us internal revenue service: p587--1999

8/14/2019 US Internal Revenue Service: p587--1999

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Contents

Introduction ........................................................ 2

Qualifying for a Deduction ................................ 2

Figuring the Deduction ...................................... 6

Deducting Expenses .......................................... 7

Depreciating Your Home ................................... 8

Day-Care Facility ................................................ 10

Sale or Exchange of Your Home ...................... 12

Business Furniture and Equipment ................. 12

Recordkeeping ................................................... 15

Where To Deduct ............................................... 15

Schedule C Example .......................................... 17

Worksheet To Figure the Deduction forBusiness Use of Your Home ..................... 22

Instructions for the Worksheet ......................... 23

How To Get More Information .......................... 24

Help With Unresolved Tax Problems ............... 25

Index .................................................................... 26

Important Changes for 1999Increase in the section 179 deduction. If you boughtcertain property to use in your business, you may beable to elect to deduct (rather than depreciate) all or apart of its cost as a section 179 deduction. For 1999,the total you can elect to deduct is increased to$19,000. In 2000 the total will increase to $20,000. Formore information on the section 179 deduction, seeSection 179 Deduction under Business Furniture andEquipment.

Definition of principal place of business. New rules

make it easier for your home office to qualify as yourprincipal place of business. For an explanation of theserules, see Principal Place of Business, later underQualifying for a Deduction.

Photographs of missing children. The Internal Rev-enue Service is a proud partner with the National Cen-ter for Missing and Exploited Children. Photographs ofmissing children selected by the Center may appear inthis publication on pages that would otherwise be blank.You can help bring these children home by looking atthe photographs and calling 1800THELOST (18008435678) if you recognize a child.

Department of the TreasuryInternal Revenue Service

Publication 58 7Cat. No. 15154T

Business Useof Your Home(Including Use byDay-Care Providers)

For use in preparing

1999 Returns


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IntroductionThe purpose of this publication is to provide informationon figuring and claiming the deduction for business useof your home. The publication will help you determinethe following.

Whether you qualify to deduct expenses for thebusiness use of your home.

What types of expenses you can deduct. How to figure the deduction (including depreciation

of your home).

What records you should keep.

Where to deduct your expense.

The term home includes a house, apartment, con-dominium, mobile home, or boat. It also includesstructures on the property, such as an unattached ga-rage, studio, barn, or greenhouse. However, it doesnot include any part of your property used exclusivelyas a hotel or inn.

The publication also includes information on the fol-

lowing.

Special rules for day-care providers.

Selling a home that was used partly for business.

Deducting expenses for furniture and equipmentused in your business.

If you are an employee or file Schedule F (Form1040), use the worksheet and its instructions, near theend of this publication, to help figure your deduction. Ifyou file Schedule C (Form 1040), you must use Form8829, Expenses for Business Use of Your Home. TheSchedule C Example shows how to report the de-

duction.If you need information on deductions for renting outyour property, see Publication 527, Residential RentalProperty.

The rules in this publication apply to individuals,trusts, estates, partnerships, and S corporations. Theydo not apply to corporations (other than S corporations).There are no special rules for the business use of ahome by a partner or S corporation shareholder.

Useful ItemsYou may want to see:

Publication

523 Selling Your Home

551 Basis of Assets

583 Starting a Business and Keeping Records

946 How To Depreciate Property

Form (and Instructions)

2106 Employee Business Expenses

2106-EZ Unreimbursed Employee Business Ex-penses

4562 Depreciation and Amortization

8829 Expenses for Business Use of Your Home

See How To Get More Information near the end ofthis publication for information about getting publica-tions and forms.

Qualifying for a DeductionTo deduct expenses related to the business use of partof your home, you must meet specific requirements.Even then, your deduction may be limited.

This section describes the tests that you must meetto qualify for the deduction. Use this section, along withFigure A, to decide if you can deduct expenses for thebusiness use of your home.

To qualify to claim expenses for the business useof your home, you must meet the following tests.

1) Your use of the business part of your home mustbe:

a) Exclusive (however, see Exceptions to Exclu-

sive Use, later),b) Regular,

c) For your trade or business, AND

2) The business part of your home must be oneof thefollowing:

a) Your principal place of business,

b) A place where you meet or deal with patients,clients, or customers in the normal course ofyour trade or business, or

c) A separate structure (not attached to yourhome) you use in connection with your tradeor business.

Additional tests for employee use. If you are anemployee and you use a part of your home for busi-ness, you may qualify for a deduction for its businessuse. You must meet the tests discussed earlier plus:

1) Your business use must be for the convenience ofyour employer, and

2) You do notrent all or part of your home to youremployer and use the rented portion to performservices as an employee.

TIPWhether your home's business use is for youremployer's convenience depends on all thefacts and circumstances. However, business

use is not considered to be for your employer's con-venience merely because it is appropriate and helpful.

Exclusive UseTo qualify under the exclusive use test, you must usea specific area of your home only for your trade orbusiness. The area used for business can be a roomor other separately identifiable space. The space doesnot need to be marked off by a permanent partition.

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You do notmeet the requirements of the exclusiveuse test if you use the area in question both for busi-ness and for personal purposes.

Example. You are an attorney and use a den in yourhome to write legal briefs and prepare clients' tax re-turns. Your family also uses the den for recreation.Since the den is not used exclusively in your profession,you cannotclaim a business deduction for its use.

Exceptions to Exclusive UseYou do not have to meet the exclusive use test if eitherof the following applies.

You use part of your home for the storage of in-ventory or product samples (discussed next).

You use part of your home as a day-care facility,discussed later under Day-Care Facility.

Storage of inventory or product samples. When youuse part of your home for the storage of inventory orproduct samples, the exclusive use test does not apply.However, you must meet all the following tests.

You keep the inventory or product samples for usein your trade or business.

Your trade or business is the wholesale or retailselling of products.

Your home is the only fixed location of your tradeor business.

You use the storage space on a regular basis.

The space you use is an identifiably separate spacesuitable for storage.

Example. Your home is the sole fixed location of

your business of selling mechanics' tools at retail. Youregularly use half of your basement for storage of in-ventory and product samples. You sometimes use thearea for personal purposes. The expenses for thestorage space are deductible even though you do notuse this part of your basement exclusively for business.

Regular UseTo qualify under the regular use test, you must use aspecific area of your home for business on a continuingbasis. You do not meet the test if your business useof the area is only occasional or incidental, even if you

do not use that area for any other purpose.

Trade or Business UseTo qualify under the trade or business use test, youmust use part of your home in connection with a tradeor business. If you use your home for a profit-seekingactivity that is not a trade or business, you cannot takea deduction for its business use.

Example. You use part of your home exclusivelyand regularly to read financial periodicals and reports,clip bond coupons, and carry out similar activities re-lated to your own investments. You do not make in-

vestments as a broker or dealer. Since your activitiesare not part of a trade or business, you cannot take adeduction for the business use of your home.

Principal Place of BusinessYou can have more than one business location, in-cluding your home, for a single trade or business. Toqualify to deduct the expenses for the business use ofyour home, your home must be your principal place of

business for that trade or business. To determine yourprincipal place of business, you must consider all thefacts and circumstances.

Your home office will qualify as your principal placeof business for deducting expenses for its use if youmeet the following requirements.

You use it exclusively and regularly for administra-tive or management activities of your trade or busi-ness.

You have no other fixed location where you conductsubstantial administrative or management activitiesof your trade or business.

Alternatively, if you do business at more than onelocation, and your home office does not qualify as yourprincipal place of business based on the previous rules,you determine your principal place of business basedon the following factors.

1) The relative importance of the activities performedat each location.

2) If the relative importance factor does not determineyour principal place of business, you can also con-sider the time spent at each location.

If, after considering your business locations, your

home cannot be identified as your principal place ofbusiness, you cannot deduct home office expenses.

Administrative or management activities. There aremany activities that are administrative or managerial innature. The following are a few examples.

Billing customers, clients or patients.

Keeping books and records.

Ordering supplies.

Setting up appointments.

Forwarding orders or writing reports.

Administrative or management activities performedat other locations. The following activities performedby you or others will not disqualify your home officefrom being your principal place of business.

You have others conduct your administrative ormanagement activities at locations other than yourhome. (For example, another company does yourbilling from its place of business.)

You conduct administrative or management activ-ities at places that are not fixed locations of yourbusiness, such as in a car or a hotel room.

