How the Internal Revenue Service Views The Home Office
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Publication 587 (1996)
Business Use of Your Home
(Including Use by Day-Care Providers)
For use in preparing 1996 Returns
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IMPORTANT CHANGES
Storage of product samples. For tax years beginning after 1995, you may
be able to deduct expenses for the part of your home you use to store product samples. For
more information, see Storage of inventory or product samples later.
Increase in the section 179 deduction. Beginning after 1996, the total
cost of section 179 property that you can deduct increases. For 1997, the total is
increased to $18,000. For more information on the increases, get Publication 553,
Highlights of 1996 Tax Changes. For more information on the section 179 deduction, get
Publication 946.
IMPORTANT REMINDER
Form 8829. If you file Schedule C, Profit or Loss From Business, with
your Form 1040, you must use Form 8828, Expenses for Business Use of Your Home, to figure
your deduction for business use of your home.
INTRODUCTION
You must meet specific tests to take a deduction for the business use
of your home. Even if you meet these tests, your deduction may be limited. This
publication explains the rules for taking the deduction and how to figure the limit. If
you are an employee or file Schedule F, the worksheet at the end of this publication will
help you figure the limit on the amount you can deduct.
The term home includes a house, apartment, condominium, mobile home, or
boat. It also includes structures on the property, such as an unattached garage, studio,
barn, or greenhouse. However, it does not include any part of your property used
exclusively as a hotel or inn.
The publication does not discuss renting out your home, part of your
home, or vacation property. For information about renting out your property, see
Publication 527,
Residential Rental Property.
The rules in this publication apply to individuals, trusts, estates,
partnerships, and S corporations. They do not apply to corporations, other than S
corporations. There are no special rules for the business use of a home by, a partner or S
corporation shareholder.
Useful Items
You may want to see:
• Publication 523 Selling Your Home
• Publication 534 Depreciating Property Placed in Service Before 1987
• Publication 551 Basis of Assets
• Publication 583 Starting a Business and Keeping Records
• Publication 946 How to Depreciate Property
Form (and Instructions)
- 2106 Employee Business Expenses
- 2106-EZ Unreimbursed Employee Business Expenses
- 4562 Depreciation and Amortization
- 8829 Expenses for Business Use of Your Home
See How To Get More Information near the end of this publication for
information about getting these publications and forms.
Help from the Problem Resolution Office. Problem Resolution Officers
can help you with tax problems that you have so far not been able to resolve with the IRS.
Also, they can offer you special help if you have a significant hardship as a result of a
tax problem. For more information, write to the Problem Resolution Office at the district
office or service center where you have the problem, or call 1-800-829-1040
(1-800-829-4059 for TDD users).
USE TESTS
Whether you are an employee or self-employed, you generally cannot
deduct expenses for the business use of your home. But you can take a limited deduction
for its business use if you use part of your home exclusively and regularly:
1) As the principal place of business for any trade or business in which you engage, or
2) As a place of business to meet or deal with patients, clients, or customers in the
normal course of four trade or business, or
3) In connection with your trade or business, if you are using a separate structure that
is not attached to your home.
Employee use. Even if you meet the exclusive and regular use tests, you
cannot take any deduction for the business use of your home if you are an employee and
either of the following situations apply to you.
1) The business use of your home is not for the convenience of your employer. Whether your
home's business use is for your employer's convenience depends on all the facts and
circumstances. However, business use is not considered for your employer's convenience
merely because it is appropriate and helpful.
2) You rent all or part of your home to your employer and use the rented portion to
perform services as an employee.
Trade or business use. You must use your home in connection with a
trade or business to take a deduction for its business use. If you use your home for a
profit-seeking activity that is not a trade or business, you cannot take a deduction for
its business use.
Example. You use pad of your home exclusively and regularly to read financial periodicals
and reports, clip bond coupons, and do similar activities for your own investments. You do
not make investments as a broker or dealer. Therefore, your activities are not a trade or
business and you cannot take a deduction for the business use of your home.
Exclusive Use
"Exclusive use" means only for business. If you use part of
your home as your business office and also use that part for personal purposes, you do not
meet the exclusive-use test. The business part of your home can be a room or other
separately identifiable space; it is not necessary that the part be marked off by a
permanent partition.
Example. You are an attorney. You use a den in your home to write legal
briefs and prepare client tax returns. You also use the den for personal purposes.
Therefore, you cannot claim a business deduction for using it.
Exceptions to Exclusive Use
There are two exceptions to the exclusive use test:
1) The use of part of your home for the storage of inventory or product samples, and
2) The use of part of your home as a day-care facility, discussed later under Day-Care
Facility.
Storage of inventory or product samples. You can deduct expenses that
relate to the use of part of your home for the storage of inventory or product samples, if
you meet all the following five tests:
1) You keep the inventory for use in your trace or business.
2) Your trade or business is the wholesale or retail selling of products.
3) Your home is the only fixed location of your trade or business.
4) You use the storage space on a regular basis.
5) The space you use is e separately identifiable space suitable for storage.
Example. Your home is the sole fixed location of your business of
selling mechanics' tools at retail. You regularly use half of your basement for storage of
inventory and product samples and sometimes use it for personal purposes. The expenses for
the storage space are deductible even though you do not use this part of your basement
exclusively for business.
Regular Use
"Regular use" means use on a continuing basis. Occasional or
incidental business use of part of your home does not meet the regular use test even if
that part is used for no other purpose. Therefore, expenses attributable to that
occasional or incidental business use are not deductible.
Principal Place of Business
You can have more than one business location, including your home, for
a single trade or business. To deduct expenses for the business use of your home, you must
determine that it is your principal place of business for that trade or business based on
all the facts and circumstances. The two primary factors are:
1) The relative importance of the activities performed at each business location, and
2)The amount of time spent at each location.
The relative importance test is considered first.
A comparison of the relative importance of the activities performed at
each business location depends on the characteristics of each business. If the nature of
your business requires that you meet or confer with clients or patients, or requires that
you deliver goods or services to a customer, the place where that contact occurs must be
given great weight in determining where the most important activities are performed.
Performance of necessary or essential activities in your home office (such as planning for
services or the delivery of goods, or the accounting or billing for those activities or
goods) is not controlling.
If the relative importance test does not clearly establish the
principal place of business, such as when you deliver goods or services at both the office
in your home and elsewhere, then the time test is considered. The time test compares the
amount of time spent on business at your home office with the amount of time spent at
other locations. In some cases, there may be no principal place of business.
Example 1. Jane Williams is a self-employed anesthesiologist: Her only
office is a room in her home used regularly and exclusively to contact patients, surgeons,
and hospitals by telephone; to maintain billing records and patient logs; to prepare for
treatments and presentations; to satisfy continuing medical education requirements; and to
read medical journals and becks.
Jane spends approximately 10 to 15 hours a week doing work in her home
office. She spends 30 to 35 hours per week administering anesthesia and postoperative care
in three hospitals, none of which provide her with an office.
The essence of Jane's business as an anesthesiologist requires her to
treat patients in hospitals. The home office activities, although essential, are Jess
important to Jane's business and take less time than the services she performs in the
hospitals. Her home office is net her principal place of business. Therefore, she cannot
deduct expenses for the business usa of her home.
Exemple 2. Sam Stone is a self-employed plumber. His only office is a
room in his home, which he uses regularly and exclusively to phone customers, decide what
supplies to order, and review the books of the business. He also employs Helen Green, a
full-time unrelated employee, to perform administrative services in his office such as
answering the telephone, scheduling his appointments, ordering supplies, and keeping his
books.
