Introduction
The purpose of this publication is to provide information on figuring and claiming the deduction for business use of your home. The term “home” includes a house, apartment, condominium, mobile home, boat, or similar property, which provides basic living accommodations. It also includes structures on the property, such as an unattached garage, studio, barn, or greenhouse. However, it does not include any part of your property used exclusively as a hotel or inn.
This publication includes information on the following.
- The requirements for qualifying to deduct expenses for the business use of your home (including special rules for storing inventory or product samples).
- Types of expenses you can deduct.
- How to figure the deduction (including depreciation of your home).
- Special rules for daycare providers.
- Selling a home that was used partly for business.
- Deducting expenses for furniture and equipment used in your business.
- Records you should keep.
- Where to deduct your expenses.
The rules in this publication apply to individuals.
If you need information on deductions for renting out your property, see Publication 527, Residential Rental Property.
Useful Items - You may want to see:
Publications
- 523 Selling Your Home
- 551 Basis of Assets
- 583 Starting a Business and Keeping Records
- 946 How To Depreciate Property
Forms (and Instructions)
- Schedule C (Form 1040)
Profit or Loss from Business - 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 Tax Help near the end of this publication for information about getting publications and forms.
Qualifying for a Deduction
Generally, you cannot deduct items such as mortgage interest and real estate taxes as business expenses. However, you may be able to deduct expenses related to the business use of part of your home if you meet specific requirements. Even then, your deduction may be limited. Use this section and Figure A, later, to decide if you can deduct expenses for the business use of your home.
To qualify to deduct expenses for business use of your home, you must use part of your home:
- Exclusively and regularly as your principal place of business (defined later),
- Exclusively and regularly as a place where you meet or deal with patients, clients, or customers in the normal course of your trade or business,
- In the case of a separate structure which is not attached to your home, in connection with your trade or business,
- On a regular basis for certain storage use (see Storage of inventory or product samples, later),
- For rental use (see Publication 527), or
- As a daycare facility (see Daycare Facility, later).
Additional tests for employee use
If you are an employee and you use a part of your home for business, you may qualify for a deduction for its business use. You must meet the tests discussed above plus:
- Your business use must be for the convenience of your employer, and
- You must not rent any part of your home to your employer and use the rented portion to perform services as an employee for that employer.
Exclusive Use
To qualify under the exclusive use test, you must use a specific area of your home only for your trade or business. The area used for business can be a room or other separately identifiable space. The space does not need to be marked off by a permanent partition.
You do not meet the requirements of the exclusive use test if you use the area in question both for business and for personal purposes.
Example �
You are an attorney and use a den in your home to write legal briefs and prepare clients' tax returns. Your family also uses the den for recreation. The den is not used exclusively in your profession, so you cannot claim a deduction for the business use of the den.
Exceptions to Exclusive Use
You do not have to meet the exclusive use test if either of the following applies.
- You use part of your home for the storage of inventory or product samples (discussed next).
- You use part of your home as a daycare facility, discussed later under Daycare Facility.
Storage of inventory or product samples
If you use part of your home for storage of inventory or product samples, you can deduct expenses for the business use of your home without meeting the exclusive use test. However, you must meet all the following tests.
- You sell products at wholesale or retail as your trade or business.
- You keep the inventory or product samples in your home for use in your trade or business.
- Your home is the only fixed location of your trade or business.
- You use the storage space on a regular basis.
- The space you use is a separately identifiable space suitable for storage.
Example �
Your home is the only 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. You sometimes use the area 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
To qualify under the regular use test, you must use a specific area of your home for business on a regular basis. Incidental or occasional business use is not regular use. You must consider all facts and circumstances in determining whether your use is on a regular basis.
Trade or Business Use
To qualify under the trade-or-business-use-test, you must use part of your home in connection with a trade or business. 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 part of your home exclusively and regularly to read financial periodicals and reports, clip bond coupons, and carry out similar activities related to your own investments. You do not make investments as a broker or dealer. So, your activities are not part of a trade or business and you cannot take a deduction for the business use of your home.
Principal Place of Business
You can have more than one business location, including your home, for a single trade or business. To qualify to deduct the expenses for the business use of your home under the principal place of business test, your home must be your principal place of business for that trade or business. To determine whether your home is your principal place of business, you must consider:
- The relative importance of the activities performed at each place where you conduct business, and
- The amount of time spent at each place where you conduct business.
Your home office will qualify as your principal place of business if you meet the following requirements.
- You use it exclusively and regularly for administrative or management activities of your trade or business.
- You have no other fixed location where you conduct substantial administrative or management activities of your trade or business.
If, after considering your business locations, your home cannot be identified as your principal place of business, you cannot deduct home office expenses. However, see the later discussions under Place To Meet Patients, Clients, or Customers or Separate Structure for other ways to qualify to deduct home office expenses.
Administrative or management activities
There are many activities that are administrative or managerial in nature. 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 performed at other locations
The following activities performed by you or others will not disqualify your home office from being your principal place of business.
- You have others conduct your administrative or management activities at locations other than your home. (For example, another company does your billing from its place of business.)
- You conduct administrative or management activities at places that are not fixed locations of your business, such as in a car or a hotel room.
- You occasionally conduct minimal administrative or management activities at a fixed location outside your home.