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Figure A.

Start Here:

Is part of your homeused in connection witha trade or business?

Are you an employee?

Do you work at homefor the convenience ofyour employer?

Do you rent part of yourhome used for businessto your employer?

Is it your principal placeof business?

Do you meet patients,clients, or customers inyour home?

Is it a separatestructure?

Deduction allowedNo deduction

Is the use regular

and exclusive?

No

Yes

Can You Deduct Business Use of the Home Expenses?*

Yes

Yes

No

No

No

Yes

No

No

Yes

No

No

Yes

Yes

Yes

* Do not use this chart if you use your home for the storage of inventory or product samples, or to operate a day-care facility. See Exceptions to Exclusive Use,earlier, and Day-Care Facility, later.

You occasionally conduct minimal administrative ormanagement activities at a fixed location outsideyour home.

You conduct substantial nonadministrative or non-management business activities at a fixed locationoutside your home. (For example, you meet withor provide services to customers, clients, or patientsat a fixed location of the business outside yourhome.)

You have suitable space to conduct administrativeor management activities outside your home, butchoose to use your home office for those activitiesinstead.

Example 1. John is a self-employed plumber. Most ofJohn's time is spent at customers' homes and officesinstalling and repairing plumbing. He has a small officein his home that he uses exclusively and regularly forthe administrative or management details of his busi-ness, such as phoning customers, ordering supplies,and keeping his books.

John does not do his own billing. He uses a localbookkeeping service to bill his customers.

John's home office qualifies as his principal place ofbusiness for deducting expenses for its use. He usesthe home office for the administrative or managerialactivities of his plumbing business and he has no otherfixed location where he conducts these administrativeor managerial activities. His choice to have his billingdone by another company does not disqualify his homeoffice from being his principal place of business. Be-

cause he meets all of the qualifications, including prin-cipal place of business, he can deduct expenses (to theextent of the deduction limit, explained later) for thebusiness use of his home.

Example 2. Pamela is a self-employed sales repre-sentative for several different product lines. She hasan office in her home that she uses exclusively andregularly to set up appointments and write up ordersand other reports for the companies whose productsshe sells. She occasionally writes up orders and setsup appointments from her hotel room when she is awayon business overnight.

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Pamela's business is selling products to customersat various locations throughout her territory. To makethese sales, she regularly visits customers to explainthe available products and take orders.

Pamela's home office qualifies as her principal placeof business for deducting expenses for its use. Sheconducts administrative or management activities thereand she has no other fixed location where she conductsadministrative or management activities. The fact thatshe conducts some administrative or management ac-

tivities in her hotel room (not a fixed location) does notdisqualify her home office from being her principal placeof business. Because she meets all of the qualifications,including principal place of business, she can deductexpenses (to the extent of the deduction limit, explainedlater) for the business use of her home.

Example 3. Paul is a self-employed anesthesiologist.He spends the majority of his time administering anes-thesia and postoperative care in three local hospitals.One of the hospitals provides him with a small sharedoffice where he could conduct administrative or man-agement activities.

Paul does not use the office the hospital provides.He uses a room in his home that he has converted toan office. He uses this room exclusively and regularlyto conduct all of the following activities.

Contacting patients, surgeons, and hospitals re-garding scheduling.

Preparing for treatments and presentations.

Maintaining billing records and patient logs.

Satisfying continuing medical education require-ments.

Reading medical journals and books.

Paul's home office qualifies as his principal place ofbusiness for deducting expenses for its use. He con-ducts administrative or management activities for hisbusiness as an anesthesiologist there and he has noother fixed location where he conducts administrativeor management activities for this business. His choiceto use his home office instead of one provided by thehospital does not disqualify his home office from beinghis principal place of business. His performance ofsubstantial nonadministrative or nonmanagement ac-tivities at fixed locations outside his home also does notdisqualify his home office from being his principal placeof business. Because he meets all of the qualifications,

including principal place of business, he can deductexpenses (to the extent of the deduction limit, explainedlater) for the business use of his home.

Example 4. Kathleen is employed as a teacher. Sheis required to teach and meet with students at theschool and to grade papers and tests. The school pro-vides her with a small office where she can work on herlesson plans, grade papers and tests, and meet withparents and students. The school does not require herto work at home.

Kathleen prefers to use the office she has set up inher home and does not use the one provided by the

school. She uses this home office exclusively and reg-ularly for the administrative duties of her teaching job.

Kathleen must meet the convenience-of-the-employer test, even if her home qualifies as her princi-pal place of business for deducting expenses for its use.Because her employer provides her with an office anddoes not require her to work at home, she does notmeet the convenience-of-the-employer test and cannotclaim a deduction for the business use of her home.

More Than One Trade or BusinessWhether your home office is the principal place ofbusiness must be determined separately for each tradeor business activity. One home office may be the prin-cipal place of business for more than one activity.However, you will not meet the exclusive use test forany activity unless each activity conducted in that officemeets all the tests for the business use of the homededuction.

Example. Tracy White is employed as a teacher.Her principal place of work is the school. She also hasa mail order jewelry business. All her work in the jewelrybusiness is done in her home office and the office isused exclusively for the business. If she meets all theother tests, she can deduct expenses for business useof her home for the jewelry business.

If Tracy also uses the office for work related to herteaching, she would not meet the exclusive use test forthe jewelry business. As an employee, Tracy must meetthe convenience-of-the-employer test to qualify for thededuction. Because she does not meet this test for herwork as a teacher, she cannot claim a deduction for thebusiness use of her home for either activity.

Place To Meet Patients, Clients, or

CustomersIf you meet or deal with patients, clients, or customersin your home in the normal course of your business,even though you also carry on business at another lo-cation, you can deduct your expenses for the part ofyour home used exclusively and regularly for businessif you meet the following tests.

You physically meet with patients, clients, or cus-tomers on your premises.

Their use of your home is substantial and integralto the conduct of your business.

Using your home for occasional meetings and tele-phone calls will not qualify you to deduct expenses forthe business use of your home.

Doctors, dentists, attorneys, and other professionalswho maintain offices in their homes will generally meetthis requirement.

The part of your home you use exclusively and reg-ularly to meet patients, clients, or customers does nothave to be your principal place of business.

Example. June Quill, a self-employed attorney,works 3 days a week in her city office. She works 2days a week in her home office used only for business.She regularly meets clients there. Her home office

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qualifies for a business deduction because she meetsclients there in the normal course of her business.

Separate StructureYou can deduct expenses for a separate free-standingstructure, such as a studio, garage, or barn, if you useit exclusively and regularly for your business. Thestructure does not have to be your principal place ofbusiness 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 be-hind his home. Since he uses the greenhouse exclu-sively and regularly in his business, he can deduct theexpenses for its use, subject to the deduction limit, ex-plained later.

Figuring the DeductionAfter you determine that you meet the tests under

Qualifying for a Deduction, you can begin to figure howmuch you can deduct. You can deduct certain ex-penses related to the business use of your home, butyour deduction is limited by the following.

Percentage of your home used for business (busi-ness percentage).

Deduction limit.

This section contains information about the businesspercentage and deduction limit, and how to adjust yourcalculations if you use your home for only part of a year.

Business PercentageTo find the business percentage, compare the size ofthe part of your home that you use for business to yourwhole house. Use the resulting percentage to figure thebusiness part of the expenses for operating your entirehome.

You can use any reasonable method to determinethe business percentage. The following are two com-monly used methods for figuring the percentage.

1) Divide the area (length multiplied by the width) usedfor business by the total area of your home.

2) Divide the number of rooms used for business bythe total number of rooms in your home. You canuse this method if the rooms in your home are allabout the same size.

Example 1.

Your office is 240 square feet (12 feet 20 feet).

Your home is 1,200 square feet.

Your office is 20% (240 1,200) of the total areaof your home.

Your business percentage is 20%.

Example 2.

You use one room in your home for business.

Your home has four rooms, all of about equal size.

Your office is 25% (1 4) of the total area of yourhome.

Your business percentage is 25%.

TIPUse lines 17 of Form 8829, or lines 13 on theworksheet near the end of this publication, tofigure your business percentage.

Part-Year UseYou cannot deduct expenses for the business use ofyour home incurred during any part of the year you didnot use your home for business purposes. For example,if you begin using part of your home for business onJuly 1, and you meet all the tests from that date untilthe end of the year, consider only your expenses for the

last half of the year in figuring your allowable deduction.