Sam spends approximately 40 hours a week at his customers' homes and
offices, installing and repairing plumbing. He spends approximately 10 hours a week doing
work in his home office.
The essence of Sam's trade or business as a plumber requires him to
perform services and deliver goods at the homes or offices of his customers. His home
office activities, although essential, are lees important and take less time than the work
he does in the customers' homes and offices. Therefore, his office in the home is not his
principal place of business and he cannot deduct expenses for the business use of the
home. The fact that Helen performs administrative activities at his office does not alter
this result.
Example 3. Joe Smith is a salesperson. His only office is a room in his
house used regularly and exclusively to set up appointments, store product samples, and
write up orders end ether reports for the companies whose products he sells.
Joe's business is selling products to customers at various locations
within the metropolitan area where he lives. To make these sales, he regularly visits the
customers to explain the available products and to take orders. He makes only a few sales
from his home office. He spends an average of 30 hours week visiting customers and 12
hours a week working at his home office.
The essence of his business as a salesperson requires him to meet with
customers primarily at the customer's place of business. The home office activities,
although essential, are less important to Joe's business and take less time than the sales
activities he performs when visiting customers. Therefore, his home office is not his
principal place of business and he cannot deduct expenses for the business use of his
home.
Example 4. Fred Jones, a salesperson, performs the same activities in
his home office as does Joe Smith in Example 3, except that Fred makes racet of his sales
to customers by telephone or mail from his home office. He spends an average of 30 hours a
week working at his home office and 12 hours a week visiting prospective customers to
deliver products and occasionally lake orders.
The essence of Fred's business as a salesperson requires him to make
telephone or mail contact with customers primarily from his office, which is in his home.
Actually visiting customers is less important to his business and takes less time than the
sales activities he performs from his home office. Therefore, he can deduct expenses for
the business use of his home.
Example 5. Nelson Lewis is employed as a teacher. He is required to
teach and meat with students at the school and to grade papers and tests. In addition to a
small shared office at the school, he maintains a home office for use in class preparation
and for grading papers and tests. He spends about 25 hours per week at the school, and 30
to 35 hours per week at his home office.
The essence of Nelson's work as a teacher requires him to teach and
meet with students at the school. Although the class preparation and grading take more
time and are essential, they are less important than the activities at the school. He
cannot deduct expenses for the business use of his home. Because his home office is not
the principal place of business, it is not necessary to determine whether he maintains the
office for the convenience of his employer.
More than one trade or business.
TIP: Whether your home office is the principal place of business must be determined
separately for each trade or business activity. One home office may be the principal place
of business for more than one activity; however, you will not meet the exclusive use test
for any activity unless each activity conducted in that office meets all the teats for the
business use of the home deduction.
Example. Tracy White is employed es a teacher. Her principal place of
work is the school. She also has a mail order jewelry business. All her work in the
jewelry business is done in her home office and the office is used exclusively for the
business. If she meets all the other tests, she may deduct expenses for business use of
her home for the jewelry business.
If Tracy makes any use of the office for work related to her teaching,
the exclusive use test is not met for the jewelry business. She may not take soy home
office deduction for either activity because her job as a teacher does not meet the tests
for the deduction.
Place To Meet Patients, Clients, or Customers
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 pert of your home used exclusively and
regularly for business. You must physically meet with patients, clients, or customers on
your premises and their use of your home must be substantial and integral to the conduct
of your business. Occasional meetings and telephone calls do not qualify you to deduct
expenses for the business use of your home.
Doctors, dentists, attorneys, and other professionals who maintain offices in their homes
will generally meet this requirement.
The part of your home you use exclusively and regularly to meet
patients, clients, or customers does not have to be your principal place of business.
Example. June Quill, an attorney, works 3 days a week in her city
office. She works 2 days a weak in her home office used only for business. She regularly
meats clients there. Her home office qualifies for a business deduction bananas she meets
clients there in the normal course of her business.
Separate Structures
You can deduct expenses for a separate freestanding structure, such as
a studio, garage, or barn, if you use it exclusively and regularly for your business. The
structure does not have to be your principal place of business or a place where you meet
patients, clients, or customers.
Example. John Berry operates a floral shop in town. He grows the plants
for his shop in a greenhouse behind his home. Since he uses the greenhouse exclusively and
regularly in his business, he can deduct the expenses for its use subject to the deduction
limit, explained later.
BUSINESS PART OF HOME EXPENSES
If you use part of your home for business and meet the requirements
discussed earlier, you must divide the expenses of operating your home between personal
and business use. This section explains how to divide each expense.
Some expenses you pay to maintain your home are directly related to its
business use. Some are indirectly related, and some are unrelated. You can deduct all of
your direct expenses and part of your indirect expenses, both subject to a limit. See
Deduction Limit, later.
Unrelated expenses benefit only the parts of your home that you do not
use for business. These include repairs to personal areas of your home, lawn care, and
landscaping. You cannot deduct unrelated expenses.
If you file Schedule C, figure the allowable deduction on Form 8929. If
you are an employee or file Schedule F, you may find it convenient to use the worksheet
near the and of this publication to help figure your deductible expenses.
The following graphic is not included in this file:
Figure A. Can You Deduct Business Use of the Home Expenses
Part-year use.
TIP: You cannot take a deduction for busi-hess use of the home for expenses incurred
during any part of the year you did not use your home for business purposes. For example,
if you begin using part of your home for business on July 1, and you meet all of the tests
from that date until the and of the year, you consider only your expenses for the last
half of the calendar year in figuring your allowable deduction.
Direct Expenses
Direct expenses benefit only the business part of your home. They
include painting or repairs made to the specific area or room used for business. You can
deduct direct expenses in full. Direct expenses for the portion of your home used
regularly, but not exclusively, as a day-care facility must be adjusted for the time the
space is used for business, as discussed later under Day-Care Facility.
Indirect Expenses
Indirect expenses are for keeping up and running your entire home. They
benefit both the business and personal parts of your home. Examples of indirect expenses
include:
- Real estate taxes,
- Deductible mortgage interest,
- Casualty losses,
- Rent,
- Utilities and services,
- Insurance,
- Repairs,
- Security systems, and
- Depreciation.
If you otherwise qualify, you can deduct the business percentage of your indirect
expenses.
Expenses related to tax-exempt income. Generally, you cannot deduct
expenses that are related to tax-exempt allowances. However, if you receive a tax-exempt
parsonage allowance or a tax-exempt military housing allowance, your expenses for mortgage
interest and real estate taxes are deductible under the normal rules. No deduction is
allowed for other expenses related to the tax-exempt allowance.
If your housing is provided free of charge and the value of the housing
is tax-exempt, you cannot deduct the rental value of any portion of the housing.
Figuring the business percentage.
TIP: To figure deductions for the business use of your home, find the business percentage.
You can do this by dividing the area used for business by the total area of your home. You
may measure the area in square feet. To figure the percentage of your home used for
business, divide the number of square feet of space used for business by the total number
of square feet of space in your home. If the rooms in your home are about the same size,
you can also figure the business percentage by dividing the number of rooms used for
business by the number of rooms in your home. You can also use any other reasonable method
to determine the business percentage.
Example 1. Your home measures 1,200 square feet. You use one room that
measures 240 square feet for business. Therefore, you use one-fifth (240 ÷ 1,200), or
20%, of the total area for business.
Example 2. If the rooms in your home are about the same size, and you
use one room in a five-room house for business, you use one-fifth, or 20%, of the total
area for business.