- You conduct substantial nonadministrative or nonmanagement business activities at a fixed location outside your home. (For example, you meet with or provide services to customers, clients, or patients at a fixed location of the business outside your home.)
- You have suitable space to conduct administrative or management activities outside your home, but choose to use your home office for those activities instead.
Can you deduct business use of the home expenses?
Example 1
John is a self-employed plumber. Most of John's time is spent at customers' homes and offices installing and repairing plumbing. He has a small office in his home that he uses exclusively and regularly for the administrative or management activities of his business, such as phoning customers, ordering supplies, and keeping his books. John writes up estimates and records of work completed at his customers' premises. He does not conduct any substantial administrative or management activities at any fixed location other than his home office. John does not do his own billing. He uses a local bookkeeping service to bill his customers. John's home office qualifies as his principal place of business for deducting expenses for its use. He uses the home office for the administrative or managerial activities of his plumbing business and he has no other fixed location where he conducts these administrative or managerial activities. His choice to have his billing done by another company does not disqualify his home office from being his principal place of business. He meets all the qualifications, including principal place of business, so he can deduct expenses (to the extent of the deduction limit, explained later) for the business use of his home.
Example 2
Pamela is a self-employed sales representative for several different product lines. She has an office in her home that she uses exclusively and regularly to set up appointments and write up orders and other reports for the companies whose products she sells. She occasionally writes up orders and sets up appointments from her hotel room when she is away on business overnight. Pamela's business is selling products to customers at various locations throughout her territory. To make these sales, she regularly visits customers to explain the available products and take orders. Pamela's home office qualifies as her principal place of business for deducting expenses for its use. She conducts administrative or management activities there and she has no other fixed location where she conducts substantial administrative or management activities. The fact that she conducts some administrative or management activities in her hotel room (not a fixed location) does not disqualify her home office from being her principal place of business. She meets all the qualifications, including principal place of business, so she can deduct expenses (to the extent of the deduction limit, explained later) for the business use of her home.
Example 3
Paul is a self-employed anesthesiologist. He spends the majority of his time administering anesthesia and postoperative care in three local hospitals. One of the hospitals provides him with a small shared office where he could conduct administrative or management activities. Paul very rarely uses the office the hospital provides. He uses a room in his home that he has converted to an office. He uses this room exclusively and regularly to conduct all the following activities.
- Contacting patients, surgeons, and hospitals regarding scheduling.
- Preparing for treatments and presentations.
- Maintaining billing records and patient logs.
- Satisfying continuing medical education requirements.
- Reading medical journals and books.
Example 4
Kathleen is employed as a teacher. She is required to teach and meet with students at the school and to grade papers and tests. The school provides her with a small office where she can work on her lesson plans, grade papers and tests, and meet with parents and students. The school does not require her to work at home. Kathleen prefers to use the office she has set up in her home and does not use the one provided by the school. She uses this home office exclusively and regularly for the administrative duties of her teaching job. Kathleen must meet the convenience-of-the-employer test, even if her home qualifies as her principal place of business for deducting expenses for its use. Her employer provides her with an office and does not require her to work at home, so she does not meet the convenience- of-the-employer test and cannot claim a deduction for the business use of her home.
More Than One Trade or Business
The same home office can be the principal place of business for two or more separate business activities. Whether your home office is the principal place of business for more than one business activity must be determined separately for each of your trade or business activities. You must use the home office exclusively and regularly for one or more of the following purposes.
- As the principal place of business for one or more of your trades or businesses.
- As a place to meet or deal with patients, clients, or customers in the normal course of one or more of your trades or businesses.
- If your home office is a separate structure, in connection with one or more of your trades or businesses.
You can use your home office for more than one business activity, but you cannot use it for any nonbusiness (personal) activities.
If you are an employee, any use of the home office in connection with your employment must be for the convenience of your employer. See Rental to employer, later if you rent part of your home to your employer.
Example �
Tracy White is employed as a teacher. Her principal place of work is the school, which provides her office space to do her school work. 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 that business. If she meets all the other tests, she can deduct expenses for the business use of her home for the jewelry business.
If Tracy also uses the office for work related to her teaching, she must meet the exclusive use test for both businesses to qualify for the deduction. As an employee, Tracy must also meet the convenience-of-the-employer test to qualify for the deduction. She does not meet this test for her work as a teacher, so she cannot claim a deduction for the business use of her home for either activity.
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 part of your home used exclusively and regularly for business if you meet both the following tests.
- You physically meet with patients, clients, or customers on your premises.
- Their use of your home is substantial and integral to the conduct of your business.
Doctors, dentists, attorneys, and other professionals who maintain offices in their homes generally will meet this requirement.
Using your home for occasional meetings and telephone calls will not qualify you to deduct expenses for the business use of your home.
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, a self-employed attorney, works 3 days a week in her city office. She works 2 days a week in her home office used only for business. She regularly meets clients there. Her home office qualifies for a business deduction because she meets clients there in the normal course of her business.
Separate Structure
You can deduct expenses for a separate free-standing 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. He uses the greenhouse exclusively and regularly in his business, so he can deduct the expenses for its use, subject to the deduction limit, explained later.
Figuring the Deduction
After you determine that you meet the tests under Qualifying for a Deduction, you can begin to figure how much you can deduct. You will need to figure the percentage of your home used for business and the limit on the deduction.