Deduction LimitIf your gross income from the business use of yourhome equals or exceeds your total business expenses(including depreciation), you can deduct all your busi-ness expenses. If your gross income from that use isless than your total business expenses, your deductionfor certain expenses for the business use of your homeis limited.

Your deduction of otherwise nondeductible ex-penses, such as insurance, utilities, and depreciation(with depreciation taken last), allocable to the businessis limited to the gross income from the business useof your home minus the sum of the following.

1) The business part of expenses you could deducteven if you did not use your home for business(such as mortgage interest, real estate taxes, andcasualty and theft losses, which are discussed un-der Deducting Expenses, later).

2) The business expenses that relate to the businessactivity in the home (for example, salaries or sup-plies), but not to the use of the home itself.

If you are self-employed, do not include in (2) aboveyour deduction for half of your self-employment tax.

Carryover of unallowed expenses. If your deductionsare greater than the current year's limit, you can carryover the excess to the next year. They are subject tothe deduction limit for that year, whether or not you livein the same home during that year.

Figuring deduction limit and carryover. If you arean employee or file Schedule F (Form 1040), Profit orLoss From Farming, use the worksheet near the endof this publication to figure your deduction limit andcarryover. If you file Schedule C (Form 1040), figureyour deduction limit and carryover on Form 8829.

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Example. You meet the requirements for deductingexpenses for the business use of your home. You use20% of your home for this business. In 1999, yourbusiness expenses, and expenses for the business useof your home are deducted from your gross income inthe following order.

You can deduct all of the business part of yourdeductible mortgage interest and real estate taxes($3,000). You also can deduct all of your business ex-penses not related to the use of your home ($2,000).Additionally, you can deduct all of the business part ofyour expenses for maintenance, insurance, and utilities,because the total ($800) is not more than the $1,000

deduction limit. Your deduction for depreciation for thebusiness use of your home is limited to $200 ($1,000minus $800) because of the deduction limit. You cancarry over the $1,400 balance and add it to your de-preciation for 2000, subject to your deduction limit in2000.

More than one place of business. If part of the grossincome from your trade or business is from the businessuse of part of your home and part is from a place otherthan your home, you must determine the part of yourgross income from the business use of your home be-fore you figure the deduction limit. In making this de-termination, consider the time you spend at each lo-cation, the business investment in each location, andany other relevant facts and circumstances.

Deducting ExpensesIf you qualify to deduct expenses for the business useof your home, you must divide the expenses of oper-ating your home between personal and business use.This section discusses the types of expenses you mayhave and gives examples and brief explanations ofsome of the expenses you may be able to deduct.

Types of ExpensesThe part of a home operating expense that you can useto figure your deduction depends on both of the fol-lowing.

Whether the expense is direct, indirect, or unrelated.

The percentage of your home used for business.

The following table describes the types of expensesyou may have and the extent to which they aredeductible.

TIP Form 8829 and the deduction worksheet (bothillustrated near the end of this publication) haveseparate columns for direct and indirect ex-

penses.

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 militaryallowance, your expenses for mortgage interest andreal 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 thevalue of the housing is tax-exempt, you cannot deductthe rental value of any portion of the housing.

Examples of ExpensesCertain expenses are deductible whether or not youuse your home for business. However, if you qualifyto claim business use of the home expenses, you canuse the business part of these expenses to figure yourbusiness use of the home deduction. These expensesinclude the following.

Real estate taxes.

Deductible mortgage interest.

Casualty losses.

Other expenses are deductible only if you use yourhome for business. You can use the business part ofthese expenses to figure your business use of the homededuction. These expenses generally include (but arenot limited to) the following.

Depreciation (covered under Depreciating YourHome, later).

Insurance.

Expense Description Deductibility

Direct Expenses only forthe business partof your home.

Deductible in full.*

Examples:Painting or repairsonly in the areaused for business.

Exception:May be onlypartially deductible in aday-care facility. SeeDay-Care Facility, later.Gross income from business .................................................. $6,000

Less:Indirect Expenses for

running your

entire home.

Deductible based on thepercentage of your home

used for business.*

Deductible mortgage interest and real estate taxes (20%) 3,000Business expenses not related to the use of your home

(business phone, supplies, and depreciation on equipment) 2,000Deduction limit ...................................................................... $1,000 Examples:Insurance,utilities, andgeneral repairs.

Less other expenses allocable to business use of home:Maintenance, insurance, and utilities (20%) ...................... 800Depreciation allowed (20% = $1,600 allowable) ................ 200

Other expenses up to the deduction limit ............................... $1,000Unrelated Expenses only for

the parts of yourhome notusedfor business.

Not deductible.Depreciation carryover to 2000 ($1,600 200) (subject todeduction limit in 2000) ........................................................... $1,400

Examples:Lawn care, or paintinga room not usedfor business.

*Subject to the deduction limit, discussed earlier.

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Rent.

Repairs.

Security system.

Utilities and services.

Real Estate TaxesTo 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 the deduction for real estatetaxes, see Publication 530, Tax Information for First-Time Homeowners.

Deductible Mortgage InterestTo figure the business part of your deductible mortgageinterest, multiply this interest by the percentage of yourhome used for business. You can include interest on asecond mortgage in this computation. If your totalmortgage debt is more than $1,000,000 or your homeequity debt is more than $100,000, your deduction maybe limited. For more information on what interest isdeductible, see Publication 936, Home Mortgage Inter-est Deduction.

Casualty LossesIf you have a casualty loss on your home that you usefor business, treat the casualty loss as a direct expense,an indirect expense, or an unrelated expense, de-pending on the property affected.

1) Direct expense. If the loss is on the portion of theproperty you use onlyin your business, use theentire loss to figure the business use of the homededuction.

2) Indirect expense. If the loss is on property you use

for bothbusiness and personal purposes, use onlythe business portion to figure the deduction.

3) Unrelated expense. If the loss is on property youdo notuse in your business, do not use any of theloss to figure the deduction.

If you are filing Schedule C (Form 1040), get Form8829 and follow the instructions for casualty losses. Ifyou are an employee or file Schedule F (Form 1040),you can use the worksheet near the end of this publi-cation. You will also need to see Form 4684, Casualtiesand Thefts.

For more information on casualty losses to business

and nonbusiness property, get Publication 547, Casu-alties, Disasters, and Thefts (Business and Nonbusi-ness).

InsuranceYou can deduct the cost of insurance that covers thebusiness part of your home. However, if your insurancepremium gives you coverage for a period that extendspast the end of your tax year, you can deduct only thebusiness percentage of the part of the premium thatgives you coverage for your tax year. You can deductthe business percentage of the part that applies to thefollowing year in that year.

RentIf you rent the home you occupy and meet the re-quirements for business use of the home, you can de-duct part of the rent you pay. To figure your deduction,multiply your rent payments by the percentage of yourhome used for business.

You cannot deduct the fair rental value of your home.If you own your home, see Depreciating Your Home,later.

RepairsThe cost of repairs and supplies that relate to yourbusiness, including labor (other than your own labor),is a deductible expense. For example, a furnace repairbenefits the entire home. If you use 10% of your homefor business, you can deduct 10% of the cost of thefurnace repair.

Repairs keep your home in good working order overits useful life. Examples of common repairs are patchingwalls and floors, painting, wallpapering, repairing roofsand gutters, and mending leaks. However, repairs aresometimes treated as a permanent improvement. SeePermanent improvements later under Depreciating

Your Home.

Security SystemIf you install a security system that protects all the doorsand windows in your home, you can deduct the busi-ness part of the expenses you incur to maintain andmonitor the system. You can also take a depreciationdeduction for the part of the cost of the security systemrelating to the business use of your home.

Utilities and ServicesExpenses for utilities and services, such as electricity,gas, trash removal, and cleaning services, are primarilypersonal expenses. However, if you use part of yourhome for business, you can deduct the business partof these expenses. Generally, the business percentagefor utilities is the same as the percentage of your homeused for business.

Telephone. The basic local telephone service charge,including taxes, for the first telephone line into yourhome is a nondeductible personal expense. However,charges for business long-distance phone calls on thatline, as well as the cost of a second line into your homeused exclusively for business, are deductible businessexpenses. You can deduct these expenses even if the

expenses for the business use of your home do notqualify for the deduction. Deduct these charges sepa-rately on the appropriate schedule. Do not include themin your home office deduction.