Real Estate Taxes
To figure the business part of your real estate taxes, multiply the
real estate taxes paid by the percentage of your home used for business.
For more information on amounts allowable as a deduction for taxes, see
Publication 530, Tax Information for First-Time Homeowners.
Deductible Mortgage Interest
To figure the business part of your deductible mortgage interest,
multiply this interest by the percentage of your home used in business. You can include
interest on a second mortgage in this computation. If your total mortgage debt is more
than $1,000.000 or your home equity debt is more than $100,000, your deduction may be
limited. For more information on what interest is deductible, see Publication 936, Home
Mortgage Interest Deduction.
Casualty Losses
If you have a casualty loss on your home that you use in business,
treat the casualty loss as an unrelated expense, a direct expense, or an indirect expense,
depending on the property affected.
1) If the loss is on the portion of the property you use only in your business, the entire
loss is used to figure the business use of the home deduction (direct expense).
2) If the loss is on property you do not use in your business, none of the loss is used to
figure the deduction (an unrelated expense).
3) If the loss is on property you use for both business and personal purposes, only the
business portion is used to figure the deduction (an indirect expense).
If you are filing Schedule C (Form 1040), get Form 8829 and follow the
instructions for casualty losses. If you are an employee or file Schedule F (Form 1040),
you can use the worksheet near the and of this publication. You will also need to get Form
4684, Casualties and Thefts.
For more information on casualty losses to business and nonbusiness
property, get Publication 547, Casualties, Disasters, and Thefts (Business and
Nonbusiness).
Rent
If you rent, rather than own, a home and meet the requirements for
business use of the home, you can deduct part of the rent you pay. To figure your
deduction, multiply your rent payments by the percentage of your home used for business.
You cannot deduct the fair rental value of your home. If you own your home, see
Depreciation, later.
Utilities and Services
Expenses for utilities and services, such as electricity, gas, trash
removal, and cleaning services, are primarily personal expenses. However, if you use pert
of your home for business, you can deduct the business part of these expenses. Generally,
the business percentage for utilities is the same as the percentage of your home used for
business.
Telephone. The basic local telephone service charge, including taxes,
for the first telephone line into your home is a nondeductible personal expense. However,
charges for business long-distance phone calls on that line, as well as the cost of a
second line into your home used exclusively for business, are deductible business
expenses. You may deduct these expenses even if you do not qualify to deduct expenses for
the business use of your home. Deduct these charges separately on the appropriate
schedule. Do not include them in your home office deduction.
Insurance
You can deduct the cost of insurance that covers the business part of
your home. However, if your insurance premium gives you coverage for a period that extends
past the and of your tax year, you can deduct only the business percentage of the part of
the premium that gives you coverage for your tax year. You can deduct the business
percentage of the part that applies to the following year in that year.
Repairs
The cost of repairs and supplies that relate to your business,
including labor (other than your own labor), is a deductible expense. For example, a
furnace repair benefits the entire home. If you usa 10% of your home for business, you can
deduct 10% of the cost of the furnace repair.
Repairs keep your home in good working order over its useful life.
Examples of common repairs are patching walls and floors, painting, wallpapering,
repairing roofs and gutters, and mending leaks. However, repairs are sometimes treated es
a permanent improvement. See Permanent improvements, later.
Security System
If you install a security system that protects all the doors and
windows in your home, you can deduct the business part of the expenses you incur to
maintain and monitor the system. You can also take a depreciation deduction for the part
of the cost of the security system relating to the business use of your home.
Depreciation
The cost of property that can be used for more than 1 year, such as a
building, a permanent improvement, or furniture, is a capital expenditure. You generally
cannot deduct its entire cost in 1 year. However, you may be able to recover this cost by
taking annual deductions for depreciation. For information on depreciating furniture, see
Business Furniture and Equipment, later.
Land is not depreciable property. You generally cannot recover the cost of land until you
dispose of it.
Permanent improvements. A permanent improvement increases the value of
property, adds to its life, or gives it a new or different use. Examples of improvements
are replacement of electric wiring or plumbing, a new roof, an addition, paneling,
remodeling, or major modifications.
If you make repairs as part of an extensive remodeling or restoration
of your home, the entire job is an improvement. You must carefully distinguish between
repairs and improvements. You must also keep accurate records of these expenditures. These
records will help you decide whether an expenditure is a deductible expense or a capital
expenditure.
Example. You buy an older home and fix up two rooms as a hairdressing
shop. You patch the plaster on the ceilings and walls, paint, repair the floor, put in an
outside door, and install new wiring, plumbing, and other equipment. The plaster patching,
painting, and floor work are repairs. However, since this work is dons, as part of a
general plan to alter your home for business use, the amount you pay for this work is a
capital expenditure that is added to the basis of the property. You cannot deduct it as a
repair expense.
Basis adjustment. You must decrease the basis of your property by the
depreciation you could have deducted on your tax returns under the method of depreciation
you selected. If you took less depreciation than you could have under the method you
selected, decrease the basis by the amount you could have taken under that method.
If you deducted more depreciation than you should have, decrease your
basis by the amount you should have deducted, plus the part of the excess deducted that
actually decreased your tax liability for any year.
For more information, see Publication 551.
Depreciating your home. If you began to use part of your home for
business before 1996, continue to use the same depreciation method you used in past tax
years.
If you began to use part of your home for business in 1996, depreciate
that part as nonresidential real property under the modified accelerated cost recovery
system (MACRS). Under MACRS, nonresidential real property is depreciated using the
straight line method over 39 years. See Publication 946 for more information.
TIP: To figure depreciation on the business part of your home, you need to know:
1) The business-use percentage of your home.
2) The first month in your tax year for which you can deduct business uss of your home
expenses, and
3) The adjusted basis and fair market value of your home at the time you qualify for a
deduction.
Adjusted basis of home. The adjusted basis of your home is generally
its cost plus the cost of any permanent improvements that you made to it minus any
casualty losses deducted in earlier tax years. For a discussion of adjusted basis, see
Publication 551.
When you change part of your home from personal to business use, your
basis for depreciation is the business use percentage times the lesser of:
1) The adjusted basis of your home (excluding land) on the date of change, or
2) The fair market value of your home (excluding land) on the date of change.
Depreciation table. If 1996 was the first year you used your home for
business, you may figure your 1996 depreciation for the business part of your home by
using the appropriate percentage from the following table.
Month of Tax Year
First Used for Business Percentages
---------------------------------------
1 2.461%
2 2.247%
3 2.033%
4 1.619%
5 1.605%
6 1.391%
7 1.177%
8 0.963%
9 0.749%
10 0.535%
11 0.321%
12 0.107%
Multiply the depreciable basis of the business part of your home by the
percentage from the table for the first month in your tax year that you uss your home for
business. See Table A-7a in Appendix A in Publication 946 for the percentages for the
remaining tax years of the recovery period.
Example. In May, George Miller began to use one room in his home
exclusively and regularly to meet clients. This room is 8% of the square footage of his
home. He bought the home in 1980 for $100,000. He determined from his property tax records
that his adjusted basis in the house (exclusive of land) is $90,000. The house had a fair
market value of $165,000 in May. He multiplies his adjusted basis (which is less than fair
market value) by 8%. The result is $7,200, his depreciable basis for the business part of
the house.
George files his return based on the calendar year. May is the 5th
month of his tax year. He multiplies his depreciable basis of $7,200 by 1,605% (.01605),
the percentage from the table for the 5th month. The result is $115.56, his depreciation
deduction.
