Title
Overview
Hello, and welcome to What You Need to Know
When You Run Your Business out of Your Home.
Publication 587, Business Use of Your Home
In this lesson, we'll provide information
on calculating and claiming the deduction
for business activities in the home
as well as business use of the home.
We'll review the requirements you must meet
to qualify for a deduction,
how to determine the business percentage of home use,
the types of expenses you can and cannot deduct
either in full or according to the percentage,
how to determine the limits on deductions,
and where to deduct the expenses on your return.
And that term home includes a house,
apartment, condominium, mobile home, boat, or similar property
which provides basic living accommodations.
It also includes structures on the property
such as an unattached garage, studio, barn, or greenhouse.
Qualifying for the business use of the home deduction
So, let's start with qualifying
for the deduction for business use of the home.
To qualify to deduct expenses
related to the business use of part of your home,
you must meet specific requirements.
Even then, the deduction may be limited.
To qualify to claim expenses for the business use of your home,
you must meet the following test.
First, your use of the business part of your home
must be exclusively used for your business;
second, it must be regular,
and third, it must be for your business.
That is, the business part of your home must be one
of the following:
your principal place of business;
or a place where you meet with patients, clients,
or customers in the normal course of your business;
or a separate structure not attached to your home
that you use in connection with your business.
Exclusive use test
First, let's look at the exclusive use test.
To qualify under the exclusive use test,
you must use that area of your home
only for your trade or business.
The area you use for a business can be a room
or other separately identifiable space,
even if not marked off by a permanent partition.
You do not meet the requirements
of the exclusive use test if you use the area
both for business and for personal purposes.
Now it's time for you to test your knowledge.
Do you know if this situation qualifies
as a business deduction?
Hi, I'm Ruth, and I'm a graphic designer.
My computer is in the family room,
and that's where I do my design work.
My family also uses the room for recreation.
Can I claim a business deduction for the use of my family room?
Can Ruth claim a business deduction
for the use of the family room?
Actually, because Ruth does not use the family room
exclusively for her business,
she cannot claim a business deduction for its use.
You're correct.
Because Ruth does not use the family room exclusively
for her business,
she cannot claim a business deduction for its use.
Okay, let's look at another example.
Hi, I'm Greg, and I brew natural sodas in my garage.
The garage is not attached to my house,
and I use this garage only for brewing and selling.
One part of the garage is used for the brewing,
and another part of the garage is where I conduct tastings
and sell the soda.
Do I meet the requirements of the exclusive use test?
Does Greg meet the requirements of the exclusive use test?
You're correct.
Greg is allowed to claim a deduction
for the business use of his garage.
The use is exclusive, regular,
and for his business.
Actually, Greg is allowed to claim a deduction
for the business use of his garage.
The use is exclusive, regular,
and for his business.
Exceptions to the exclusive use test
There are exceptions to the exclusive use test.
You do not have to meet the exclusive use test
if you use part of your home for the storage of inventory
or product samples, or if you use part of your home
as a daycare facility.
Storage of inventory and daycare facilities
have separate requirements.
Regular use test
The next test is the regular use test.
To qualify under the regular use test,
you must use a specific area of your home for business
on a continuing basis.
You do not meet this test if your business use
of that area is only occasional or incidental,
even if you do not use that area for any other purpose.
Okay it's time to test your knowledge.
Let's look at an example.
Hi, I'm Tom, and I'm a painter.
I have a separate studio in my home
that sometimes I paint in,
but most of the time I'm painting outdoors.
Can I claim a business deduction for the use of my studio?
Can Tom claim a business deduction
for the use of his studio?
Actually, Tom cannot claim a business deduction
for the use of his studio as he uses the studio
only occasionally and not on a continuing basis.
You're correct.
Tom cannot claim a business deduction
for the use of his studio as he uses the studio
only occasionally and not on a continuing basis.
Principal place of business test
The final test is the principal place of business test.
You can have more than one business location,
including your home, for a single trade or business.
One way to qualify to deduct the expenses
for the business use of your home
is if your home is your principal place of business.
To determine this, you must consider
all of the facts and circumstances.
Your home office will qualify as your principal place of business
for deducting expenses for its use
if you use your home office exclusively
and regularly for administrative or management activities
of your trade or business and have no other fixed location
where you conduct substantial administrative
or management activities of your trade or business.
