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Tuesday, December 20, 2011

Almost Done! - Home Office Expense

I needed the weekend off :)

Part One
Part Two
Schedule C Tax Form
Schedule C Instructions

And remember: I'm not a tax accountant. Always double-check my comments by reading the instructions for yourself or by consulting your tax accountant.

Today we'll go over the Form 8829 for your home office expenses. Here are the instructions for that. I will be honest. This is the first year I have used this, so I will be learning right along with you. We will just read one line at a time and research it. It looks pretty self-explanatory.

Line 1 - Area used regularly and exclusively for business. They are looking for square footage here. You will measure your eBay room and put the square footage on Line 1. The instructions say this:
Your home office will qualify as your principal place of business if you meet the following requirements.
  • You use it exclusively and regularly for administrative or management activities of your trade or business.
  • You have no other fixed location where you conduct substantial administrative or management activities of your trade or business.
You can also deduct expenses that apply to space within your home used on a regular basis to store inventory or product samples from your trade or business of selling products at retail or wholesale. Your home must be the only fixed location of your trade or business.
Line 2 - Total Area of Your Home. Again, enter the square footage of your entire home on this line. We will use this to figure what percentage of your home is made up by your eBay space.

Line 3 - Divide Line 1 by Line 2. Enter the result as a percentage. My home is 2200 square feet. My eBay room is 146 square feet. 146 divided by 2200 = .067, or 6.7%. That number will go on Line 3.

Line 4 - Multiply Days Used for Daycare During Year by Hours Used Per Day. We are eBay sellers, not babysitters. This will be 0.

Line 5 - Total hours available for use during the year. We're ignoring this as well.

Line 6 - Divide Line 4 by Line 5. Since Line 4 was 0, Line 6 will be 0. Lines 4-6 are for people who run a daycare in their home.

Line 7 - Business Percentage. Daycare providers do something different. All others enter the number from Line 3. Enter the number from Line 3 :)  This number is the percentage of your home that is used for business.

Line 8 - Enter the amount from Schedule C, line 29 .... Basically, we need to do just that. If you made money outside of your home office, then you'll need to read the instructions to see how to determine the number that goes here. Also, it looks like any profit or loss from selling your home would need special consideration too. If that applies to you, read the instructions, but I think most of us can just enter the amount from Line 29 of our Schedule C.

Line 9 - Casualty Losses. Looks like this is another special situation - theft or fire damage to your inventory or office space, I think?

Line 10 - Deductible mortgage interest. Deduct the portion of your mortgage interest that is deductible on a Schedule A. You will definitely want to read the instructions for this. This number may be limited, depending on your Adjusted Gross Income. Something very important that I'd like to point out here ... if we end up itemizing this year (filling out a Schedule A instead of taking the standard deduction), I'll need to remember to only deduct 93.3% of our mortgage interest on my Schedule A, since I'll have already deducted 6.7% of it on the Business Use of Your Home form.

Line 11 - Real estate taxes. This is the same process as mortgage interest. You'll find your real estate taxes paid on the same form as your mortgage interest paid (1098). Remember to split the percentage correctly.

Line 12-15 are basic arithmetic problems.

This looks like a big chunk, but a lot of it is simple arithmetic. For lines 16 through 20, column A is for direct expenses, column B is for indirect. Column A is for things like painting or repairs in your eBay room - expenses that were directly used for your eBay space. Column B is for things that benefit your whole home, but a portion of it benefits your eBay space. There are exceptions to this. The example in the instructions is a good one:

Line 16 - Excess mortgage interest. If your mortgage interest deduction was limited because of your adjusted gross income, then you can enter the rest of it here.

Line 17, 19, and 20 - Insurance, Repairs and Maintenance, and Utilities. Enter the full amount of the insurance, repairs, maintenance, and utilities that you paid for your home through the year.

Line 18 - Rent. If you rent your home, then you'll put your full rent paid on this line. If your housing is provided free of charge and is tax exempt, you may not deduct any rent.

Line 21 - Other expenses. If you have any other home office expenses that aren't included in lines 9 through 20, then put them here. I can't think of anything that might go in here, and the instructions don't give any examples.

Line 22 - Add lines 16 through 21. This is the total expenses paid on your whole home.

Line 23 - Multiply line 22 (column B) by the amount on line 7. This is the percentage of your whole home expenses that just your eBay space used.

Line 24 - Carryover of operating expenses from 2010 Form 8829. If you filled this form out last year, then find it and copy line 42 from last year's Form 8829 onto this year's Form 8829 Line 24.

Line 25 - Add line 22 (column A), line 23 and line 24. Simple arithmetic.

Line 26 - Allowable operating expenses. Enter the smaller of line 15 or line 25.

Line 27 - Limit on excess casualty losses. Subtract line 26 from line 15.

Line 28 - Excess casualty losses. If you had casualty losses (from theft or fire, for example), you would have figured that number on line 9. If they were limited, then you can take the amount that was over what you wrote on line 9 and multiply it by the percentage on line 7. That number goes here on line 28.

(Who was it that said this all looked easy and self-explanatory??)

Line 29 - Depreciation of your home from line 41 below. We'll be doing that section in my next blog post.

Line 30 - Carryover of excess casualty losses from 2010. If you had home business expenses last year and had casualty losses last year that you weren't able to deduct, you can enter that carryover amount here. Check your 2010 Form 8829. Copy the number from line 43 onto this year's Form 8829 Line 30.

Line 31-35 are all arithmetic. Yay! I love it when we get to that part, because it's easy and I don't have to think. :)

Ok. That is a LOT for today. I'll have to study the depreciation section before blogging about it. That may be a day or two, but that's ok. I don't want to get burned out, and I don't want you to give up on me. I may do a light post or two between now and then. This is supposed to be a fun place, not a heavy one full of hard work. :)

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