Recordkeeping
RECORD: You do not have to use a particular method of recordkeeping, but you must keep
records that provide the information needed to figure your deductions for the business use
of your home. You should keep canceled checks, receipts, and other evidence of expanses
you paid.
Your records must show:
1) The part of your home you use for business,
2) That you use this part exclusively and regularly for business as either your principal
place of business or as the place where you meet or deal with clients or customers in the
normal course of your business (however, see the earlier discussion, Exceptions to
Exclusive Use), and
3) The depreciation and expenses for the business part.
You must keep your records for as long as they are important for any
federal tax law. This is usually 3 years from the date the return was due or filed, or 2
years from the date the tax was paid, whichever is later.
Keep records that support your basis in your home for as long as they
are needed to figure the correct basis of your original or replacement home. This includes
records of any improvements to your home and any depreciation you are allowed because you
maintained an office in your home. You can keep copies of Forms 8829 or the Publication
587 worksheets as records of depreciation.
For more information on recordkeeping, see Publication 583.
DEDUCTION LIMIT
If your gross income from the business use of your home equals or
exceeds your total business expenses (including depreciation), you can deduct all your
expenses for the business use of your home. But it your gross income from that use is less
than your total business expenses, your deduction for certain expenses for the business
use of your home is limited. The total of your deductions for otherwise nondeductible
expenses, such as utilities, insurance, and depreciation (with depreciation taken last)
cannot be more than your gross income from the business use of your home minus the sum of:
1) The business percentage of the otherwise deductible mortgage interest, real estate
taxes, and casualty and theft losses (these three items are discussed more fully under
Indirect Expenses, earlier), and
2) The business expenses that are attributable to the business activity in the home (for
example, salaries or supplies), but not to the use of the home itself.
If you are self-employed, do not include in (2) above your deduction
for half of your self-employment tax.
Carryover of unallowed expenses. You can carry forward to your next tax
year deductions over the current year's limit. These deductions are subject to the gross
income limit from the business use of your home for the next tax year. The amount carried
forward will be allowable only up to your gross income in the next tax year from the
business in which the deduction arose, whether or not you live in the home during that
year.
Figuring deduction limit and carryover. If you are an employee or file
Schedule F, Profit or Loss From Farming, use the worksheet near the and of this
publication to figure your deduction limit. If you file Schedule C, figure your deduction
limit on Form 8829.
Example. You meet the requirements for deducting expenses for the
business use of your hame. You use 20% of your home for this business. In 1996, your gross
income, business expenses, and expenses for the business use of your home are as follows:
Gross income from business $ 6,000
Less: Deductible mortgage interest and
real estate taxes [20% allowable as
business part) 3,000
-------
Balance $ 3,000
Less: Business expenses other than for
use of home (business phone and
depreciation on office equipment) 2,000
-------
Gross income limit $ 1,000
=======
Less: Other expenses allocable to
business use of home:
1) Maintenance, insurance, and
utilities (20%) 800
-------
Limit on further deduction $ 200
2) Depreciation (20%) 1,600
-------
Depreciation carryover to 1997 subject to
deduction limit in 1997 $ 1,400
=======
You can deduct all the business part of your deductible mortgage
interest and real estate taxes. You can also deduct all the business part of your expenses
for maintenance, insurance, and utilities, because the total is not more than the $1,000
gross income limit. But your deduction for depreciation for the business use of your home
is limited to $200 for 1996 because of the gross income limit. The $1,400 balance can be
carried forward and added to your depreciation for 1997, subject to your 1997 gross income
limit.
More then one place of business.
TIP: If part of the gross income from your trade or business is from the business use of
part of your home and part is from a place other than your home, you must determine the
part of your gross income from the business use of your horne before you figure the
deduction limit. In making this determination, consider the time you spend at each
location, the business investment in each location, and any other relevant facts and
circumstances.
Where To Deduct
Deduct expenses for the business use of your home on Form 1040. Where
you deduct these expenses on Form 1040 depends on whether you are:
1) An employee, or
2) A self-employed person.
Employees
As an employee, you must itemize deductions on Schedule A (Form 1040)
to claim expanses for the business use of your home and any other employee business
expenses. This generally applies to all employees, including outside salespersons. If you
are a statutory employee, use Schedule C (Form 1040) to claim the expenses. Follow the
instructions given later under Self-Employed Person. The Statutory Employee box within box
15 on your Form W-2 will be checked if you are a statutory employee.
If you have employee expenses for which you were not reimbursed, report
them on line 20 of Schedule A. You generally must also complete Form 2106, if:
1) You claim any travel, transportation, meal, or entertainment expenses, or
2) Your employer paid you for any of your job expenses reportable on line 20. (Amounts
your employer included in box 1 of your Form W-2 are not considered paid by your
employer).
However, you may use a simpler form, Form 2106-EZ, instead of Form
2106, if:
1) You were not reimbursed for your expenses by your employer, or if you were reimbursed,
the reimbursements were included in box 1 of your Form W-2, and
2) If you claim car expenses, you use the standard mileage rate.
When your employer pays for your expanses, the payments generally
should not be on your Form W-2 if you:
1) Are required to account, and do account, to your employer for the expenses, and
2) Are required to return, and do return, any payments not spent for business expanses.
If you account to your employer and your business expenses equal your
reimbursement, do not report the reimbursement as income and do not deduct the expenses.
Accounting to employer. You account to your employer when you give your
employer documentary evidence and an account book, diary, or similar statement to verify
the amount, time, place, and business purpose of each expense. You are also treated as
accounting to your employer if your employer gives you a fixed allowance under an
accountable plan that is similar in form to an allowance specified by the federal
government and you verify the time, place, and business purpose of each expense. See the
instructions for Form 2106 and Publication 463, Travel, Entertainment, Gift, and Car
Expenses, for more information.
Deductible mortgage interest. Although you generally can deduct
expenses for the business uss of your home on line 20 of Schedule A (Form 1040), do not
include any deductible home mortgage interest on that line. Instead, deduct both the
business and nonbusiness parts of this interest on line 10 or 11 of Schedule A.
If the home mortgage interest you can deduct on lines 10 or 11 is
limited by the home mortgage interest rules, you cannot deduct the excess as an employee
business expanse on line 20 of Schedule A, even though you use part of your home for
business. To determine if the limits on home mortgage interest apply to you, see the
instructions for Schedule A or Publication 936.
Real estate taxes. Deduct both the business and nonbusiness parts of
your real estate taxes on line 6 of Schedule A. For more information on amounts allowable
as a deduction for taxes, see Publication 530.
Casualty losses. Compute the deductible business part of casualty
losses in Section B of Form 4684, Casualties and Thefts. Enter the business part of
casualty losses (line 31 of the worksheet) on line 27 of Form 4684, Section B. Also
complete lines 19 through 26. Write "See attached statement" above line 27.
Other expenses. If you file Form 2106 or Form 2106-EZ, report the
business part of your other expenses (utilities, maintenance, insurance, depreciation;
etc.) that do not exceed the limit no line 4 of Form 2106 (or Forrn 2106-EZ); Add these to
your other employee business expenses and complete the test of the form. The total from
line 10, Form 2106, or line 6, Form 2106- EZ, is entered on line 20 of Schedule A, where
it is subject to the 2% of adjusted gross income limit. If you do not have to file Form
2106 or Form 2106-EZ, enter your total expenses directly on line 20 of Schedule A.
Business expenses not attributable to use of your home. If you have any
employee business expenses not attributable to the use of your home, such as advertising,
and you were not reimbursed for them, and you are not claiming travel, transportation,
meal, or entertainment expenses, do not fill out Form 2106 or Form 2106-EZ. Enter these
expenses directly on line 20 of Schedule A (Form 1040), where they are subject to the 2%
of adjusted gross income limit.