So what are administrative or managerial activities?
Common activities would include billing customers,
keeping books and records, ordering supplies,
setting up appointments, and forwarding orders
or writing reports.
Activities that don't disqualify your home office
There are activities that you might think disqualify
your home office as your principal place of business,
but they don't.
For example, employing others to conduct your administrative
or management activities at locations other than your home,
or conducting administrative or management activities
at places that are not fixed locations of your business,
such as in a car or in a hotel room,
does not disqualify your home office
as your principal place of business.
Occasionally conducting minimal administrative
or management activities at a fixed location
outside of your home also does not disqualify your home office
as your principal place of business.
Finally, the last activity that does not disqualify
your home office as your principal place of business
is conducting substantial, non-administrative,
or non-management business activities
at a fixed location outside of your home
and having suitable space to conduct administrative
or management activities outside your home,
but choosing to use your home office
for those activities instead.
Okay, let's take a look at an example
and see if you can answer Joe's question.
Hi, I'm Joe, and I'm a self-employed plumber.
Most of my time is spent at customers' homes and offices
installing and repairing plumbing.
I have a small office in my home that I use exclusively
and regularly for administrative or management
details of my business--
phoning customers, ordering supplies,
and keeping books.
I don't do my own billing; instead,
I use a local bookkeeping service to bill my customers.
Does my home office qualify as a principal place of business?
Does Joe's home office qualify as a principal place of business
for deducting expenses for its use?
You're correct.
Joe's home office qualifies as his principal place of business
for deducting expenses for its use.
He uses the home office for the administrative
or managerial activities of his plumbing business
and he has no other fixed location
where he conducts these administrative
or managerial activities.
His choice to have his billing done
by another company does not disqualify his home office
as his principle place of business.
Joe's business meets all the qualifications,
including principal place of business;
therefore, Joe can deduct expenses
to the extent of the deduction limit
for the business use of his home.
Actually, Joe's home office does qualify
as his principal place of business
for deducting expenses for its use.
He uses the home office for the administrative
or managerial activities of his plumbing business
and he has no other fixed location
where he conducts these administrative
or managerial activities.
His choice to have his billing done by another company
does not disqualify his home office
as his principal place of business.
Joe's business meets all the qualifications,
including principal place of business;
therefore, Joe can deduct expenses
to the extent of the deduction limit
for the business use of his home.
Okay, let's look at the next test.
Meeting place for customers test
If you don't meet the principal place of business test,
you might qualify under the meeting place
for customers test.
Your home office may qualify if you meet or deal
with patients, clients, or customers in your home
in the normal course of your business
even though you also carry on business at another location.
You can deduct your expenses for the part of your home
used exclusively and regularly if you physically meet
with patients, clients, or customers at your home
and the use of your home is substantial and integral
to the conduct of your business.
Okay, it's time to test your knowledge.
See if you can answer Sarah's question.
Hi, I'm Sarah, and I'm an interior decorator.
Because of all the samples and pattern books I have,
it's usually better for clients to come visit me
to look at samples and patterns.
I have a room designated exclusively for this purpose,
and conduct all administrative
and management functions there--
scheduling appointments, preparing design presentations,
and book- and recordkeeping.
After clients decide on what they want,
I spend the rest of the project at their home,
supervising the painting, the wallpapering,
and the furniture placement.
Does my home office qualify as a principal place of business
for deducting expenses for its use?
Does Sarah's office qualify as a principal place of business
for deducting expenses for its use?
You're correct.
Sarah's home office does qualify
as a principal place of business for deducting expenses
for its use under the meeting place for customers test.
Although she carries on most of her business
in other people's homes, she does meet with clients
in her home in the normal course of business.
Actually, Sarah's home office does qualify
as a principal place of business
for deducting expenses for its use under the meeting place
for customers test.
Although she carries on most of her business
in other people's homes, she does meet with clients
in her home in the normal course of business.
Separate structure test
Here's the last test,
and it's called the separate structure test.
You can deduct expenses
for a separate free standing structure
such as a studio, garage, studio shed,
or barn if you use it exclusively and regularly
for the business.
The structure does not have to be
your principal place of business
or a place where you meet patients, clients, or customers.
Let's now test your knowledge.