If you are an employee or a partner, or you file Schedule F (Form 1040), Profit or Loss From Farming, use the Worksheet To Figure the Deduction for Business Use of Your Home, near the end of this publication, to help figure your deduction. If you file Schedule C (Form 1040), Profit or Loss From Business, you must generally use Form 8829, Expenses for Business Use of Your Home. The Schedule C Example, near the end of this publication, shows how to report the deduction on Form 8829.
Rental to employer
If you rent part of your home to your employer and you use the rented part in performing services for your employer as an employee, your deduction for the business use of your home is limited. You can deduct mortgage interest, qualified mortgage insurance premiums, real estate taxes, and personal casualty losses for the rented part, subject to any limitations. However, you cannot deduct otherwise allowable trade or business expenses, business casualty losses, or depreciation related to the use of your home in performing services for your employer.
Business Percentage
To find the business percentage, compare the size of the part of your home that you use for business to your whole house. Use the resulting percentage to figure the business part of the expenses for operating your entire home.
You can use any reasonable method to determine the business percentage. The following are two commonly used methods for figuring the percentage.
- Divide the area (length multiplied by the width) used for business by the total area of your home.
- If the rooms in your home are all about the same size, you can divide the number of rooms used for business by the total number of rooms in your home.
Example �
- 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 area of your home.
- Your business percentage is 20%.
Example �
- You use one room in your home for business.
- Your home has 10 rooms, all about equal size.
- Your office is 10% (1 ÷ 10) of the total area of your home.
- Your business percentage is 10%.
Part-Year Use
You cannot deduct expenses for the business use of your home 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 the tests from that date until the end of the year, consider only your expenses for the last half of the year in figuring your allowable deduction.
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 business expenses related to the use of your home.
If your gross income from the business use of your home is less than your total business expenses, your deduction for certain expenses for the business use of your home is limited.
Your deduction of otherwise nondeductible expenses, such as insurance, utilities, and depreciation (with depreciation taken last), that are allocable to the business, is limited to the gross income from the business use of your home minus the sum of the following.
- The business part of expenses you could deduct even if you did not use your home for business (such as mortgage interest, real estate taxes, and casualty and theft losses that are allowable as itemized deductions on Schedule A (Form 1040)). These expenses are discussed in detail under Deducting Expenses, later.
- The business expenses that relate to the business activity in the home (for example, business phone, supplies, and depreciation on equipment), 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
If your deductions are greater than the current year's limit, you can carry over the excess to the next year. They are subject to the deduction limit for that year, whether or not you live in the same home during that year.
Figuring the deduction limit and carryover
If you are an employee or a partner, or you file Schedule F (Form 1040), use the Worksheet To Figure the Deduction for Business Use of Your Home, near the end of this publication. If you file Schedule C (Form 1040), figure your deduction limit and carryover on Form 8829.
Example �
You meet the requirements for deducting expenses for the business use of your home. You use 20% of your home for business. In 2007, your business expenses and the expenses for the business use of your home are deducted from your gross income in the following order.
| Gross income from business | $6,000 |
| Minus: | |
| Deductible mortgage interest and real estate taxes (20%) | 3,000 |
| Business expenses not related to the use of your home (100%) (business phone, supplies, and depreciation on equipment) | 2,000 |
| Deduction limit | $1,000 |
| Minus other expenses allocable to business use of home: | |
| Maintenance, insurance, and utilities (20%) | 800 |
| Depreciation allowed (20% = $1,600 allowable, but subject to balance of deduction limit) | 200 |
| Other expenses up to the deduction limit | $1,000 |
| Depreciation carryover to 2008 ($1,600 - $200) (subject to deduction limit in 2008) | $1,400 |
More than one place of business
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 home 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. If your home office qualifies as your principal place of business, you can deduct your daily transportation costs between your home and another work location in the same trade or business. For more information on transportation costs, see Publication 463, Travel, Entertainment, Gift, and Car Expenses.
Deducting Expenses
If you qualify to deduct expenses for the business use of your home, you must divide the expenses of operating your home between personal and business use. This section discusses the types of expenses you may have and gives examples and brief explanations of these expenses.
Types of Expenses
The part of a home operating expense you can use to figure your deduction depends on both of the following.
- Whether the expense is direct, indirect, or unrelated.
- The percentage of your home used for business.
Table 1, next, describes the types of expenses you may have and the extent to which they are deductible.
Table 1. Types of Expenses
Expense | Description | Deductibility |
|---|---|---|
| Direct | Expenses only for the business part of your home. | Deductible in full.* |
| Examples: Painting or repairs only in the area used for business. | Exception: May be only partially deductible in a daycare facility. See Daycare Facility, later. | |
| Indirect | Expenses for keeping up and running your entire home. | Deductible based on the percentage of your home used for business.* |
| Examples: Insurance, utilities, and general repairs. | ||
| Unrelated | Expenses only for the parts of your home not used for business. | Not deductible. |
| Examples: Lawn care or painting a room not used for business. | ||
| *Subject to the deduction limit, discussed earlier. | ||
Examples of Expenses
Certain expenses are deductible whether or not you use your home for business. If you qualify to deduct business use of the home expenses, use the business percentage of these expenses to figure your total business use of the home deduction. These expenses include the following.
- Real estate taxes.
- Qualified mortgage insurance premiums.
- Deductible mortgage interest.
- Casualty losses.