Depreciating Your HomeIf you own your home and qualify to deduct expensesfor its business use, you can claim a deduction for de-preciation. Depreciation is an allowance for the wearand tear on the part of your home used for business.You cannot depreciate the cost or value of the land.

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You recover its cost when you sell or otherwise disposeof the property.

Before you figure your depreciation deduction, youneed to know the following information.

The month and year you started using your homefor business.

The adjusted basis and fair market value of yourhome at the time you began using it for business.

The cost of any improvements before and after youbegan using the property for business.

The percentage of your home used for business.See Business Percentage, earlier.

Adjusted basis defined. The adjusted basis of yourhome is generally its cost, plus the cost of any perma-nent improvements you made to it, minus any casualtylosses or depreciation deducted in earlier tax years. Fora discussion of adjusted basis, see Publication 551.

Permanent improvements. A permanent improve-ment increases the value of property, adds to its life,or gives it a new or different use. Examples of im-provements are replacing electric wiring or plumbing,adding a new roof or addition, paneling, or remodeling.

If you make repairs as part of an extensive remod-eling or restoration of your home, the entire job is animprovement. You must carefully distinguish betweenrepairs and improvements. You must also keep accu-rate records of these expenses. These records will helpyou decide whether an expense is a deductible orcapital (added to the basis) expense.

Example. You buy an older home and fix up tworooms as a beauty salon. You patch the plaster on theceilings and walls, paint, repair the floor, install an out-side door, and install new wiring, plumbing, and other

equipment. Normally, the patching, painting, and floorwork are repairs and the other expenses are permanentimprovements. However, since the work gives yourproperty a new use, the entire remodeling job is a per-manent improvement and its cost is added to the basisof the property. You cannot deduct any portion of it asa repair expense.

Adjusting for depreciation deducted in earlieryears. You must decrease the basis of your propertyby the depreciation you could have deducted on yourtax returns under the method of depreciation youproperly selected. If you took less depreciation than youcould have under the method you selected, decrease

the basis by the amount you could have taken underthat method. If you did not take a depreciation de-duction, decrease the basis by the amount you couldhave deducted.

If you deducted more depreciation than you shouldhave, decrease your basis by the amount you shouldhave deducted, plus the part of the excess deductedthat actually decreased your tax liability for any year.

For more information on adjusting your basis for de-preciation deducted in earlier years, see Publication551. If you deducted the incorrect amount of depreci-ation, see Incorrect Amount of Depreciation Deductedin Publication 946.

Fair market value defined. The fair market value ofyour home is the price at which the property wouldchange hands between a buyer and a seller, neitherhaving to buy or sell, and both having reasonableknowledge of all necessary facts. Sales of similarproperty, on or about the date you begin using yourhome for business, may be helpful in figuring theproperty's fair market value.

Figuring the Depreciation Deductionfor the Current YearIf you began using your home for business before 1999,continue to use the same depreciation method youused in past tax years.

If you began using your home for business in 1999,depreciate the business part as nonresidential realproperty under the modified accelerated cost recoverysystem (MACRS). Under MACRS, nonresidential realproperty is depreciated using the straight line methodover 39 years. For more information on MACRS andother methods of depreciation, see Publication 946.

To figure the depreciation deduction, you must first

figure the part of the cost of your home that can bedepreciated (depreciable basis). The depreciable basisis figured by multiplying the percentage of your homeused for business by the smaller of the following.

The adjusted basis of your home (excluding land)on the date you began using your home for busi-ness.

The fair market value of your home (excluding land)on the date you began using your home for busi-ness.

Depreciation table. If 1999 was the first year youused your home for business, you can figure your 1999depreciation for the business part of your home by us-ing the appropriate percentage from the following table.

Multiply the depreciable basis of the business partof your home by the percentage from the table for thefirst month in your tax year that you use your home forbusiness. See Table A-7ain Appendix A of Publication946 for the percentages for the remaining tax years ofthe recovery period.

Month of Tax YearFirst Used for Business Percentage To Use

1 2.461%

2 2.247%

3 2.033%

4 1.819%

5 1.605%

6 1.391%

7 1.177%

8 0.963%

9 0.749%

10 0.535%

11 0.321%

12 0.107%

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Example. In May, George Miller began to use oneroom in his home exclusively and regularly to meet cli-ents. This room is 8% of the square footage of hishome. He bought the home in 1990 for $125,000. Hedetermined from his property tax records that his ad-

justed basis in the house (exclusive of land) is$115,000. In May, the house had a fair market valueof $165,000. He multiplies his adjusted basis (which isless than fair market value) by 8%. The result is $9,200,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 hisdepreciable basis of $9,200 by 1.605% (.01605), thepercentage from the table for the 5th month. The resultis $147.66, his depreciation deduction.

Depreciating Permanent ImprovementsAdd the costs of permanent improvements made beforeyou began using your home for business to the basisof your property. Depreciate these costs as part of thecost of the house as explained earlier. The costs ofimprovements made after you begin using your homefor business (that affect the business part of your home,such as a new roof), are depreciated separately. Multi-ply the cost of the improvement by the business-usepercentage and depreciate the result over the appro-priate recovery period. For more information on whatrecovery period to use, see Property Classes and Re-covery Periodsin chapter 3 of Publication 946.

Day-Care FacilityIf you use space in your home on a regularbasis forproviding day care, you may be able to deduct thebusiness expenses for that part of your home eventhough you use the same space for nonbusiness pur-

poses. To qualify for this exception to the exclusive userule, you must meet the following requirements.

1) You must be in the trade or business of providingday care for children, persons 65 or older, or per-sons who are physically or mentally unable to carefor themselves.

2) You must have applied for, been granted, or beexempt from having a license, certification, regis-tration, or approval as a day-care center or as afamily or group day-care home under state law. Youdo not meet this requirement if your application wasrejected or your license or other authorization wasrevoked.

Figuring the deduction. If you regularly use part ofyour home for day care, figure what part is used for daycare, as explained earlier under Business Percentage.If you use that part exclusively for day care, deductall the allocable expenses, subject to the deductionlimit, as explained earlier.

If the use of part of your home as a day-care facilityis regular, but notexclusive, you must figure what partof available time you actually use it for business. Aroom that is availablefor use throughout each businessday and that you regularly use in your business isconsidered to be used for day care throughout each

business day. You do not have to keep records to showthe specific hours the area was used for business. Youmay use the area occasionally for personal reasons.However, a room you use only occasionally for busi-ness does not qualify for the deduction.

TIPTo find what part of the available time you ac-tually use your home for business, compare thetotal time used for business to the total time that

part of your home can be used for all purposes. You

can compare the hours of business use in a week withthe number of hours in a week (168). Or you cancompare the hours of business use for the year with thenumber of hours in the year (8,760 in 1999).

Example 1. Mary Lake uses her basement to op-erate a day-care business for children. She figures thebusiness percentage of the basement as follows.

She uses the basement for day care an average of 12hours a day, 5 days a week, for 50 weeks a year.During the other 12 hours a day, the family can use thebasement. She figures the percentage of time thebasement is available for use as follows.

Mary can deduct 34.25% of any directexpenses for thebasement. However, because her indirect expensesare for the entire house she can deduct only 17.13%of the indirect expenses. She figures the percentage forher indirect expenses as follows.

Mary completes Form 8829 as shown on page 11

(Figure B). In Part I she figures the percentage of herhome used for business, including the percentage oftime the basement is used.

In Part II, Mary figures her deductible expenses. Sheuses the following information to complete Part II.

Mary enters her tentative profit, $25,000, on line 8.(This figure is the same as the amount on line 29 of herSchedule C.)

The expenses she paid for rent and utilities relate toher entire home. Therefore, she enters them in column(b) on the appropriate lines. She adds these two ex-penses (line 21) and multiplies the total by the per-centage on line 7 and enters the result, $1,585, on line22.