See if you can answer Joanne's question.
Hi, I'm Joanne.
I build custom-designed furniture
in my detached garage,
but when clients and I discuss the plans together,
we talk in the dining room of my house.
Does my garage qualify as a separate structure?
Does Joanne's garage qualify as a separate structure?
You're correct.
Because Joanne's garage is a separate structure
and is used exclusively and regularly in her business,
she does not have to meet clients there to be eligible
to deduct the expense for its use,
subject to the deduction limit.
Actually, because Joanne's garage is a separate structure
and is used exclusively and regularly in her business,
she does not have to meet clients there
to be eligible to deduct the expense for its use
subject to the deduction limit.
Deduction limits
And now, let's discuss those deduction limits.
Because most home businesses are run from a part of the home
rather than the whole structure,
most expenses related to the business use of your home
are limited to the percentage of your home
used for business,
Business percentage
also known as the business percentage.
To calculate the business percentage,
compare the size of the part of your home
that you use for the business to your whole house.
You can use any reasonable method
to determine the business percentage,
but we're going to discuss...
two commonly used methods for figuring the percentage:
the area method, and the number of rooms method.
Area method
To use the area method, divide the area used for business
by the total area of your home.
For example, if your office is 2 hundred and 40 square feet,
and your home is 12 hundred square feet,
your business percentage would be 20 percent;
that is, 2 hundred and forty divided by 12 hundred.
Rooms method
To use the number of rooms method,
divide the number of rooms used for business
by the total number of rooms in your home.
You can use this method if the rooms in your house
are all about the same size.
For example, if you have ten rooms in your house,
and you use one of them for your office,
your business percentage would be 10 percent;
that is, 1 divided by 10.
Recording business percentage
Now that you know how to calculate business percentage,
here's where you record it.
Form 8829, Expenses for Business Use of Your Home
Use Part One of Form 8829,
Expenses for Business Use of Your Home,
to calculate the business percentage
of your home business.
Types of expenses
Now that we've discussed all the tests
for the business use of the home,
let's look at the types of expenses.
There are two types of expenses
related to using your home for business.
The first are expenses related to the business activity
in the home, but not to the use of the home itself.
The second expenses are for the business use of the home,
and these expenses are divided into three categories:
direct expenses, indirect expenses,
and unrelated expenses.
Expenses related to the business activity
Let's discuss the first type of expenses,
business expenses related to the business activity in the home.
These expenses are the ordinary and necessary expenses,
such as advertising, business taxes, car and truck expenses,
salaries, supplies, and travel.
These expenses are not limited to the business use
of the home percentage or the deduction limit,
Form 1040, Schedule C
and they are deductible in full on Schedule C Form 1040,
Profit or Loss from Business.
Form 8829, Expenses for Business Use of Your Home
Expenses related to the business use of the home
The second type of expenses is for the business use
of the home.
As we mentioned above,
expenses for the business use of the home
are divided into three categories:
direct, indirect, and unrelated expenses.
The part of a home operating expense
that you can use to calculate a deduction
depends on whether the expense is direct,
indirect, or unrelated,
as well as the percentage of your home
that is used for your business.
Direct expenses
Direct expenses are expenses
only for the business part of your home;
these expenses are generally deductible in full,
unless subject to the deduction limit,
which we will be discussing soon.
A good example is painting or repairs
made only in the area used for business
or having high speed internet service
for your business so you can advertise business
through your Website and communicate via email
with customers.
Indirect expenses
Indirect expenses refer to expenses
for running your entire home but are deductible
based on the percentage of your home used for business.
They may also be subject to the deduction limit.
Examples of indirect expenses are homeowners insurance,
utilities, and general repair such as a new roof
or gutter cleaning.
Unrelated expenses
Unrelated expenses are expenses
from the parts of the home that are not used for business,
such as lawn care or improvements to rooms
not used for the business.
These expenses are not deductible.
Deductible expenses
Certain expenses are deductible
whether or not you use your home for business.
If you qualify to claim business use of your home expenses,
you can use the business part of these expenses
to calculate your business use of the home deduction.
These expenses are real estate taxes,
deductible mortgage interest,
qualified mortgage insurance premiums,
and casualty losses.
Deductible only when you use home for business
There are, however, expenses that are deductible
only if you use your home for business.