Other expenses are deductible only if you use your home for business. You can use the business percentage of these expenses to figure your total business use of the home deduction. These expenses generally include (but are not limited to) the following.
- Depreciation (covered under Depreciating Your Home, later).
- Insurance.
- Rent.
- Repairs.
- Security system.
- Utilities and services.
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 the deduction for real estate 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 for 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.
Qualified Mortgage Insurance Premiums
To figure the business part of your qualified mortgage insurance premiums, multiply the premiums by the percentage of your home used for business. You can include premiums for insurance on a second mortgage in this computation. If your adjusted gross income is more than $100,000 ($50,000 if your filing status is married filing separately), your deduction may be limited. For more information, see Publication 936, Home Mortgage Interest Deduction, and Line 13 in the instructions for Schedule A (Form 1040).
Casualty Losses
If you have a casualty loss on your home that you use for business, treat the casualty loss as a direct expense, an indirect expense, or an unrelated expense, depending on the property affected.
- A direct expense is the loss on the portion of the property you use only in your business. Use the entire loss to figure the business use of the home deduction.
- An indirect expense is the loss on property you use for both business and personal purposes. Use only the business portion to figure the deduction.
- An unrelated expense is the loss on property you do not use in your business. Do not use any of the loss to figure the deduction.
If you are filing Schedule C (Form 1040), get Form 8829 and follow the instructions for casualty losses. If you are an employee or a partner, or you file Schedule F (Form 1040), use the Worksheet To Figure the Deduction for Business Use of Your Home, near the end of this publication. You will also need to get Form 4684, Casualties and Thefts.
For more information on casualty losses, see Publication 547, Casualties, Disasters, and Thefts.
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 end 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.
Rent
If you rent the home you occupy 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.
If you own your home, you cannot deduct the fair rental value of your home. However, see Depreciating Your Home, later.
Repairs
The cost of repairs 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 use 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 as a permanent improvement. See Permanent improvements, later, under Depreciating Your Home.
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 also can take a depreciation deduction for the part of the cost of the security system relating to the business use of your home.
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 part 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. Do not include these expenses as a cost of using your home for business. Deduct these charges separately on the appropriate form or schedule. For example, if you file Schedule C (Form 1040), deduct these expenses on line 25, Utilities, (instead of line 30).
Depreciating Your Home
If you own your home and qualify to deduct expenses for its business use, you can claim a deduction for depreciation. Depreciation is an allowance for the wear and tear on the part of your home used for business. You cannot depreciate the cost or value of the land. You recover its cost when you sell or otherwise dispose of the property.
Before you figure your depreciation deduction, you need to know the following information.
- The month and year you started using your home for business.
- The adjusted basis and fair market value of your home (excluding land) at the time you began using it for business.
- The cost of any improvements before and after you began using the property for business.
- The percentage of your home used for business. See Business Percentage, earlier, under Figuring the Deduction.
Adjusted basis defined
The adjusted basis of your home is generally its cost, plus the cost of any permanent improvements you made to it, minus any casualty losses or depreciation deducted in earlier tax years. For a discussion of adjusted basis, see Publication 551.
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 replacing electric wiring or plumbing, adding a new roof or addition, paneling, or remodeling. You must carefully distinguish between repairs and improvements. See Repairs, earlier, under Deducting Expenses. You also must keep accurate records of these expenses. These records will help you decide whether an expense is a deductible or capital (added to the basis) expense. However, if you make repairs as part of an extensive remodeling or restoration of your home, the entire job is an improvement.
Example �
You buy an older home and fix up two rooms as a beauty salon. You patch the plaster on the ceilings and walls, paint, repair the floor, install an outside door, and install new wiring, plumbing, and other equipment. Normally, the patching, painting, and floor work are repairs and the other expenses are permanent improvements. However, because the work gives your property a new use, the entire remodeling job is a permanent improvement and its cost is added to the basis of the property. You cannot deduct any portion of it as a repair expense.
Adjusting for depreciation deducted in earlier years
Decrease the basis of your property by the depreciation you deducted, or could have deducted, on your tax returns under the method of depreciation you properly selected. If you deducted less depreciation than you could have under the method you selected, decrease the basis by the amount you could have deducted under that method. If you did not deduct any depreciation, decrease the basis by the amount you could have deducted. 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 depreciation you deducted that actually decreased your tax liability for any year. If you deducted the incorrect amount of depreciation, see How Do You Correct Depreciation Deductions in chapter 1 of Publication 946.
Fair market value defined
The fair market value of your home is the price at which the property would change hands between a buyer and a seller, neither having to buy or sell, and both having reasonable knowledge of all necessary facts. Sales of similar property, on or about the date you begin using your home for business, may be helpful in figuring the property's fair market value.
Figuring the Depreciation Deduction for the Current Year
If you began using your home for business before 2007, continue to use the same depreciation method you used in past tax years.
If you began using your home for business in 2007, depreciate the business 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. For more information on MACRS and other 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 be depreciated (depreciable basis). The depreciable basis is figured by multiplying the percentage of your home used 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 business.
- The fair market value of your home (excluding land) on the date you began using your home for business.
Depreciation table
If 2007 was the first year you used your home for business, you can figure your 2007 depreciation for the business part of your home by using the appropriate percentage from the following table.