Example. You are an employee who works at home for the convenience of
your employer. You meet all the requirements to deduct expenses for the business use of
your home. Your employer does not reimburse you for any of your business expanses and you
are not otherwise required to file Form 2106 or Form 2106-EZ.
As an employee, you do not have gross receipts, cost of goods sold,
etc. You begin with gross income from the business use of your home, which you determine
to be $6,000. Your total employee business expenses related to the business activity in
your home, but not attributable to the use of your home itself, such as advertising,
supplies, and telephone use, total $2,000. Subtract this amount from your gross income
from the business use of your home. Your balance is $4,000.
The percentage of expenses attributable to the business use of your
home is 20%. The business pert of your mortgage interest and real estate taxes is $2,500.
Deduct this amount on the lines of your Schedule A (Form 1040) for interest end taxes.
Subtract this $2,500 from your balance of $4,000. Your gross income limit is $1,500. Your other expenses for the business use of your home cannot be more than $1,500.
The business part of your maintenance, insurance, and utilities for
your home is $800. The business part of your depreciation is $1,600. Add $1,500 ($800 plus
$700 of the depreciation expense) to the $2,000 for your other business expenses, and
deduct the $3,500 total as a miscellaneous deduction on line 20, Schedule A (Form 1040).
It is then subject to the 2% of adjusted gross income limit. Carry over the $900 of your
depreciation expense that exceeds the deduction limit to the next tax year, subject to the
deduction limit for that year.
Self-Employed Persons
If you are self-employed and file Schedule C (Form 1040), attach Form
8829 to your return. If you file Schedule F (Form 1040), report your entire deduction for
business use of the home, up to the limit discussed earlier (line 32 if you used the
worksheet) on line 34 of Schedule F. Write "Business Use of Home" on the line
beside the entry.
Deductible mortgage Interest. If you file Schedule C (Form 1040), enter
all your deductible mortgage interest on fine 10 of Form 8829. After you have figured the
business part of the mortgage interest on Form 8829, subtract that amount from the total
mortgage interest on line 10. The remainder is deductible on Schedule A (Form 1040), lines
10 and 11. Do not deduct any of the business part on Schedule A. If the interest you
deduct on Schedule A for your home mortgage is limited, enter the excess on line 16 of
Form 8829.
If you file Schedule F (Form 1040), include the business part of your
deductible home mortgage interest with your total business uss of the home expenses on
line 34. You can use the worksheet near the back of this publication to figure the
deductible part of mortgage interest.
To determine if the limits on qualified home mortgage interest apply to
you, see the instructions for Schedule A (Form 1040) or Publication 936.
Real estate taxes. If you file Schedule C (Form 1040), enter all your
deductible real estate taxes on line 11 of Form 8829. After you have figured the business
part of your taxes on Form 8829, subtract that amount from your total real estate taxes on
line 11. The remainder is deductible on Schedule A, line 6. Do not deduct any of the
business part of real estate taxes on Schedule A.
If you file Schedule F, include the business part of real estate taxes
with your total business use of the home expenses on line 34. Enter the nonbusiness part
of your real estate taxes on line 6 of Schedule A.
Casualty losses. If you file Schedule F, enter the business part of
casualty losses (line 31 if you use the worksheet) on line 27 of Form 4684, Section B.
Also complete lines 19 through 26 of Section B. Write "See attached statement"
above line 27.
If you are using Form 8829, refer to the specific instructions for
lines 9 and 27, and enter the amount from line 33 on line 27 of Form 4684, Section B.
Write "See Form 8829" above line 27.
Other expenses. Report the other home expenses that would not be
allowable if you did not use your home for business (insurance, maintenance, utilities,
depreciation, etc.), on the appropriate lines of your Form 8829. If you rent rather than
own your home, include the rent you paid on line 20. If any of these expenses exceed the
deduction limit, carry them over to next year. They will be subject to the gross income
limit from the business use of your home next year.
If you file Schedule F, include your other home expenses that would not
be allowable if you did not use your home for business (insurance, maintenance, utilities,
depreciation, etc.), with your total business use of the home expenses on line 34 of
Schedule F. If any of these expenses exceed the deduction limit, carry them over to the
next year. They will be subject to the gross income limit from the business use of your
home next year.
The following graphic is not included in theis file:
Figure B. Form 8829 Expenses for Business Use of Your Home
Business expenses not for the use of your home. Deduct in full your
business expenses that are not for the use of your home itself (dues, salaries, supplies,
certain telephone expenses, etc.) on the appropriate lines of Schedule C or Schedule F.
Because these expenses are not for the use of your home, they are not subject to the
deduction limit for business use of the home expenses.
DAY-CARE FACILITY
You can deduct expenses for using part of your home on a regular basis
to provide day-care services if you meet the following requirements.
1) You must be in the trade or business of providing day care for children, for persons 65
or older, or for persons who are physically or mentally unable to care for themselves.
2) You must have applied for, been granted, or be exempt from having, a license,
certification, registration, or approval as a day-care center or as a family or group
day-care home under applicable state law. You do not meet this requirement if your
application was rejected or your license or other authorization was revoked.
If you regularly use part of your home for day care, figure what part
is used for day care, as explained earlier under Business Part of Home Expenses. If you
use that part exclusively for day care deduct all the allocable expenses subject to the
deduction limit.
If the use of part of your home as a day-care facility is regular, but
not exclusive, you must figure what part of available time you actually use it for
business. A room that is available for use throughout each business day and that you
regularly use in your business is considered to be used for day care throughout each
business day. You do not have to keep records to show the specific hours the area was used
for business. You may use the area occasionally for personal reasons. However, a room you
use only occasionally for business does not qualify for the deduction.
TIP: To find what part of the available time you actually use your home for business,
compare the total business-use time to the total time that part of your home can be used
for all purposes. You may compare the hours of business use in a week with the number of
hours in a week (168). Or you may compare the hours of business use for the tax year with
the number of hours in your tax year (8,784 in 1996).
Example 1. Mary Lake uses her basement to operate a day-care business
for children. Her home totals 3,200 square feet. The basement is 1,600 square feet or 50%
of the total area of the home (1,600 ÷ 3,200). She uses the basement for day care an
average of 12 hours a day, 5 days a week, for 50 weeks During the other 12 hours, the
family can use the basement. During the year, the basement is used far day care for a
total of 3,000 hours (250 days x 12 hours). The basement can be used 8,784 hours (24 hours
x 366 days) during the year. Only 34, 15% (3,000 ÷ 8,784) of the expenses of her basement
are business expenses. Mary can deduct 34.15% of any direct expenses for the basement.
However, only 34.15% of the basement part of her indirect expenses are business expenses.
Because the basement is 50% of the total area of her home, she can deduct 17.08 % (34.15%
of 50%) of her indirect expenses.
Mary completes Part I of Form 8829 as shown in Figure B.
Example 2. Assume the same facts as in Example 1 except that Mary also
has another room that is available each business day for children to take naps in.
Although she did not keep a record of the number of hours the room was actually used for
naps, it was used for part of each business day. Since the room was available during
regular operating hours each business day and was used regularly in the business, it is
considered to be used for day care throughout each business day. In figuring her expenses,
34.15% of any direct expenses of the basement and room are deductible In addition, 34.15%
of the indirect expenses of the basement and room are business expenses. Because the
basement and room are 60% of the total area of her home. Mary can deduct 20,49% (34.15% of
60%) of her indirect expenses.