These expenses generally include,
but are not limited to, insurance,
rent, repairs, utilities and services,
and depreciation on your home.
Deduction limits - Gross Income
Now, let's talk about the deduction limits
we mentioned earlier.
If your gross income from the business operated
or managed from your home
equals or exceeds your total business expenses,
you can deduct all your business expenses.
If, however, the gross income from that business
is less than your total business expenses,
your deduction for certain expenses
for the business use of your home is limited.
These expenses are limited to the gross income
from the business use of your home minus the following:
ordinary and necessary business expenses,
as well as the business part of the expenses,
such as your mortgage interest,
real estate taxes, and casualty losses,
that you could deduct even if you did not use your home
for business.
Expenses that cannot be deducted
because of the deduction limit can be carried forward
to later years subject to the deduction limit in those years.
Self-employed individuals show their business income
and expenses on Schedule C Form 1040,
Profit or Loss from Business.
If you file Schedule C, you calculate expenses
related to the business use of the home on Form 8829,
Expenses for Business Use of Your Home,
and you report the deductible amount on Schedule C.
Let's look at an example.
Example - Determining the home office deduction
Let's work with Miguel, a small business owner,
to help him determine his home office deduction.
Miguel already has a copy of Form 8829,
Expenses for Business Use of Your Home
as well as the instructions to complete Form 8829.
To start...
let's look at Part One, Part of Your Home Used for Business.
First, Miguel, you need to determine the area of your home
used regularly and exclusively for your business
and enter that number on line 1.
That would be 2 hundred and 50 square feet,
so I enter 2 hundred and 50.
Next, enter the total area of your home on line 2.
And that would be 25 hundred square feet,
so I enter 25 hundred.
Now, divide the area of your home used for business
by the total area of your home.
That is, divide line 1 by line 2 and enter the result
as a percentage on line 3.
Let's see, 2 hundred and 50
divided by 25 hundred comes to 10 percent.
Miguel, because you are not operating
a home daycare business, you can skip lines 4, 5, and 6.
Instead, reenter the percentage from line 3 on line 7.
And that's it, Miguel, you have completed Part One.
So far, so good.
With Part One completed, we're now on to Part Two.
In Part Two, Miguel,
you'll calculate your allowable deduction.
We start with line 8, where, Miguel,
you'll enter the amount from Schedule C, line 29,
plus any gain derived from the business use of your home
and shown on Form 1040 Schedule D,
Capital Gains and Losses,
or Form 4797, Sales of Business Property,
minus any loss from the trade or business not derived
from the business use of your home
and shown on Schedule D or Form 4797.
Could you run that by me again?
I know it sounds confusing,
so let's go over line 8 in more detail.
If all the gross income from your trade or business
is from the business use of your home,
the source for your entry on line 8
is the amount from Schedule C, line 29.
But don't write in that number yet.
To that number, add any gain derived from the business use
of your home and shown on Form 8949,
Sales and other Dispositions of Capital Assets,
or Form 4797, Sales of Business Property,
and subtract any loss shown on Form 8949 or Form 4797
that are allocable to the trade or business
in which you use your home but are not allocable
to the use of your home.
What if someone files more than one Form 8829?
If a business owner files more than one Form 8829,
include only the income earned
and the deductions attributable to that income
during the period you owned the home
for which Part I was completed.
Miguel, how are you doing?
I think I'm doing okay.
It looks like line 8
comes to 25 thousand, 5 hundred, and 50 dollars.
Great.
Now, let's look at lines 9 through 22.
You'll see that most of those lines have two columns,
one for direct expenses
and one for indirect expenses.
Enter as direct or indirect expenses
only expenses for the business use of your home;
that is, expenses allowable only because your home
is used for business.
For lines 9, 10 and 11, though,
enter only the amounts that would be deductible
whether or not you used your home for business;
that is, amounts allowable as itemized deductions
on Form 1040 Schedule A, Itemized Deductions,
or amounts allowable for net disaster loss on Form 1040A
or Form 1040 Schedule L,
Standard Deduction for Certain Filers.
If you did not operate a business for the entire year,
you can deduct only the expenses paid
or incurred for the portion of the year
you used your home for business.