Table 2. MACRS Percentage Table for 39-Year Nonresidential Real Property
| Month First 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% |
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 1997 for $125,000. He determined from his property tax records that his adjusted basis in the house (exclusive of land) is $115,000. In May, the house had a fair market value of $165,000. He multiplies his adjusted basis (which is less than the 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 his depreciable basis of $9,200 by 1.605% (.01605), the percentage from the table for the 5th month. His depreciation deduction is $147.66.
Depreciating Permanent Improvements
Add the costs of permanent improvements made before you began using your home for business to the basis of your property. Depreciate these costs as part of the cost of your home as explained earlier. The costs of improvements made after you begin using your home for business (that affect the business part of your home, such as a new roof) are depreciated separately. Multiply the cost of the improvement by the business-use percentage and depreciate the result over the recovery period that would apply to your home if you began using it for business at the same time as the improvement. For improvements made this year, the recovery period is 39 years. For the percentage to use for the first year, see Table 2, earlier. For more information on recovery periods, see Which Recovery Period Applies in chapter 4 of Publication 946.
Daycare Facility
If you use space in your home on a regular basis for providing daycare, you may be able to deduct the business expenses for that part of your home even if you use the same space for nonbusiness purposes. To qualify for this exception to the exclusive use rule, you must meet both of the following requirements.
- You must be in the trade or business of providing daycare for children, persons age 65 or older, or persons who are physically or mentally unable to care for themselves.
- You must have applied for, been granted, or be exempt from having, a license, certification, registration, or approval as a daycare center or as a family or group daycare home under state law. You do not meet this requirement if your application was rejected or your license or other authorization was revoked.
Figuring the deduction
If you regularly use part of your home for daycare, figure what part is used for daycare, as explained at Business Percentage, earlier under Figuring the Deduction. If you use that part exclusively for daycare, deduct all the allocable expenses, subject to the deduction limit, as explained earlier. If the use of part of your home as a daycare facility is regular, but not exclusive, you must figure the percentage of time that part of your home is used for daycare. 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 daycare throughout each business day. You do not have to keep records to show the specific hours the area was used for business. You can use the area occasionally for personal reasons. However, a room you use only occasionally for business does not qualify for the deduction. To find the percentage of time you actually use your home for business, compare the total 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 with the number of hours in a week (168). Or you can compare the hours of business use for the year with the number of hours in the year (8,760 in 2007). If you started or stopped using your home for daycare in 2007, you must prorate the number of hours based on the number of days the home was available for daycare.
Example �
Mary Lake used her basement to operate a daycare business for children. She figures the business percentage of the basement as follows.
| Square footage of the basement Square footage of her home | = | 1,600 3,200 | = | 50% |
She used the basement for daycare an average of 12 hours a day, 5 days a week, for 50 weeks a year. During the other 12 hours a day, the family could use the basement. She figures the percentage of time the basement was used for daycare as follows.
| Number of hours used for daycare (12 x 5 x 50) Total number of hours in the year (24 x 365) | = | 3,000 8,760 | = | 34.25% |
Mary can deduct 34.25% of any direct expenses for the basement. However, because her indirect expenses are for the entire house, she can deduct only 17.13% of the indirect expenses. She figures the percentage for her indirect expenses as follows.
| Business percentage of the basement | 50% |
| Multiplied by: Percentage of time used for daycare | × 34.25% |
| Percentage for indirect expenses | 17.13% |
Mary completes Form 8829, shown later. In Part I, she figures the percentage of her home used for business, including the percentage of time the basement was used.
In Part II, Mary figures her deductible expenses. She uses the following information to complete Part II.
| Gross income from her daycare business | $50,000 |
| Expenses not related to the business use of the home | $25,000 |
| Tentative profit | $25,000 |
| Rent | $8,400 |
| Utilities | $850 |
| Painting the basement | $500 |
Mary enters her tentative profit, $25,000, on line 8. (This figure is the same as the amount on line 29 of her Schedule C.)
The expenses she paid for rent and utilities relate to her entire home. Therefore, she enters them in column (b) on the appropriate lines. She adds these two expenses (line 22) and multiplies the total by the percentage on line 7 and enters the result, $1,585, on line 23.
Mary paid $500 to have the basement painted. The painting is a direct expense. However, because she did not use the basement exclusively for daycare, she must multiply $500 by the percentage of time the basement was used for daycare (34.25% - line 6). She enters $171 (34.25% × $500) on line 19, column (a). She adds line 22, column (a), and line 23 and enters $1,756 ($171 + $1,585) on line 25. This is less than her deduction limit (line 15), so she can deduct the entire amount. She completes the rest of Part II by entering $1,756 on lines 33 and 35. She then carries the $1,756 to line 30 of her Schedule C (not shown).
This image is too large to be displayed in the current screen. Please click the link to view the image.Figure B—Part I of Form 8829
Example �
Assume the same facts as in Example 1 except that Mary also has another room that was 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 for business use during regular operating hours each business day and was used regularly in the business, it is considered used for daycare throughout each business day. The basement and room are 60% of the total area of her home. In figuring her expenses, 34.25% of any direct expenses for the basement and room are deductible. In addition, 20.55% (34.25% × 60%) of her indirect expenses are deductible.