Meals. If you provide food for your day-care business, do not include
the expense as a cost of using your home for business. Claim it as a separate deduction on
your Schedule C (Form 1040). You can deduct 100% of the cost of food consumed by your
day-care recipients and 50% of the cost of food consumed by your employees as a business
expense. But you can never deduct the cost of food consumed by you or your family.
If you deduct the cost of food for your day-care business, keep a
separate record (with receipts) of your family's food costs.
Reimbursements you receive from a sponsor under the Child and Adult
Food Care Program of the Department of Agriculture are only taxable to the extent they
exceed your expenses for food for eligible children. If your reimbursements are more than
your expenses for food, show the difference as income in Part I of Schedule C. If your
food expenses are greater than the reimbursements, show the difference as an expense in
Part V of Schedule C. Do not include payments or expenses for your own children if they
are eligible for the program. Follow this procedure even if you receive a Form 1099
reporting a payment from the sponsor.
SALE OR EXCHANGE OF YOUR HOME
If you sell your home and within 2 years buy one that costs more than
the sale price of your old home, you generally must postpone recognizing any gain on the
sale. However, if in the year of sale you were able to deduct expenses for the business
use of a part of your home, postpone recognizing gain only on the non-business part. You
must recognize any gain on the business part. Similarly, if you have a loss on the sale of
your home, you can deduct the loss only on the business part. You cannot deduct any loss
on the nonbusiness part.
To figure whether the cost of your new home is more than the sale price
of your old home for postponing recognition of gain, compare the nonbusiness part of your
old home's sale price with the nonbusiness part of your new home's cost.
If your business use does not meet the requirements for the allowance
of a business deduction for the year of sale, do not divide the gain on the sale between
the business and nonbusiness parts. Under these circumstances, all your gain can be
postponed if your purchase of another home meets all the other requirements for this
treatment.
For more information on the sale or exchange of a home used partly for
business, see Publication 523
Depreciation. If you used any part of your home for business, you must
adjust the basis of your home for any depreciation that was allowable for its business
use, even if you did not claim it. If you took less depreciation than you could have under
the method you selected, you must decrease the basis by the amount you could have taken
under that method. For more information, see Publication 551.
If you used ACRS, MACRS, or some other accelerated method to figure
your depreciation, some of the gain on the sale of the business part of your home may have
to be treated as ordinary income.
BUSINESS FURNITURE AND EQUIPMENT
Even if you do not qualify for a business use of the home deduction,
you may be allowed to take a depreciation deduction or elect a section 179 deduction for
furniture and equipment you use in your home for business or work as an employee.
There are different rules, explained later, for property you bought to
use for business and property you previously used for personal purposes.
If you placed furniture or equipment in service in your business before
this year, you continue to claim depreciation deductions over its recovery period. See
Publication 946 for more information.
Listed Property
If you use certain types of property, called listed property, in your
home, special rules apply to the depreciation deductions you are allowed to take. Listed
property includes any property of a type generally used for entertainment, recreation, and
amusement (including photographic, phonographic, communication, and video recording
equipment). Listed property also includes computers and related equipment unless they are
used in a qualifying office in your home If you use your computer in a Qualifying office
in your home, see Property Bought for Business Use, later. For a complete discussion of
listed property, see chapter 4 in Publication 946.
More-than-50% test. If you bought listed property and placed it in
service in 1996, special rules apply More than 50% of your use of the property must be for
business (including work as an employee) during the tax year for you to claim a section
179 or an accelerated depreciation deduction. If your business use is 50% or less, you
cannot take a section 179 deduction. You must figure the depreciation for it using the
Alternate depreciation System (ADS) (straight line method), as explained in Publication
946.
If you use listed property more than 50% in a business in the tax year
the property is placed in service but not in a later year of the recovery period, figure
your depreciation for property placed in service before 1987 using Table 16 in the
Appendix of Publication 534. For property placed in service after 1986, you must use the
ADS method. Figure your depreciation for the tax year and any later tax years as if that
listed property were not used more than 50% for business in the year it was pieced in
service.
For the tax year in which the business use is 50% or less, you may have
to include in income (recapture) part of the depreciation claimed in earlier tax years.
For more information on recapturing depreciation on listed property, see Publication 946.
Employee. If you use listed property, such as a home computer, in your
work as an employee, it will not be treated as used for business for the more-than-50%
test unless:
1) The use is for the convenience of your employer, and
2) The use is required as a condition of your employment.
"As a condition of your employment" means that the use of the
property is necessary for you to properly perform your work. Whether the use of the
property is required for this purpose depends on all the facts and circumstances. Your
employer does not have to tell you specifically to have a computer in your home. Nor is a
statement by your employer to that effect sufficient.
Investment time. The time you use the computer for investments does not
count as business-use time for the more-than-50% test. However, if you meet the
more-than-50% test, you can take into account the combined business and investment time to
figure your depreciation deduction under MACRS. If you do not meet the test, you can use
the combined time to figure the depreciation deduction under the straight line method.
If you use your computer to produce income from investments, see
Publication 529, Miscellaneous Deductions.
Reporting and substantiation requirements. If you use listed property
in your business, you must file Form 4562 to claim a depreciation or section 179
deduction. Begin with Part V, Section A of that form.
You must keep adequate records to prove your business use of any listed property.
Property Bought for Business Use
If you bought certain property to use in your business, you can elect
to deduct all or part of its cost as a section 179 deduction. You can generally claim the
section 179 deduction on depreciable tangible personal property bought for use in the
active conduct of your business. You cannot take a section 179 deduction for the basis of
the business part of your home.
The total cost you can deduct cannot exceed $17,500. But there are
certain provisions that can reduce this maximum.
The total cost that you can deduct each tax year is limited to your
total taxable income from the active conduct of all your trade or business activities,
including wages, during the tax year. Figure taxable income for this purpose in the usual
way but without a deduction for the cost of the section 179 property or a deduction for
half of the self-employment tax. See How To Figure the Deduction, in chapter 2 of
Publication 946, for more information.
You choose how much (subject to the limit) of the cost you want to
deduct under section 179 and how much you want to depreciate. You do not have to deduct
the full cost of the property. You can deduct part of its cost under section 179 and
depreciate the rest over its recovery period. You can spread the section 179 deduction
over several items of property in any way you choose as long as the total does not exceed
the maximum allowable.
You elect to take the section 179 deduc-lion by completing Part I of
Form 4562.
Depreciation In Part II of Form 4562 you depreciate, under MACRS, the
cost of depreciable property bought in 1996 that is not deducted under section 179. Most
business property in a home office is either 5-year or 7-year property under MACRS.
5-year property includes computers and peripheral equipment,
typewriters, calculators, adding machines, and copiers.
4-year property includes office furniture and equipment such as desks,
files, and safes.
Under MACRS, you generally usa the half-year convention, which allows
you to deduct a half year of depreciation in the first year you use the property in your
business. If more than 40% of your depreciable basis is placed in service during the last
3 months of your tax year, you must use the mid-quarter convention instead of the
half-year convention.
Figure your depreciation by applying the appropriate percentage from
the following table (which has been adjusted for the half-year convention) to each
property's cost minus any section 179 deduction taken on the property.
Percentages
Recovery year 5-year property 7-year property
-----------------------------------------------------
1 20% 14.29%
2 32% 24.49%
3 19.2% 17.49%
4 11 52% 12.49%
5 11.52% 8.93%
6 5.76% 8.92%
7 8.93%
8 4.46%
See Publication 946 for a discussion of the mid-quarter convention and
for complete percentage tables.
