Example of Home Office Deduction Computation

Steps for computing the home office deduction

  • First, complete Schedule C.
  • Check Schedule C, Line 29, Tentative profit or (loss).
  • If line 29 is zero or if it shows a loss, STOP, you may not take the home office deduction or use it to increase a business loss.
  • If Schedule C, Line 29 shows a Tentative profit, complete Form 8829 to compute the home office deduction.
  • Enter your deduction on Line 34 of Form 8829, then carry it to Schedule C, Line 30.
  • On Schedule C, subtract the home office deduction shown on line 30 from Line 29 and enter the result on Line 31.
  • Finally, carry the amount from Schedule C, Line 31 to Form 1040, Line 12.

Example:

In this example, the Home Office Deduction zeros out Schedule C net profit.

The example assumes you own your home and use 20% of its total square feet for your home office (400 S.F/2,000 S.F.). In addition, Schedule C and Line 29 shows a Tentative profit $3,900

  • Your first step is to complete Form 8829, Part II.
    • You enter the $3,900 "Tentative profit" from Line 29 of Schedule C, on Line 8 on Form 8829.
    • The first category of items subtracted from Tentative profit include:
      • Total annual mortgage interest: $9,000 x 20% = $1,800
      • Total annual property taxes: $2,000 x 20% = $400
    • Second category of items to subtract from remaining Tentative profit:
      • Insurance: $800 x 20% = $160
      • Utilities: $1,200 x 20% = 240
    • Last item to deduct from remaining Tentative profit:
      • Depreciation on office office portion of the house: $1,400
Home Office Deduction Computation: Allocation Percentage 20%
Step
1 Enter Tentative profit from Schedule C, Line 29 $3,900
2 First Category of Items Deducted from Tentative Profit:
Deductible mortgage interest: $1,800 (20% x $9,000)

Note: The remaining $7,200 (80% x $9,000) is deducted on Schedule A as an itemized deduction
$1,800
Real estate taxes: $400 (20% x $2,000).

Note: The remaining $1,600 (80% x $2,000) is deducted on Schedule A as an itemized deduction.
$400
3 Total-Mortgage interest plus real estate taxes($1,800 + 400) ($2,200)
4 Remaining tentative profit - ($3,900 minus $2,200) $1,700
Next Category of Items Deducted from Remaining Tentative Profit:
Insurance: $160 (2-% x $800) $160
Utilities: $240 (20% x $1,200) $240
5 Total-Insurance plus utilities ($160 + $240) ($400)
Remaining tentative profit - ($1,700 minus $400) $1,300
6 Last Item Deducted from Remaining Tentative Profit is Depreciation:
 

Depreciation deducted from the remaining tentative profit.
- Use a 39-year recovery period
- For depreciation purposes, the cost basis of the house is the lower of the fair market value of the house at the time you started to use part of it for business or its adjusted basis, exclusive of the cost of the land.

You may not create a loss by claiming the Home Office Deduction. Since depreciation was $1,400, you may only deduct $1,300, the amount of the remaining tentative profit. The excess $100 is carried over to the following tax year.

($1,300)
Remaining Tentative profit ($1,300 minus $1,300)

Form 1040, Line 12, Business income or(loss) is zero. Attach Schedule C and Form
$0

File your personal and small business taxes (Schedule C)