Mary paid $500 to have the basement painted. Thepainting is a direct expense. However, because shedoes not use the basement exclusively for day care,she must multiply $500 by the percentage of time thebasement is used for day care (34.25% line 6). Sheenters $171 (34.25% $500) on line 18, column (a).She adds lines 21 and 22 and enters $1,756 ($171 +

Square footage of the basementSquare footage of her home

=1,6003,200

= 50%

Number of hours available for use (12 x 5 x 50)Total number of hours in the year (24 x 365)

=3,0008,760

= 34.25%

Business percentage of the basement ............................... 50%Multiplied by: Percentage of time used .............................. 34.25%Percentage for indirect expenses ................................... 17.13%

Gross income from her day-care business ........................... $50,000Expenses not related to the business use of the home ....... $25,000Tentative profit ....................................................................... $25,000

Rent ....................................................................................... $8,400Utilities ................................................................................... $850Painting the basement .......................................................... $500

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Mary Lake 412 0 0 1234

1,60 0

3,20050

3,000

3425

17.13

25,000

-0 -

25,000

1,7561,756

23,244

-0 --0 -

1,756

-0 -

1,756

171

171

8 50

8,400

9,2501,58 5

Figure BExpenses for Business Use of Your Home

Part of Your Home Used for Business

1 Area used regularly and exclusively for business, regularly for day care, or for storage of inventoryor product samples. See instructions

2 Total area of home

3 Divide line 1 by line 2. Enter the result as a percentage

For day-care facilities not used exclusively for business, also complete lines 46.

All others, skip lines 46 and enter the amount from line 3 on line 7.

4 Multiply days used for day care during year by hours used per day

5 Total hours available for use during the year (365 days 24 hours). See instructions

6 Divide line 4 by line 5. Enter the result as a decimal amount

7 Business percentage. For day-care facilities not used exclusively for business, multiply line 6 byline 3 (enter the result as a percentage). All others, enter the amount from line 3

Figure Your Allowable Deduction

8 Enter the amount from Schedule C, line 29, plus any net gain or (loss) derived from the business use ofyour home and shown on Schedule D or Form 4797. If more than one place of business, see instructions

9 Casualty losses. See instructions

10 Deductible mortgage interest. See instructions

11 Real estate taxes. See instructions

12 Add lines 9, 10, and 11

13 Multiply line 12, column (b) by line 7

14 Add line 12, column (a) and line 13

15 Subtract line 14 from line 8. If zero or less, enter -0-

16 Excess mortgage interest. See instructions

17 Insurance

18 Repairs and maintenance

File only with Schedule C (Form 1040). Use a separate Form 8829 for eachhome you used for business during the year.

See separate instructions.

OMB No. 1545-1266

Department of the TreasuryInternal Revenue Service

AttachmentSequence No. 66

Form 8829

Name(s) of proprietor(s)

(a) Direct expenses (b) Indirect expenses

19 Utilities

20 Other expenses. See instructions

21 Add lines 16 through 2022 Multiply line 21, column (b) by line 7

23 Carryover of operating expenses from 1998 Form 8829, line 41

24 Add line 21 in column (a), line 22, and line 23

25 Allowable operating expenses. Enter the smaller of line 15 or line 24

26 Limit on excess casualty losses and depreciation. Subtract line 25 from line 15

27 Excess casualty losses. See instructions

28 Depreciation of your home from Part III below

29 Carryover of excess casualty losses and depreciation from 1998 Form 8829, line 42

30 Add lines 27 through 29

31 Allowable excess casualty losses and depreciation. Enter the smaller of line 26 or line 30

32 Add lines 14, 25, and 31

33 Casualty loss portion, if any, from lines 14 and 31. Carry amount to Form 4684, Section B

34 Allowable expenses for business use of your home. Subtract line 33 from line 32. Enter here

and on Schedule C, line 30. If your home was used for more than one business, see instruct ions

35 Enter the smaller of your homes adjusted basis or its fair market value. See instructions

36 Value of land included on line 35

37 Basis of building. Subtract line 36 from line 35

38 Business basis of building. Multiply line 37 by line 7

Depreciation of Your Home

39 Depreciation percentage. See instructions40 Depreciation allowable. Multiply line 38 by line 39. Enter here and on line 28 above. See instructions

41 Operating expenses. Subtract line 25 from line 24. If less than zero, enter -0-42 Excess casualty losses and depreciation. Subtract line 31 from line 30. If less than zero, enter -0-

Carryover of Unallowed Expenses to 2000

For Paperwork Reduction Act Notice, see page 4 of separate instructions. Cat. No. 13232M Form 8829 (1999)

1

2

3

4

5

6

7

24

25

26

30

31

32

33

34

35

36

37

38

39

40

41

42

27

28

29

22

23

8

9

10

11

12

13

14

15

16

17

18

19

20

21

hr.

8,760 hr.

.

%

Part IV

Part I

Part II

Your social security number

%

%

Part III

See instructions for columns (a) and (b) beforecompleting lines 920.

1999

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$1,585) on line 24. Because this is less than her de-duction limit (line 15), she can deduct the entire amount.She completes the rest of Part II by entering $1,756 onlines 32 and 34. She then carries the $1,756 to line 30of her Schedule C (not shown).

Example 2. Assume the same facts as in Example1 except that Mary also has another room that isavailable each business day for children to take napsin. Although she did not keep a record of the number

of hours the room was actually used for naps, it wasused for part of each business day. Since the room wasavailable during regular operating hours each businessday and was used regularly in the business, it is con-sidered to be used for day care throughout each busi-ness day. The basement and room are 60% of the totalarea of her home. In figuring her expenses, 34.25%of any direct expenses for the basement and room aredeductible. In addition, 20.55% (34.25% 60%) of herindirect expenses are deductible.

Meals. If you provide food for your day-care recipients,do not include the expense as a cost of using your

home for business. Claim it as a separate deductionon your Schedule C (Form 1040). You can never de-duct the cost of food consumed by you or your family.You can deduct as a business expense 100% of thecost of food consumed by your day-care recipients andgenerally only 50% of the cost of food consumed byyour employees. However, you can deduct 100% of thecost of food consumed by your employees if its valuecan be excluded from their wages as a de minimisfringe benefit. Generally, the value of meals you provideto employees on your business premises is de minimisif more than half of these employees are provided themeals for your convenience. For more information, seechapters 2, 3, and 4 in Publication 535, Business Ex-

penses.If you deduct the cost of food for your day-care

business, keep a separate record (with receipts) of yourfamily's food costs.

Reimbursements you receive from a sponsor underthe Child and Adult Food Care Program of the Depart-ment of Agriculture are taxable only to the extent theyexceed your expenses for food for eligible children. Ifyour reimbursements are more than your expenses forfood, show the difference as income in Part I ofSchedule C. If your food expenses are greater than thereimbursements, show the difference as an expense inPart V of Schedule C. Do not include payments or ex-penses for your own children if they are eligible for the

program. Follow this procedure even if you receive aForm 1099 reporting a payment from the sponsor.

Sale or Exchange ofYour HomeIf you sell or exchange your home, you may be able toexclude up to $250,000 ($500,000 for certain marriedpersons filing a joint return) of the gain on the sale orexchange if you meet the ownership and use tests.

Ownership and use tests. To claim the exclusion, youmust meet the ownership and use tests. This meansthat during the 5-year period ending on the date of thesale, you met the following tests.

1) You owned the home for at least 2 years (owner-ship test).

2) You lived in the home as your main home for atleast 2 years (use test).

Business use during the ownership and use pe-riods. If you used part of your home for business formore than 3 years during the ownership and use peri-ods, the exclusion generally applies only to the gainattributable to the personal part of your home.

Depreciation. If you were entitled to take depreciationdeductions because you used your home for business,you cannotexclude the part of your gain equal to anydepreciation allowed or allowable as a deduction forperiods after May 6, 1997. If you can show by adequaterecords or other evidence that the depreciation de-duction allowed was less than the amount allowable,

the amount you cannot exclude is the depreciation al-lowed.

Basis adjustment. If you used any part of your homefor business, you must adjust the basis of your homefor any depreciation that was allowable for its businessuse, even if you did not claim it. If you took less de-preciation than you could have under the method youproperly selected, you must decrease the basis by theamount you could have taken under that method. If youtook more depreciation than you should have under themethod you properly selected, you must decrease thebasis by the amount you should have deducted, plusthe part of the excess deducted that actually decreasedyour tax liability for any year. For more information onreducing the basis of your property for depreciation, seePublication 551.

More information. This section covers only the basicrules for the sale or exchange of your home. For moreinformation, see Publication 523.

Business Furniture andEquipmentThis section discusses the depreciation and section 179deductions you may be entitled to take for furniture andequipment that you use in your home for business orwork as an employee. These deductions are availablewhether or not you qualify to deduct expenses for thebusiness use of your home.

This section explains the different rules for each ofthe following.

1) Listed property.

2) Property bought for business use.

3) Personal property converted to business use.