Example. During the year, Donald Kent bought a desk and three chairs
for use in his office. His total bill for the furniture was $1,975. His taxable business
income for the year was $3,000 without any deduction for the office furniture. Donald can
elect to do one of the following:
1) Take a section 179 deduction for the full cost of the office furniture.
2) Take part of the cost of the furniture as a section 179 deduction and depreciate the
balance.
3) Not take a section 179 deduction and depreciate the full cost of the office furniture.
The furniture is 7-year property. If Donald does not take a section 179
deduction, he multiplies $1,975, his cost of the furniture, by 14.29% (.1429) to get his
depreciation deduction of $282.23.
Property Changed From Personal Use
If you began to use property in your home office that was used
previously for personal purposes, you cannot take a section 179 deduction. The method of
depreciation you use depends on when you first used the property for personal purposes.
If you began to use the property for personal purposes before 1981 and
change it to business use in 1996, depreciate the property by the straight line or
declining balance method based on salvage value and useful life.
If you began to use the property for personal purposes alter 1981 and
before 1987 and change it to business use in 1996, you generally depreciate the property
under the accelerated cost recovery system (ACRS). However, if the depreciation under ACRS
is greater in the first year than the depreciation under MACRS, you must depreciate it
under MACRS. For a discussion of depreciation methods for property used for personal
purposes before 1987, see Publication 534.
II you began to use the property for personal purposes after 1986 and
change it to business use in 1996, depreciate the property under MACRS.
The basis for depreciation of property changed from personal to business use is the lesser
of:
1) The adjusted basis of the property on the date of change, or
2) The fair market value of the property on the date of change.
Example 1. James Roe bought a desk for $1,000 on November 1, 1986. He
began to use if in his home office on February 5, 1996, when it had a fair market value of
$600. The depreciable basis of the desk is the fair market value of $600, which is less
than its cost. Under ACRS, a desk is 5-year property. Under MACRS, it is 7-year property.
Under ACRS, its depreciation is $90 (15%, the first year ACRS percentage for 5. year'
property, of $600). Under MACRS, its depreciation is $85.74 (14.29%, the first year
percentage for 7-year property, of $600). Since the depreciation is greater using ACRS,
James must use MACRS to depreciate his desk.
Example 2. Assume the same facts as in Example 1 except that the
property is a computer Under both ACRS and MACRS, a computer is 5-year property. Under
ACRS, its depreciation is $90. Under MACRS, its depreciation is $120 (20%, the first year
percentage for 5-year property, of $600). Since its depreciation is greater osing MACRS,
James must use ACRS to depreciate his computer.
SCHEDULE C EXAMPLE
The filled-in forms for Jehn Stephens that follow show how to report
deductions for the business use of your home if you file Schedule C (Form 1040). The first
page of Schedule C, Form 8829, and Form 4562 are shown later. Only the expenses and
information that relate to the business use of the home are discussed.
Schedule C. The following bold line references apply to Schedule C.
Line 13. John enters his section 179 expense deduction for assets used
in his home office on Form 4562, shown later, and on line
When John began using part of the home for business in 1986, the
furniture in it was 5-year property under ACRS. Tax year 1990 was the last year of the
recovery period for that property. He has recovered his total depreciable basis in that
property. He cannot deduct any depreciation for that property in 1996.
In March 1996 he bought a file cabinet for $600 and a copier for $2,500
to use in his business, He elects to take a section 179 deduction for both items.
John completes Part I of Form 4562. He enters the cost of both items,
$3,100, on line 2 and completes lines 4 and 6. On line 6, he enters a description of each
item, its cost and the cost he is electing to expense. He completes the remaining lines in
Part I. He then enters $3,100, the total section 179 deduction, on line 13 of Schedule C.
Line 16b. This amount is the interest on installment payments for the
business assets John uses in his home office.
Line 25. Because he had a separate telephone line in his home office
that he used only for business, he can deduct the expense for it of $347.
Lines 28-30. On line 28, he totals all his expenses other than those
for the business use of his home, and then he subtracts that total from his gross income.
He uses the result, on line 29, to figure the deduction limit on his expenses for the
business use of his home. He enters that amount on line 8 of Form 8829 and then completes
the form. He enters the amount of his home office deduction from line 34, Form 8829, on
line 30 of Schedule C.
Form 8829, Part I. John began to use one room of his home exclusively
and regularly to meet clients in August 1986. In Part I of Form 6829 he shows that, based
on the square footage, the room is 10% of his home.
Form 8829, Part II. He uses Part II of Form 8829 to figure his
allowable horne office deduction.
Step 1. First, he figures the business part of expenses that would be
deductible even if he did not use part of his home for business. Because these expenses
($4,500 deductibio mortgage interest and $1,000 real estate taxes) relate to his entire
home, he enters them in column (b) of lines 10 and 11. He then subtracts the $650 business
part of these expenses (line 14) from his tentative business profit (line 8). The result,
$25,781 on line 15, is the most he can deduct for his other home office expenses.
Step 2. Next, he figures his deduction for operating expenses. He paid
$300 to have his office repainted. He enters this amount on line 18, column (a) because it
is a direct expense. All of his other expenses ($400 homeowner's insurance, $1,400 roof
repairs, and $1,800 heating and lighting) relate to his entire home. Therefore, he enters
them in column (b) on the appropriate lines. He adds the $300 direct expenses (line 21) to
the $960 total for indirect expenses (line 22) and enters the total, $680, on line 24.
Because this amount is less than his deduction limit, he can deduct it in full. The
$25,121 balance of his deduction limit (line 26) is the most he can deduct for
depreciation.
Step 3. Next, he figures his allowable depreciation deduction for the
business use of his home. In Part III of Form 8829, he determines that the basis of his
home office (line 38) is $6,000. Because he began using the office in August 1986, it is
19-year real property under ACRS. 1996 is the eleventh year of the recovery period and,
because he files his return based on the calendar year, August is the eighth month of his
tax year. Using Table 6 in the Appendix of Publication 534, he finds that the depreciation
percentage for the eleventh year of the recovery period, for assets placed in service in
the eighth month, is 4.2%. Therefore, his depreciation for 1996 (line 40) is $252. He
enters that amount in Part II on lines 28 and 30. Because it is less than the available
balance of his deduction limit (line 26), he can deduct the full depreciation.
Step 4. Finally, he figures his total deduction for his home office by
adding together his otherwise deductible expenses (line 14), his operating expenses (line
25), and depreciation (line 31). He enters the result, $1,462, on lines 32 and 34, and on
Schedule C, line 30.
Instructions for the Worksheet
Part 1 -- Part of Your Home Used for Business
If you are an employee or file Schedule F (Form 1040), use the
worksheet near the end of this publication to figure your deduction limits for each type
of expense. If you file Schedule C (Form 1040), use Form 8829 to figure the deductions and
attach the form to your return. Your entries on the worksheet may differ from your actual
deductions for business expenses. Differences will be explained when they occur.
If you figure the percentage based on area, use lines 1 through 3 to
figure the business-use percentage. Enter the percentage on line 3. You may use any other
reasonable method that accurately reflects your business-use percentage. If you operate a
day-care facility and you meet the exception to the exclusive use test for part or all of
the area you use for business, you must figure the business use percentage for that area
as explained under Day-Care Facility, earlier.
Part 2 -- Figure Your Allowable Deduction
If you file Schedule F, enter on line 4 your total gross income from
the business use of your home. This would generally be the amount on line 11 of Schedule
F.