Example �
Assume the same facts as in Example 1 except that Mary stopped using her home for a daycare facility on June 24, 2007. She used the basement for daycare an average of 12 hours a day, 5 days a week, but for only 25 weeks of the year. During the other 12 hours a day, the family could still use the basement. She figures the percentage of time the basement was used for business as follows.
| Number of hours used for daycare (12 x 5 x 25) Total number of hours during period used (24 x 175) | = | 1,500 4,200 | = | 35.71% |
Mary can deduct 35.71% of any direct expenses for the basement. However, because her indirect expenses are for the entire house, she can deduct only 17.86% of the indirect expenses. She figures the percentage for her indirect expenses as follows.
| Business percentage of the basement | 50% |
| Multiplied by: Percentage of time used for daycare | × 35.71% |
| Percentage for indirect expenses | 17.86% |
Meals
If you provide food for your daycare recipients, 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 never deduct the cost of food consumed by you or your family. You can deduct as a business expense 100% of the actual cost of food consumed by your daycare recipients (see Standard meal and snack rates, later, for an optional method for eligible children) and generally only 50% of the cost of food consumed by your employees. However, you can deduct 100% of the cost of food consumed by your employees if its value can be excluded from their wages as a de minimis fringe benefit. For more information on meals that meet these requirements, see Meals in chapter 2 of Publication 15-B, Employer's Tax Guide to Fringe Benefits. If you deduct the actual cost of food for your daycare 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 taxable only 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.
Standard meal and snack rates
If you qualify as a family daycare provider, you can use the standard meal and snack rates, instead of actual costs, to compute the deductible cost of meals and snacks provided to eligible children. For these purposes:
- A family daycare provider is a person engaged in the business of providing family daycare.
- Family daycare is childcare provided to eligible children in the home of the family daycare provider. The care must be non-medical, not involve a transfer of legal custody, and generally last less than 24 hours each day.
- Eligible children are minor children receiving family daycare in the home of the family daycare provider. Eligible children do not include children who are full-time or part-time residents in the home where the childcare is provided or children whose parents or guardians are residents of the same home. Eligible children do not include children who receive daycare services for personal reasons of the provider. For example, if a provider provides daycare services for a relative as a favor to that relative, that child is not an eligible child.
Table 3. 2007 Standard Meal and Snack Rates
| Location of Family Daycare Provider | Breakfast | Lunch | Dinner | Snack |
|---|---|---|---|---|
| States other than Alaska and Hawaii | $1.06 | $1.97 | $1.97 | $0.58 |
| Alaska | $1.69 | $3.20 | $3.20 | $0.95 |
| Hawaii | $1.24 | $2.31 | $2.31 | $0.69 |
Sale or Exchange of Your Home
If you sell or exchange your home, you may be able to exclude up to $250,000 ($500,000 for certain married persons filing a joint return) of the gain on the sale or exchange if you meet the ownership and use tests.
Ownership and use tests
To qualify for the exclusion, you must meet the ownership and use tests. This means that during the 5-year period ending on the date of the sale:
- You owned the home for at least 2 years (ownership test), and
- You lived in the home as your main home for at least 2 years (use test).
Business use of your home
If you used part of your home for business, you cannot exclude the part of the gain equal to any depreciation allowed or allowable after May 6, 1997, on the part used for business. If you used a separate part of your home for business, the rules for figuring the exclusion depend on whether you met the use test for the separate part and whether used the separate part for business in the year of sale. See Business Use or Rental of Home in Publication 523 for details.
Depreciation
If you were entitled to take depreciation deductions because you used your home for business, you cannot exclude the part of your gain equal to any depreciation allowed or allowable as a deduction for periods after May 6, 1997. If you can show by adequate records or other evidence that the depreciation deduction allowed was less than the amount allowable, the amount you cannot exclude is the amount allowed.
Basis adjustment
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 deducted less depreciation than you could have under the method you properly selected, you must decrease the basis by the amount you could have deducted under that method. If you deducted more depreciation than you should have under the method you properly selected, you must decrease the 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 on reducing the basis of your property for depreciation, see Publication 551.
More information
This section covers only the basic rules for the sale or exchange of your home. For more information, see Publication 523.
Business Furniture and Equipment
This section discusses the depreciation and section 179 deductions you may be entitled to take for furniture and equipment you use in your home for business or work as an employee. These deductions are available whether or not you qualify to deduct expenses for the business use of your home.
This section explains the different rules for each of the following.
- Listed property.
- Property bought for business use.
- Personal property converted to business use.
Listed Property
If you use certain types of property, called listed property, in your home, special rules apply. Listed property includes computers and related equipment and any property of a type generally used for entertainment, recreation, and amusement (including photographic, phonographic, communication, and video recording equipment).
Exception for certain use of computers
Computers and related equipment used exclusively in a qualifying office in your home are not listed property. If you qualify to deduct expenses for the business use of your home (see Qualifying for a Deduction, earlier) and you use your computer exclusively in your qualifying office in the home, do not use the listed property rules discussed below. Instead, follow the rules discussed under Property Bought for Business Use, later. More-than-50%-use test. If you bought listed property and placed it in service during the year, you must use it more than 50% for business (including work as an employee) to claim a section 179 deduction or an accelerated depreciation deduction. If your business use of listed property is 50% or less, you cannot take a section 179 deduction and you must depreciate the property using the Alternative Depreciation System (ADS) (straight line method). For more information on ADS, see chapter 4 in Publication 946. Listed property meets the more-than-50%-use test for any year if its qualified business use is more than 50% of its total use. You must allocate the use of any item of listed property used for more than one purpose during the year among its various uses. You cannot use the percentage of investment use as part of the percentage of qualified business use to meet the more-than-50%-use test. However, you do use the combined total of business and investment use to figure your depreciation deduction for the property.