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Listed PropertyIf you use certain types of property, called listedproperty, in your home, special rules apply. Listedproperty includes any property of a type generally usedfor entertainment, recreation, and amusement (includ-ing photographic, phonographic, communication, andvideo recording equipment). Listed property also in-cludes computers and related equipment unless theyare used in a qualifying office in your home. If you use

your computer in a qualifying office in your home, seeProperty Bought for Business Use, later.

More-than-50%-use test. If you bought listed propertyand placed it in service during the year, you must useit more than 50% for business (including work as anemployee) to claim a section 179 deduction or an ac-celerated depreciation deduction.

If your business use of listed property is 50% or less,you cannot take a section 179 deduction and you mustdepreciate the property using the Alternate Depreci-ation System (ADS) (straight line method). For moreinformation on ADS, see chapter 3 in Publication 946.

Listed property meets the more-than-50%-use test

for any year if its qualified business use is more than50% of its total use. You must allocate the use of anyitem of listed property used for more than one purposeduring the year among its various uses. You cannot usethe percentage of investment use as part of the per-centage of qualified business use to meet the more-than-50%-use test. However, you do use the combinedtotal of business and investment use to figure your de-preciation deduction for the property.

Example 1. Sarah does not qualify to claim a de-duction for the business use of her home, but she usesher home computer 40% of the time for a business sheoperates out of her home. She also uses the computer

50% of the time to manage her investments. Sarah'shome computer is listed property because it is not usedin a qualified office in her home. Because she does notuse the computer more than 50% for business, shecannot elect a section 179 deduction. She can use hercombined business/investment use (90%) to figure herdepreciation deduction using ADS.

Example 2. If Sarah uses her computer 60% of thetime for her business and 30% for managing her in-vestments, her computer meets the more-than-50%-use test. She can elect a section 179 deduction. Shecan use her combined business/investment use (90%)to figure her depreciation deduction using the GeneralDepreciation System (GDS).

Employee. If you use your own listed property (orlisted property you rent) in your work as an employee,the property is business-use property only if you meetthe following requirements.

The use is for the convenience of your employer.

The use is required as a condition of your employ-ment.

As a condition of your employment means that theuse of the property is necessary for you to properlyperform your work. Whether the use of the property is

required for this purpose depends on all the facts andcircumstances. Your employer does not have to tell youspecifically to use the property. Nor is a statement byyour employer to that effect sufficient.

Years following the year placed in service. If, in ayear after you place an item of l isted property in service,you fail to meet the more-than-50%-use test for thatitem of property, you may be required to do the follow-ing.

1) Figure depreciation, beginning with the year you nolonger use the property more than 50% for busi-ness, using the straight line method.

2) Figure any excess depreciation and section 179deduction on the property and add it to:

a) Your gross income, and

b) The adjusted basis of your property.

For more information, see Years After the First Recov-ery Yearunder Applying the Predominant Use Test inPublication 946.

Reporting and recordkeeping requirements. If youuse listed property in your business, you must file Form4562 to claim a depreciation or section 179 deduction.Begin with Part V, Section A, of that form.

RECORDS

You cannot take any depreciation or section179 deduction for the use of listed property un-less you can prove your business/investment

use with adequate records or sufficient evidence tosupport your own statements.

To meet the adequate records requirement, youmust maintain an account book, diary, log, statementof expense, trip sheet, or similar record or other docu-mentary evidence that is sufficient to establish busi-

ness/investment use. For more information on whatrecords to keep, see What Records Must Be Kept inchapter 4 of Publication 946.

More information. For more information on listedproperty, see chapter 4 in Publication 946.

Property Bought for Business UseIf you bought certain property to use in your business,you can do any one of the following (subject to the limitsdiscussed later).

Elect a section 179 deductionfor the full cost of

the property. Take part of the cost as a section 179 deduction

and depreciatethe balance.

Depreciatethe full cost of the property.

Section 179 DeductionYou can generally elect to claim the section 179 de-duction on depreciable tangible personal propertybought for use in the active conduct of your business.You can choose how much (subject to the limit) of thecost you want to deduct under section 179 and howmuch you want to depreciate. You can spread the

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section 179 deduction over several items of property inany way you choose as long as the total does not ex-ceed the maximum allowable. You cannot take a sec-tion 179 deduction for the basis of the business part ofyour home.

You elect the section 179 deduction by completingPart 1 of Form 4562.

Deduction limits. The section 179 deduction cannotbe more than the business cost of the qualifying prop-

erty. In addition, you must apply the following limitswhen figuring your section 179 deduction.

1) Maximum dollar limit.

2) Investment limit.

3) Taxable income limit.

Maximum dollar limit. The total cost of section 179property you can elect to deduct for 1999 cannot bemore than $19,000. This maximum dollar limit is re-duced if you go over the investment limit (discussednext) in any year.

Investment limit. If the cost of your qualifying sec-

tion 179 property is over $200,000, you must reduce themaximum dollar limit ($19,000) for each dollar over$200,000.

Taxable income limit. The total cost you can de-duct each year is limited to your total taxable incomefrom the active conduct of all your trade or businessactivities, including wages, during the tax year. Figuretaxable income for this purpose in the usual way, butwithout regard to all of the following.

The section 179 deduction.

The self-employment tax deduction.

Any net operating loss carryback or carryforward.

More information. For more information on the section179 deduction, see chapter 2 in Publication 946.

DepreciationUse Part II of Form 4562 to claim your deduction fordepreciation on property placed in service during theyear. Do not include any costs deducted in Part I (sec-tion 179 deduction).

Most business property used in a home office is ei-ther 5-year or 7-year property under MACRS.

5-year propertyincludes computers and peripheralequipment, typewriters, calculators, adding ma-

chines, and copiers.7-year propertyincludes office furniture and

equipment such as desks, files, and safes.

Under MACRS, you generally use the half-yearconvention, which allows you to deduct a half year ofdepreciation in the first year you use the property inyour business. If you place more than 40% of yourdepreciable property in service during the last 3 monthsof your tax year, you must use the mid-quarter con-vention instead of the half-year convention.

After you have determined the cost of the deprecia-ble property (minus any section 179 deduction taken

on the property) and whether it is 5-year or 7-yearproperty, use the half-year convention table, shownnext, to figure your depreciation.

See Publication 946 for a discussion of the mid-quarter convention and for complete MACRS percent-age tables.

Example. During the year, Donald Kent bought adesk and three chairs for use in his office. His total billfor the furniture was $1,975. His taxable business in-come for the year was $3,000 without any deduction forthe office furniture. Donald can elect to do one of thefollowing.

1) Take a section 179 deduction for the full cost of theoffice furniture.

2) Take part of the cost of the furniture as a section179 deduction and depreciate the balance.

3) Depreciate the full cost of the office furniture.

The furniture is 7-year property. If Donald does nottake a section 179 deduction, he multiplies $1,975, thecost of the furniture, by 14.29% (.1429) to get his de-preciation deduction of $282.23.

Personal Property Converted toBusiness UseIf you use property in your home office that was usedpreviously for personal purposes, you cannot take asection 179 deduction for the property. You can de-preciate it, however. The method of depreciation youuse depends on when you first used the property forpersonal purposes.

If you began using the property for personal pur-poses before 1981 and change it to business use in1999, depreciate the property by the straight line ordeclining balance method based on salvage value anduseful life.

If you began using the property for personal pur-

poses after 1980 and before 1987 and change it tobusiness use in 1999, you generally depreciate theproperty under the accelerated cost recovery system(ACRS). However, if the depreciation under ACRS isgreater in the first year than the depreciation underMACRS, you must depreciate it under MACRS. Forinformation on ACRS, see Publication 534, Depreciat-ing Property Placed in Service Before 1987.

If you began using the property for personal pur-poses after 1986 and change it to business use in 1999,depreciate the property under MACRS.

The basis for depreciation of property changed frompersonal to business use is the lesser of the following.

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%

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1) The adjusted basis of the property on the date ofchange.

2) The fair market value of the property on the dateof change.

Recordkeeping

RECORDS

You do not have to use a particular method ofrecordkeeping, but you must keep records thatprovide the information needed to figure your

deductions for the business use of your home. Youshould keep canceled checks, receipts, and other evi-dence of expenses you paid.

Your records must show the following information.

The part of your home you use for business.

That you use the part in (1) exclusively and regularlyfor business as either your principal place of busi-ness or as the place where you meet or deal withclients or customers in the normal course of your

business. (However, see the earlier discussion, Ex-ceptions to Exclusive Use.)