Other expenses not allocable to the business use of your home,
such as salaries, supplies, and business telephone expenses,
are deductible elsewhere on Schedule C
and should not be entered on Form 8829.
Can you remind me of the difference between direct
and indirect expenses?
Sure.
Direct expenses benefit only the business part of your home.
They include painting or repairs made to the specific area
or rooms used for business.
Enter 100 percent of your direct expenses
on the appropriate line in column a.
Indirect expenses are for keeping up
and running your entire home.
They benefit both the business and personal parts
of your home.
Generally, enter 100 percent of your indirect expenses
on the appropriate line in column b.
I would like to point out an exception, however.
If the business percentage of an indirect expense
is different from the percentage on line 7,
enter only the business part of the expense
on the appropriate line in column a,
and leave that line in column b blank.
For example, suppose your electric bill
is 8 hundred dollars for lighting, cooking,
laundry, and television.
If you reasonably estimate 3 hundred dollars
of your electric bill is for lighting
and you use 10 percent of your home for business,
enter 30 dollars on line 20 in column a.
Do not make an entry on line 20 in column b
for any part of your electric bill.
Okay, let's see what I can enter
into those lines and columns.
Those expenses are 45 hundred dollars
for deductible mortgage interest and 1 thousand dollars
for real estate taxes, and they relate to my entire home.
So, I enter them in column b on lines 10 and 11, respectively.
I add lines 9, 10, and 11, and enter the total,
55 hundred dollars, on line 12.
And for line 13, Miguel,
you're going to multiply line 12, column b, by line 7.
So I multiply 55 hundred dollars by 10 percent--
that's the business percentage I calculated earlier--
and that comes to 5 hundred and 50 dollars.
For line 14, then,
you are going to add line 12, column a, and line 13.
That would be the 5 hundred and 50 dollars,
the business part of these expenses.
For line 15, subtract line 14 from line 8.
So I would subtract the 5 hundred and 50 dollars
that I entered on line 14
from the 25 thousand, 5 hundred, and 50 dollars
that I had entered on line 8.
That result is 25 thousand dollars.
And that 25 thousand dollars
would be the most you could deduct, Miguel,
for other home office expenses.
The third step is calculating your deductions
for the operating expenses for your home.
Let's see, I paid 3 hundred dollars
to have my office repainted.
And you enter that 3 hundred dollars on line 19 in column a.
All your other expenses you would enter
on the appropriate lines in column b.
And that would be...
4 hundred dollars for homeowners insurance,
and that would be entered on line 17 in column b.
Then there's the 14 hundred dollars for roof repairs--
I enter that on line 19 in column b.
Finally, there's the 18 hundred dollars
for gas and electric related to my entire home,
so I enter that on line 20 in column b.
These expenses total to 36 hundred dollars.
For line 22, Miguel,
you're going to add lines 16 through 21,
for both the direct and indirect expenses.
That's easy--
a total of 3 hundred dollars for direct expenses,
and a total of 36 hundred dollars
for indirect expenses.
And because you use only 10 percent of your home
for business, Miguel, the business part
of those indirect expenses is 3 hundred and 60 dollars,
and that's the number you would enter on line 23.
As you don't have any carryover of operating expenses
from last year, let's go to line 25.
Here, you'll add line 22, column a,
line 23 and line 24, if it applies.
So I add the 3 hundred dollars of direct expenses
from line 22, column a, to the 3 hundred and 60 dollar total
for the indirect expenses on line 23.
I don't have anything for line 24,
so on line 25 I would enter the total,
6 hundred and 60 dollars.
And, Miguel, because that amount
is less than your deduction limit of 25 thousand dollars
from line 15, you can deduct it in full.
And remember, the 24 thousand, 3 hundred, and 40 dollar balance
of your deduction limit,
from line 27, is the most you could deduct for depreciation.
You can calculate your allowable depreciation
for the business use of your home
in Part Three of Form 8829.
I've already completed that part.
My allowable depreciation is 2 hundred and 70 dollars.
You're going to enter that 2 hundred and 70
on both lines 41 and 29.
Looks like I'm nearly done.
What's left?
First, you're going to complete lines 31 and 32.
Then, you are going to complete line 33
by adding together the business portion
of your otherwise deductible expenses from line 14,
your operating expenses from line 26,
and your depreciation from line 32.