Example �
Sarah does not qualify to claim a deduction for the business use of her home, but she uses her home computer 40% of the time for a business she operates out of her home. She also uses the computer 50% of the time to manage her investments. Sarah's home computer is listed property because it is not used in a qualified office in her home. She does not use the computer more than 50% for business, so she cannot elect a section 179 deduction. She can use her combined business/investment use (90%) to figure her depreciation deduction using ADS.
Example �
If Sarah uses her computer 60% of the time for her business and 30% for managing her investments, her computer meets the more-than-50%-use test. She can elect a section 179 deduction. She can use her combined business/investment use (90%) to figure her depreciation deduction using the General Depreciation System (GDS).
Employee
If you use your own listed property (or listed property you rent) in your work as an employee, the property is business-use property only if you meet the following requirements.
- The use is for your employer's convenience.
- The use is required as a condition of your employment.
Years following the year placed in service
If, in a year after you place an item of listed property in service, you fail to meet the more-than-50%-use test for that item of property, you may be required to do the following.
- Figure depreciation, beginning with the year you no longer use the property more than 50% for business, using the straight line method.
- Figure any excess depreciation (include any section 179 deduction on the property in figuring excess depreciation) and add it to:
- Your gross income, and
- The adjusted basis of your property.
Reporting and recordkeeping 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 cannot take any depreciation or section 179 deduction for the use of listed property unless you can prove your business/investment use with adequate records or sufficient evidence to support your own statements. To meet the adequate records requirement, you must maintain an account book, diary, log, statement of expense, trip sheet, or similar record or other documentary evidence that is sufficient to establish business/investment use. For more information on what records to keep, see What Records Must Be Kept in chapter 5 of Publication 946.
Property Bought for Business Use
If you bought certain property during 2007 to use in your business, you can do any one of the following (subject to the limits discussed later).
- Elect a section 179 deduction for the full cost of the property.
- Depreciate the full cost of the property.
- Take part of the cost as a section 179 deduction and depreciate the balance.
Section 179 Deduction
You can claim the section 179 deduction for the cost of depreciable tangible personal property bought for use in your trade or business. You can 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 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 cannot take a section 179 deduction for the basis of the business part of your home.
You elect the section 179 deduction by completing Part I of Form 4562.
More information
For more information on the section 179 deduction, qualifying property, the dollar limit, and the business income limit, see chapter 2 in Publication 946.
Depreciation
You can take a special depreciation allowance to recover part of the cost of qualified Gulf Opportunity Zone (GO Zone) property placed in service during the tax year. The allowance applies for the first year you place the property in service. For qualified property placed in service after August 27, 2005, you can take an additional deduction of 50% of the property's depreciable basis (after any section 179 deduction and before you figure regular depreciation). For more information, see Claiming the Special Depreciation Allowance in chapter 3 of Publication 946.Use Parts II and III of Form 4562 to claim your deduction for depreciation on property placed in service during the year. Do not include any costs deducted in Part I (section 179 deduction).
Most business property used 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.
- 7-year property includes office furniture and fixtures such as desks, files, and safes.
Under MACRS, you generally use 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 you place more than 40% of your depreciable property in service during the last 3 months of your tax year, you must use the mid-quarter convention instead of the half-year convention.
After you have determined the cost of the depreciable property (minus any section 179 deduction and special depreciation allowance taken on the property) and whether it is 5-year or 7-year property, use the table, shown next, to figure your depreciation if the half-year convention applies.
Table 4. MACRS Percentage Table for 5- and 7-Year Property Using Half-Year Convention| Recovery Year | 5-Year Property | 7-Year Property |
|---|---|---|
| 1 | 20.00% | 14.29% |
| 2 | 32.00% | 24.49% |
| 3 | 19.20% | 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 MACRS percentage tables.
Example �
In June 2007, 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.
- Take a section 179 deduction for the full cost of the office furniture.
- Take part of the cost of the furniture as a section 179 deduction and depreciate the balance.
- Depreciate the full cost of the office furniture.
The furniture is 7-year property under MACRS. Donald does not take a section 179 deduction. He multiplies $1,975 by 14.29% (.1429) to get his MACRS depreciation deduction of $282.23.
Personal Property Converted to Business Use
If you use property in your home office that was used previously for personal purposes, you cannot take a section 179 deduction for the property. You also cannot take a GO Zone depreciation allowance for the property. You can depreciate it, however. The method of depreciation you use depends on when you first used the property for personal purposes.
If you began using the property for personal purposes after 1986 and change it to business use in 2007, depreciate the property under MACRS.
The basis for depreciation of property changed from personal to business use is the lesser of the following.
- The adjusted basis of the property on the date of change.
- The fair market value of the property on the date of change.
If you began using the property for personal purposes after 1980 and before 1987 and change it to business use in 2007, 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 information on ACRS, see Publication 534, Depreciating Property Placed in Service Before 1987.
If you began using the property for personal purposes before 1981 and change it to business use in 2007, depreciate the property by the straight line or declining balance method based on salvage value and useful life.
Recordkeeping
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 expenses you paid.Your records must show the following information.
