest home cost, so the quick test in the method comparison is worth running.

Do I enter the whole home bill or just the business share?

Enter the whole home bill on Form 8829, not just the business share. It takes the full amount of costs that run the whole home and applies the business percentage itself. Costs for the office alone go in at their full amount. If one bill has a business share that differs from the office percentage, enter only that business part (Form 8829 instructions). The simplified method uses no home bills, only the square-foot figures.

So the books need the complete bills and the measurements, not a monthly guess at the business share. For the accounts, see a chart of accounts that maps to Schedule C.

What records do I keep for the home office?

Records must show the part of the home used for business, that you use it regularly and exclusively as your principal place of business or to meet clients, and the expenses and depreciation for the business part. No particular system is required. Keep canceled checks, receipts and other proof of what you paid (Publication 587).

If you own, keep the home's purchase and improvement records and your copies of Form 8829 well past the usual period, because depreciation and basis matter again on a sale. For how long to keep records and a year-round system, see record keeping for the self-employed.

What happens when I sell a home I deducted an office in?

An office inside the home does not split the sale into a home part and a business part, but the part of the gain equal to depreciation after May 6, 1997 cannot be excluded (Publication 523; Publication 587). That part can be taxed at up to 25% (Topic 409).

• The rest of the gain can be excluded, up to $250,000 ($500,000 for certain joint filers), if the ownership and use tests are met: see the home-sale exclusion.
• Simplified years carry no depreciation, so they add nothing to the taxable amount.
• Skipping depreciation on Form 8829 does not avoid the basis reduction. The home's basis is reduced by depreciation you could have taken, even if you did not claim it. For the part of the gain that cannot be excluded, Publication 587 uses the depreciation actually deducted when records show it was less than allowable. Settle this before a sale.
• A separate structure such as a studio, garage or barn can be treated as separate property on a sale, and its gain may not qualify for the exclusion: see the home-sale exclusion.

Example

These examples are illustrative. All amounts are in US dollars.

A freelance designer who rents

A designer rents a 1,600-square-foot home and uses a 200-square-foot room only for work. Rent, utilities and insurance total US$20,000 for the year, and her profit is well above either figure below.

• Simplified: 200 × US$5 = US$1,000.
• Form 8829: 200 ÷ 1,600 = 12.5%, and 12.5% × US$20,000 = US$2,500.

Her yearly cost is US$12.50 per square foot, more than US$5, so Form 8829 gives the larger amount. It also needs the bills and the measurements.

A developer with a W-2 job and a side business

A developer uses a 150-square-foot room only for a side business, in a 1,500-square-foot home with rent and utilities of US$12,000. The side business earns US$600 before the office deduction. The W-2 wages do not count toward the limit.

• Simplified: 150 × US$5 = US$750, but the income limit allows only US$600. The other US$150 is lost.
• Form 8829: 10% × US$12,000 = US$1,200. The limit allows US$600 this year, and US$600 carries to the next year Form 8829 is used.

An owner who sells after three years

An owner used Form 8829 for three years and deducted US$2,400 of depreciation on the office. The home sells for a gain of US$150,000, and the owner, a single filer, meets the ownership and use tests. The US$2,400 is taxed even though the exclusion covers the remaining US$147,600.

Different for you?

• Your space is mixed-use, such as a kitchen table or guest room, or you do both jobs in one room: whether any part qualifies depends on the facts, and the method depends on the answer. Get individual tax help before choosing.
• You have W-2 pay and 1099 income, and the side-business profit is small against the home's costs: the limit decides how much counts now and what carries over. Review it with individual tax help, and see other legal ways to lower business tax.
• The office was left off earlier returns: the simplified method is elected on a timely filed original return, and Revenue Procedure 2013-13 names no way to elect it later, so an amended return generally means Form 8829. Each year has its own refund deadline: generally 3 years from filing or 2 years from payment, whichever is later. See amending a return for business expense mistakes and get individual tax help.
• You plan to sell the home soon: office depreciation and any separate structure change the gain. See the home-sale exclusion and get individual tax help before listing.
• You own an S corporation or are a partner: an S corporation can repay an owner's home costs: see reimbursing owner expenses. A partner may deduct unreimbursed partnership expenses, including home office costs, only if the partnership agreement required them; a worksheet in Publication 587 replaces Form 8829 for that.
• You rent your home to your own S corporation for meetings: see the Augusta rule.
• You run a home daycare: the time-space percentage works differently: see home daycare books.
• You worry the deduction will be questioned: see Schedule C expenses the IRS questions.