The depreciation and expenses for the businesspart.

You must keep your records for as long as they areimportant for any tax law. This is usually the later of thefollowing dates.

1) 3 years from the return due date or the date filed.

2) 2 years from the date the tax was paid.

Keep records to prove your home's depreciable ba-sis. This includes records of your original purchaseprice, any improvements to your home, and any de-preciation you are allowed because you maintained anoffice in your home. You can keep copies of Forms8829 or the Publication 587 worksheets as records ofdepreciation.

For more information on recordkeeping, see Publi-cation 583.

Where To DeductDeduct expenses for the business use of your homeon Form 1040. Where you deduct these expenses onForm 1040 depends on whether you are:

A self-employed person, or

An employee.

Self-Employed PersonsIf you are self-employed and file Schedule C (Form1040), attach Form 8829 to your return. If you fileSchedule F (Form 1040), report your entire deductionfor business use of the home, up to the limit discussedearlier (line 32 if you used the worksheet) on line 34

of Schedule F. Write Business Use of Home on thedotted line beside the entry.

Deductible mortgage interest. If you file Schedule C(Form 1040), enter all your deductible mortgage intereston line 10 of Form 8829. After you have figured thebusiness part of the mortgage interest on lines 12 and13, subtract that amount from the total mortgage inter-est on line 10. The remainder is deductible on ScheduleA (Form 1040), lines 10 and 11. Do not deduct any of

the business part on Schedule A. If the interest youdeduct on Schedule A for your home mortgage is lim-ited, enter the excess on line 16 of Form 8829.

If you file Schedule F (Form 1040), include thebusiness part of your deductible home mortgage inter-est with your total business use of the home expenseson line 34. You can use the worksheet near the backof this publication to figure the deductible part of mort-gage interest. Enter the nonbusiness part of thedeductible mortgage interest on Schedule A, lines 10and 11.

To determine if the limits on qualified home mortgageinterest apply to you, see the instructions for ScheduleA or Publication 936.

Real estate taxes. If you file Schedule C (Form 1040),enter all your deductible real estate taxes on line 11 ofForm 8829. After you have figured the business partof your taxes on lines 12 and 13, subtract that amountfrom your total real estate taxes on line 11. The re-mainder is deductible on Schedule A, line 6. Do notdeduct any of the business part of real estate taxes onSchedule A.

If you file Schedule F (Form 1040), include thebusiness part of real estate taxes with your total busi-ness use of the home expenses on line 34. Enter thenonbusiness part of your real estate taxes on line 6 of

Schedule A.

Casualty losses. If you are using Form 8829, refer tothe specific instructions for lines 9 and 27 and enter theamount from line 33 on line 27 of Form 4684, SectionB. Write See Form 8829 above line 27.

If you file Schedule F (Form 1040), enter the busi-ness part of casualty losses (line 31 if you use theworksheet) on line 27 of Form 4684, Section B. WriteSee attached statement above line 27.

Other expenses. Report the other home expensesthat would not be allowable if you did not use your homefor business (insurance, maintenance, utilities, depre-

ciation, etc.), on the appropriate lines of your Form8829. If you rent rather than own your home, includethe rent you paid on line 20. If any of these expensesexceed the deduction limit, carry them over to next year.They will be subject to next year's deduction limit.

If you file Schedule F (Form 1040), include your otherhome expenses that would not be allowable if you didnot use your home for business (insurance, mainte-nance, utilities, depreciation, etc.), with your total busi-ness use of the home expenses on line 34 of ScheduleF. If any of these expenses exceed the deduction limit,carry them over to the next year. They will be subjectto next years deduction limit.

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Business expenses not for the use of your home.Deduct in full your business expenses that are not forthe use of your home itself (dues, salaries, supplies,certain telephone expenses, etc.) on the appropriatelines of Schedule C (Form 1040) or Schedule F (Form1040). Because these expenses are not for the use ofyour home, they are not subject to the deduction limitfor business use of the home expenses.

EmployeesAs an employee, you must itemize deductions onSchedule A (Form 1040) to claim expenses for thebusiness use of your home and any other employeebusiness expenses. This generally applies to all em-ployees, including outside salespersons. If you are astatutory employee, use Schedule C (Form 1040) toclaim the expenses. Follow the instructions given earlierunder Self-Employed Persons. The statutoryemployee box within box 15 on your Form W-2 will bechecked if you are a statutory employee.

If you have employee expenses for which you werenot reimbursed, report them on line 20 of Schedule A.You generally must also complete Form 2106 if either

of the following apply.

You claim any travel, transportation, meal, orentertainment expenses.

Your employer paid you for any of your job ex-penses reportable on line 20. (Amounts your em-ployer included in box 1 of your Form W-2 are notconsidered paid by your employer).

However, you can use a simpler form, Form2106-EZ, instead of Form 2106, if you meet the fol-lowing requirements.

You were not reimbursed for your expenses by your

employer, or if you were reimbursed, the re-imbursement was included in box 1 of your FormW-2.

If you claim car expenses, you use the standardmileage rate.

When your employer pays for your expenses usinga reimbursement or allowance arrangement, the pay-ments generally should not be on your Form W-2 if thefollowing rules for an accountable plan are met.

1) You adequately account to your employer for theexpenses within a reasonable time.

2) You return any payments not spent for businessexpenses (excess reimbursements).

3) You must have paid or incurred deductible ex-penses while performing services as an employee.

If you meet the accountable plan rules and yourbusiness expenses equal your reimbursement, do notreport the reimbursement as income and do not deductthe expenses.

Accounting to employer. You account to your em-ployer when you give your employer documentary evi-dence of your travel, mileage, and other employee

business expenses, such as receipts, along with anaccount book, diary, or similar record in which you en-tered each expense at or near the time you had it. Youalso may be treated as accounting to your employer ifyour employer gives you a per diem or car allowancethat is similar in form to and not more than the federalrate and you verify the time, place, and business pur-pose of each expense. For more information, see theinstructions for Form 2106 and Publication 463, Travel,Entertainment, Gift, and Car Expenses.

Deductible mortgage interest. Although you gener-ally can deduct expenses for the business use of yourhome on line 20 of Schedule A (Form 1040), do notinclude any deductible home mortgage interest on thatline. Instead, deduct both the business and nonbusi-ness parts of this interest on line 10 or 11 of ScheduleA.

If the home mortgage interest you can deduct onlines 10 or 11 is limited by the home mortgage interestrules, you cannot deduct the excess as an employeebusiness expense on line 20 of Schedule A, eventhough you use part of your home for business. Todetermine if the limits on home mortgage interest applyto you, see the instructions for Schedule A or Publica-tion 936.

Real estate taxes. Deduct both the business andnonbusiness parts of your real estate taxes on line 6of Schedule A. For more information on amounts al-lowable as a deduction for real estate taxes, see Pub-lication 530, Tax Information for First-Time Homeown-ers.

Casualty losses. Enter the business part of casualtylosses (line 31 of the worksheet) on line 27 of Form4684, Section B. Write See attached statement above

line 27.

Other expenses. If you file Form 2106 or Form2106-EZ, report on line 4 the following expenses.

The business part of your otherwise nondeductibleexpenses (utilities, maintenance, insurance, depre-ciation, etc.) that do not exceed the deduction limit.

The employee business expenses not related to theuse of your home, such as advertising.

Add these to your other employee business expensesand complete the rest of the form. Enter the total fromForm 2106, or Form 2106-EZ on line 20 of ScheduleA, where it is subject to the2%-of-adjusted-gross-income limit. If you do not haveto file Form 2106 or Form 2106-EZ, enter your totalexpenses directly on line 20 of Schedule A.

Example. You are an employee who works at homefor the convenience of your employer. You meet all therequirements to deduct expenses for the business useof your home. Your employer does not reimburse youfor any of your business expenses and you are nototherwise 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

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from the business use of your home, which you deter-mine to be $6,000.

The percentage of expenses due to the business useof your home is 20%. You have the following expenses.

Based on the above expenses, you figure your de-duction limit as follows.

Your deduction for otherwise nondeductible expensesand depreciation is limited to $1,500. You can deductall of your otherwise nondeductible expenses ($800)and $700 ($1,500 $800) of your depreciation.

You deduct your expenses for business use of yourhome on Schedule A (Form 1040) as shown in the fol-lowing table.