If you are an employee, enter on line 4 your total wages that were from
business use of the home.
Enter your total expenses paid for deductible mortgage interest, real
estate taxes, and casually losses on lines 5 through 7 of the worksheet. Under column (a),
Direct Expenses, enter expenses that benefit only the business part of your home. Under
column (b), Indirect Expenses, enter expenses that benefit the entire home. You generally
enter 100% of the expense. However, if the business percentage of an indirect expense is
different from the percentage on line 3, enter only the business part of the expense on
the appropriate line in column (a), and leave that line in column (b) blank.
Enter only the amounts that would be deductible whether or not you used
your home for business. In other words, these amounts would normally be allowable as
itemized deductions on Schedule A (Form 1040). Only the part of a casualty loss that
exceeds $100 plus 10% of adjusted gross income is included here.
Multiply your total expenses by the business percentage from line 3.
Enter the result on line 9. Add this amount to the total Direct Expenses and enter the
total on line 10.
On line 11, enter any other business expenses that are
not attributable to business use of the home. For employees, examples include travel,
supplies, and business telephone expenses. Farmers should generally enter their total farm
expenses before deducting office in the home expenses. Do not enter the deduction for half
the self-employment tax. Add the expenses on line 11 to the line 10 amount, and enter the
total on line 12. Subtract line 12 from line 4, and enter the result on line 13. This is
your gross income limit. You use it to determine whether you can deduct this year any of
your other expenses for business use of the home. If you cannot, you will carry them over
to next year.
If line 13 is zero, deduct your expenses for deductible
home mortgage interest, real estate taxes, and casualty losses that would be deductible if
you did not use your home for business. Also deduct any business expenses not attributable
to use of your home on the appropriate lines of the schedule(s) for Form 1040 as explained
earlier under Where To Deduct.
On lines 14 through 18, enter the total expenses for
the business use of your home that would not be allowable if your home were not used for
business. These include utilities, insurance, repairs, and maintenance. If you rent,
include the amount paid on line 18. If you file Schedule F, include any part of your home
mortgage interest that is more than the limits given in Publication 936. (If you are an
employee, do not enter any excess home mortgage interest). In column (a), enter the
expenses that benefit only the business part of your home (Direct Expenses). In column
(b), enter the expenses that benefit the entire home (Indirect Expenses). Multiply line
19, column (b) by the business use percentage and enter this amount on line 20.
If you claimed a deduction for business use of your
home on your 1995 tax return, enter the amount from line 39 of your 1995 worksheet on line
21.
On lines 24 through 29, figure your limit on deductions
for excess casualty losses and depreciation.
On line 25, figure the excess casualty loss by
multiplying the business use percentage from line 3 by the part of casualty losses that
would not be allowable if you did not use your home for business ($100 plus 10% of your
adjusted gross income).
On line 26, enter the depreciation deduction from Part
8 below.
On lines 27 through 29, figure your allowable excess
casualty losses and depreciation.
If you claimed a deduction for business use of your
home on your 1995 tax return, enter on line 27 the amount from line 40 of your 1995
worksheet.
On line 30, total all allowable business use of the
home deductions.
On line 31, enter the total of the casualty losses
shown on lines 10 and 29. Enter the amount from line 31 on line 27 of Form 4684, Section
B. See the instructions for Form 4684 for more information on completing that form.
Line 32 is the total (other than casualty losses)
allowable as a deduction for business use of your home. If you file Schedule F, report
this amount as an entry on line 34 of Schedule F and write "Business Use of
Home" on the line beside the entry. Do not add the specific expenses into other line
totals of Part II.
If you are an employee, see Where To Deduct, earlier,
for information on how to claim the deduction.
Part 3 -- Depreciation of Your Home
Figure your depreciation deduction on lines 33 through 38. On line 33,
enter the smaller of the adjusted basis or the fair market value of the property at the
time you first used it for business. Do not adjust this amount for changes in basis or
value after that date. Allocate the basis between the land and the building on lines 34
and 35. You cannot depreciate any part of the land. On line 37, enter the correct
percentage for the current year from the tables in Publication 946. Multiply this
percentage by the business basis to get the depreciation deduction. Enter this figure on
lines 38 and 26. Complete and attach Form 4562 to your return if this is the first year
you used your home, or an improvement or addition to your home, in business.
Part 4 -- Carryover of Unallowed Expenses to Next Year
Complete these lines to figure the expenses that must be carried
forward to next year.
The following forms are not included in this file:
SCHEDULE C (Form 1040) - Profit or Loss From Business
Form 8829 - Expenses for Business Use of Your Home
Form 4562 - Depreciation and Amortization
Worksheet to Figure the Deduction for Business Use of Your Home
PART 1--Part of Your Home Used for Business:
1) Area of home used for business..............................1)________
2) Total area of home..........................................2)________
3) Percentage of home used for business (divide
line 1 by line 2 and show result as a percentage............3)________
PART 2--Figure Your Allowable Deduction:
4) Gross income from business (see instructions)...............4)________
(a) (b)
Direct Indirect
Expenses Expenses
5) Casualty losses..........................5)________ ________
6) Deductable mortgage interest.............6)________ ________
7) Real estate taxes........................7)________ ________
8) Total of lines 5 through 7...............8)________ ________
9) Multiply line 8, column (b), by line 3.............9)________
10) Add line 8, column (a), and line 9................10)________
11) Business expenses not from business use of
home (see instructions)...........................11)________
12) Add lines 10 and 11.........................................12)________
13) Gross income limit. Subtract line 12 from
line 4......................................................13)________
14) Excess mortgage interest................14)________ ________
15) Insurance...............................15)________ ________
16) Repairs and maintenance.................16)________ ________
17) Utilities...............................17)________ ________
18) Other expenses..........................18)________ ________
19) Add lines 14 through 18.................19)________ ________
20) Multiply line 19, column (b) by line 3............20)________
21) Carryover of operating expenses from prior year
(See Instructions)................................21)________
22) Add line 19, column (a), line 20, and line 21...............22)________
23) Allowable operating expenses. Enter the
smaller of line 13 or line 22...............................23)________
24) Limit on excess casualty losses and
depreciation. Subtract line 23 from line 13.................24)________
25) Excess casualty losses (see instructions).........25)________
26) Depreciation of your home from line 38 below......26)________
27) Carryover of excess casualty losses and
depreciation from prior year (See Instructions)...27)________
28) Add lines 25 through 27.....................................28)________
29) Allowable excess casualty losses and
depreciation. Enter the smaller of line 24 or
line 28.....................................................29)________
30) Add lines 10, 23, and 29....................................30)________
31) Casualty losses included on lines 10 and 29 (See
instructions)...............................................31)________
32) Allowable expenses for business use of your home.
(Subtract line 31 from line 30). See instructions
for where to enter on your return...........................32)________
PART 3--Depreciation of Your Home
33) Smaller of adjusted basis or fair market value of
home (see instructions).....................................33)________
34) Basis of land...............................................34)________
35) Basis of building (Subtract line 34 from line 33)...........35)________
36) Business basis of building (Multiply line 35 by
line 3).....................................................36)________
37) Depreciation percentage (from applicable table or
method).....................................................37)________
38) Depreciation allowable (multiply line 36 by line 37)........38)________
PART 4--Carryover of Unallowed Expenses to Next Year
39) Operating expenses. Subtract line 23 from line 22.
If less than zero, enter -0-................................39)________
40) Excess casualty losses and depreciation. Subtract
line 29 from line 28. If less than zero, enter -0-..........40)________
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