That total is 1 thousand, 4 hundred, and 80 dollars.
Because you didn't have any casualty loss portion
entered on line 34, you will also enter
the 1 thousand, 4 hundred, and 80 dollars on line 35.
That number represents the allowable expenses
for business use of your home.
And don't forget to enter that same number
on Schedule C, line 30.
Finished!
Thanks for the information.
This wasn't as difficult as I thought it would be.
We're glad we could help, Miguel.
The material we just covered with Miguel
was one example of how to complete Form 8829.
Your situation may be different,
Form 8829 Instructions
and we encourage you to read the instructions to Form 8829
for more information as well as consult
with a tax practitioner, if necessary.
Form 8829, Business Use of Your Home
What you can't do . . . .
Let's say that Miguel was just starting out
and his tentative profit turned out to be 13 hundred dollars
instead of 25 thousand, 5 hundred, and 50 dollars.
In this case, he would subtract the business part
of his mortgage interest and taxes,
5 hundred and 50 dollars, to calculate his deduction
limit of 7 hundred and 50 dollars.
In addition, he could still deduct the entire
6 hundred and 60 dollars he calculated for the business part
of the operating expenses for his home.
He could only claim 90 dollars of the 2 hundred and 70 dollars
for depreciation;
however, he could carry forward
the remaining 1 hundred and 80 dollars
to a year when he has more income.
The point here is that you cannot use
your home's operating expenses,
or your home's depreciation deduction, to create a net loss
for a business operated out of your home.
Now, let's talk a little about business owners
deducting real estate taxes and mortgage interest-- twice.
Do not take a double deduction
for real estate taxes and mortgage interest.
If you report an amount for the business portion of the taxes
and interest on Schedule C,
make sure you report only the personal portion
on Schedule A, Itemized Deductions.
The amounts reported on Schedule C and Schedule A
should be the total interest and taxes you paid for the year.
Publication 587, Business Use of Your Home
IRS Publication 587, Business Use of Your Home,
has further information on all of the above topics.
Like our other publications, you can find it online
at www.irs.gov.
Selling your home when you used it for business
If you used your home for business,
some special rules apply when you sell it at a profit,
or what is sometimes referred to as a gain.
Briefly, you pay tax on the part of the gain
that is equal to what you claimed or could have claimed
for depreciation over the years.
Publication 523, Selling Your Home
For more information on the sale or exchange of a home,
see IRS Publication 523, Selling Your Home.
Recordkeeping
Recordkeeping
We'd also like to remind you
about the importance of recordkeeping,
which was covered in an earlier lesson.
Recordkeeping is vital when you have a home business,
and you must keep records that provide the information
needed to calculate your deductions
for the business use of your home.
Publication 3995, Recognizing Illegal Tax Avoidance Schemes
Illegal Tax Avoidance Schemes
Also, we want to touch on a tax avoidance scheme
related to home-based businesses.
Most taxpayers with home-based businesses
accurately report their income and expenses
while still enjoying the benefits
that a home-based business can offer.
However, some individuals have received advice
that they can operate any kind of unprofitable business
out of their home and then claim personal expenses
as business expenses.
No matter how convincing
any information you read about this might be,
non-deductible personal living expenses cannot be transformed
into deductible business expenses.
We encourage you to go to www.irs.gov
for information on how to avoid these types of schemes.
Lesson Review
Let's review what we've learned.
In this lesson, we discussed the requirements you must meet
to qualify for a deduction for the business use of your home,
how to determine the business percentage of home use,
the types of expenses you can and cannot deduct
either in full or according to the percentage,
how to determine the limits on business use
of the home deductions, and where to deduct the expenses
on your return.
We've also briefly talked about the effect
of claiming these expenses when you sell your home,
recordkeeping requirements, and tax avoidance schemes.
Publication 587
Publication 523
Remember, IRS Publications 587 and 523
can provide more information;
we also encourage you
Small Business/Self-Employed Tax Center
to visit the Small Business and Self-Employed Tax Center
at www.irs.gov/smallbiz.
It is also important to note that there are special rules
that apply to home-based daycare providers.
If you run a daycare business from your home,
you'll find the special rules and publications
that apply to your business at www.irs.gov/smallbiz.
Thank you for joining us for this lesson
on home-based businesses.
Best wishes on your home-based business.