You can carry over the $900 of depreciation thatexceeds the deduction limit to next year, subject to thededuction limit for that year.

Schedule C ExampleThe filled-in forms for John Stephens that follow show

how to report deductions for the business use of yourhome if you file Schedule C (Form 1040). Only the ex-penses and information that relate to the business useof the home are discussed.

Form 4562. The following bold line references applyto Form 4562.

Part I, lines 113. John began using his home forbusiness in January of this year. He purchased a newcomputer and filing cabinet to use in his business. Thecomputer, used 100% for business, cost $3,200. Thefiling cabinet cost $600. He elects to take the section179 deduction for both items.

John completes Part I of Form 4562. He enters thecost of both the computer and filing cabinet, $3,800,on line 2 and completes lines 4 and 5. On line 6, heenters a description of each item, its cost and the costhe elects to expense. He completes the remaining linesin Part I.

Part II, line 15c. John converted to business use adesk and chair he had purchased in 1994 for personalpurposes. In 1994 he paid $1,500 for them. The fairmarket value in 1999 is $550. Since the fair market

value is less than the cost, his depreciable basis is$550.

In Part II, line 15c, column (c), he enters $550 for thedesk and chair. He completes columns (d) through (f).Since the furniture is 7-year property under MACRS,he uses the table on page 14 or Table A-1 in Publication946 to find the rate of 14.29% for property placed inservice during the first month of the year. He multiplies$550 by 14.29% (.1429) and enters $79 in column (g).

Part II, line 15i. Because this is the first year Johnused his home for business, he must figure the depre-ciation on line 15i. On line 15i, column (c), he enters$11,000, the depreciable basis of the business part ofhis home. (For a discussion on how the depreciable

basis is figured, see Step 3under Form 8829, Part II.)Because the property is 39-year nonresidential realproperty under MACRS, he uses the table on page 9or Table A-7a in Publication 946 to find the rate of2.461% for property placed in service during the firstmonth of the year. He multiplies $11,000 by 2.461%(.02461) and enters $271 in column (g).

Part IV, line 21. John totals the amounts on line 12and line 15 in column (g) and enters the total on line21. He enters both the section 179 deduction ($3,800)and the depreciation on the furniture ($79) on line 13of Schedule C. He enters the depreciation on his home($271) on Form 8829, line 28.

Schedule C. The following bold line references applyto Schedule C.

Line 13. John enters the amount from Form 4562for his section 179 deduction ($3,800) and the depre-ciation deduction for his office furniture ($79).

Line 16b. This amount is the interest on installmentpayments for the business assets John uses in hishome office.

Line 25. John had a separate telephone line in hishome office that he used only for business. He candeduct $347 for the line.

Lines 28-30. On line 28, he totals all his expensesother than those for the business use of his home, and

then he subtracts that total from his gross income. Heuses the result on line 29 to figure the deduction limiton his expenses for the business use of his home. Heenters that amount on line 8 of Form 8829 and thencompletes the form. He enters the amount of his homeoffice deduction from line 34, Form 8829, on line 30 ofSchedule C.

Form 8829, Part I. John uses one room of his homeexclusively and regularly to meet clients. In Part I ofForm 8829 he shows that, based on the square footage,the room is 10% of his home.

Deductible mortgage interest (20%) ....................................... $1,500Real estate taxes (20%) .......................................................... 1,000Total ......................................................................................... $2,500

Expenses not related to business use of the home:Supplies .............................................................................. $500Advertising .......................................................................... 1,300

Telephone ........................................................................... 200Total ......................................................................................... $2,000

Otherwise nondeductible expenses:Maintenance (20%) ............................................................. $200Utilities (20%) ...................................................................... 350Insurance (20%) ................................................................. 250

Total ......................................................................................... $800

Depreciation (20%) .................................................................. $1,600

Gross income .............................................................. $6,000Less:

Deductible mortgage interest (20%) ....................... $1,500Real estate taxes (20%) ......................................... 1,000Expenses not related to business use of the home 2,000 4,500

Deduction limit .......................................................... $1,500

Expense Amount Schedule A

Deductible mortgage interest $1,500Lines

10 or 11*

Real estate taxes $1,000 Line 6*

Expenses not related to the business

use of the home $2,000 Line 20**Otherwise nondeductible expenses $800 Line 20**

Depreciation $700 Line 20**

*In addition to the 80% nonbusiness part of the expense.**Subject to the 2%-of-adjusted-gross-income limit.

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Form 8829, Part II. John uses Part II of Form 8829 tofigure his allowable home office deduction.

Step 1. First, he figures the business part of ex-penses that would be deductible even if he did not usepart of his home for business. Because these expenses($4,500 deductible mortgage interest and $1,000 realestate taxes) relate to his entire home, he enters themin column (b) on lines 10 and 11. He then subtracts the$550 business part of these expenses (line 14) fromhis tentative business profit (line 8). The result, $25,002

on line 15, is the most he can deduct for his other homeoffice expenses.

Step 2. Next, he figures his deduction for operatingexpenses. He paid $300 to have his office repainted.He enters this amount on line 18, column (a) becauseit is a direct expense. All of his other expenses ($400homeowner'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 appro-priate lines. He adds the $300 direct expenses (line 21)to the $360 total for indirect expenses (line 22) andenters the total, $660, on line 24. Because this amountis less than his deduction limit, he can deduct it in full.The $24,342 balance of his deduction limit (line 26) is

the most he can deduct for depreciation.

Step 3. Next, he figures his allowable depreciationdeduction for the business use of his home in Part IIIof Form 8829. The adjusted basis of his home is$130,000, which is less than the fair market value of$160,000. He figures the value of the land to be$20,000. He subtracts the land value from the adjustedbasis. He multiplies the result ($110,000) by the per-centage on line 7 to get the depreciable basis of thebusiness part of his home ($11,000).

Because he began using the office in January of this

year, it is 39-year nonresidential real property underMACRS. Using the table on page 9 or Table A-7a inAppendix A of Publication 946, he finds that the de-preciation percentage for the first year of the recoveryperiod, for assets placed in service in the first month,is 2.461%. His depreciation for 1999 (line 40) is $271(.02461 $11,000). He enters that amount in Part IIon lines 28 and 30. Because it is less than the availablebalance of his deduction limit (line 26), he can deductthe full depreciation. John must also complete Form4562. See Form 4562, earlier.

Step 4. Finally, he figures his total deduction for hishome office by adding together his otherwise deductibleexpenses (line 14), his operating expenses (line 25),

and depreciation (line 31). He enters the result, $1,481,on lines 32 and 34, and on Schedule C, line 30.

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John St ephens

Tax Preparat ion Services

St ephens Tax Service

8 21 Union St reetHomet own, IA 5276 1

46 5 0 0 0 0 0 1

5 4 1 2 1 3

34,280

34,280

34,280

34,280

25 3

310

256

347

26 7

8,728

25,5521,48 1

24,071

256

512

250

1,26 6

3,879

750

20 0

3506 0 0

0

0

0

XX

OMB No. 1545-0074SCHEDULE C(Form 1040)

Profit or Loss From Business(Sole Proprietorship)

Partnerships, joint ventures, etc., must file Form 1065 or Form 1065-B.Department of the TreasuryInternal Revenue Service

AttachmentSequence No. 09 Attach to Form 1040 or Form 1041. See Instructions for Schedule C (Form 1040).

Name of proprietor Social security number (SSN)

A Principal business or profession, including product or service (see page C-1) B Enter code from pages C-8 & 9

D Employer ID number (EIN), if anyBusiness name. If no separate business name, leave blank.C

Accounting method:

E

F

Yes NoG

H

Did you materially participate in the operation of this business during 1999? If No, see page C-2 for limit on losses

If you started or acquired this business during 1999, check here

Income

Gross receipts or sales. Caution: If this income was reported to you on Form W-2 and the Statutory

employee box on that form was checked, see page C-2 and check here 1

1

22 Returns and allowances

33 Subtract line 2 from line 1

44 Cost of goods sold (from line 42 on page 2)

5Gross profit. Subtract line 4 from line 35

6Other income, including Federal and state gasoline or fuel tax credit or refund (see page C-3)6

7 Gross income. Add lines 5 and 6 7

Expenses. Enter expenses for business use of your home only on line 30.

8

21Repairs and maintenance21

Advertising8

22Supplies (not included in Part III)22

Bad debts from sales or

services (see page C-3)

us internal revenue service: p587--1999

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