- The part of your home you use for business.
- That you use part of your home 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, under Qualifying for a Deduction.)
- The depreciation and expenses for the business part.
You must keep your records for as long as they are important for any tax law. This is usually the later of the following dates.
- 3 years from the return due date or the date filed.
- 2 years after the tax was paid.
Keep records to prove your home's depreciable basis. This includes records of when and how you acquired your home, your original purchase price, 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.
Where To Deduct
Deduct expenses for the business use of your home on Form 1040. Where you deduct these expenses on the form depends on whether you are:
- A self-employed person, or
- An employee.
If you are a partner, see Partners, later, for information on where to deduct expenses for the business use of your home.
Self-Employed Persons
If you are self-employed and file Schedule C (Form 1040), complete and attach Form 8829 to your return.
If you file Schedule F (Form 1040), report your entire deduction for business use of the home (line 33 of the Worksheet To Figure the Deduction for Business Use of Your Home), up to the deduction limit discussed under Figuring the Deduction, earlier, on line 34 of Schedule F. Enter “Business Use of Home” on the dotted line beside the entry.
Deductible mortgage interest
If you file Schedule C (Form 1040), enter all your deductible mortgage interest on line 10 of Form 8829. After you have figured the business part of the mortgage interest on lines 12 and 13, subtract that amount from the total on line 10. The remainder is deductible on Schedule A (Form 1040), line 10 or 11. 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 use of the home expenses on line 34. You can use the Worksheet To Figure the Deduction for Business Use of Your Home, later in this publication, to figure the deductible part of mortgage interest. Enter the nonbusiness part of the deductible mortgage interest on Schedule A, line 10 or 11. To determine if the limits on qualified home mortgage interest apply to you, see the instructions for Schedule A or Publication 936.
Qualified mortgage insurance premiums
If you file Schedule C (Form 1040), enter all your deductible qualified mortgage insurance premiums on line 10 of Form 8829. After you have figured the business part of the qualified mortgage insurance premiums on lines 12 and 13, subtract that amount from the qualified mortgage insurance premiums included on line 10. The remainder is deductible on Schedule A (Form 1040), line 13. If the premiums you deduct on Schedule A are limited, include the excess with any excess mortgage interest and enter the total on line 16 of Form 8829. If you file Schedule F (Form 1040), include the business part of your deductible qualified mortgage insurance premiums with your total business use of the home expenses on line 34. You can use the Worksheet To Figure the Deduction for Business Use of Your Home, later in this publication, to figure the deductible part of qualified mortgage insurance premiums. Enter the nonbusiness part of the qualified mortgage insurance premiums on Schedule A, line 13. To determine if the limits on qualified mortgage insurance premiums apply to you, see the instructions for Schedule A or Publication 936.
Real estate taxes
If you file Schedule C (Form 1040), enter all your deductible real estate taxes on Form 8829, line 11. After you have figured the business part of your taxes on lines 12 and 13, subtract that amount from your total real estate taxes on line 11. The remainder is deductible on Schedule A (Form 1040), line 6. If you file Schedule F (Form 1040), 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. If you itemize your deductions, be sure to include only the personal part of your deductible mortgage interest, qualified mortgage insurance premiums, and real estate taxes on Schedule A (Form 1040). Do not deduct any of the business part on Schedule A. For example, if your business percentage on Form 8829, line 7, or line 3 of the Worksheet To Figure the Deduction for Business Use of Your Home , later, is 30%, you can deduct only 70% of your deductible mortgage interest, qualified mortgage insurance premiums, and real estate taxes as personal expenses on Schedule A.
Casualty losses
If you are using Form 8829, refer to the specific instructions for line 9 and enter the amount from line 34 on line 30 of Form 4684, Section B. Enter “See Form 8829” above line 30. If you file Schedule F (Form 1040), enter the business part of casualty losses (line 32 of the Worksheet To Figure the Deduction for Business Use of Your Home) on line 30 of Form 4684, Section B. Enter “See attached statement” above line 30.
Other expenses
If you file Schedule C (Form 1040), 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, report the rent you paid on line 18. If these expenses exceed the deduction limit, carry the excess over to next year. The carryover will be subject to next year's deduction limit. If you file Schedule F (Form 1040), include your otherwise nondeductible expenses (insurance, maintenance, utilities, depreciation, etc.) with your total business use of the home expenses on Schedule F, line 34. If these expenses exceed the deduction limit, carry the excess over to the next year. The carryover will be subject to next year's deduction limit.
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 (Form 1040) or Schedule F (Form 1040). These expenses are not for the use of your home, so they are not subject to the deduction limit for business use of the home expenses.
Employees
As an employee, you must itemize deductions on Schedule A (Form 1040) to claim a deduction 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 earlier under Self-Employed Persons. The statutory employee box within box 13 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 Schedule A, line 21. You also generally must complete Form 2106 if either of the following apply.
- You claim any job-related vehicle, travel, transportation, meal, or entertainment expenses.
- Your employer paid you for any of your job expenses reportable on line 21. (Amounts your employer included in box 1 of your Form W-2 are not considered paid by your employer.)
However, you can use the simpler Form 2106-EZ, instead of Form 2106, if you meet the following requirements.
- You were not reimbursed for your expenses by your employer, or if you were reimbursed, the reimbursement was included in box 1 of your Form W-2.
- If you claim car expenses, you use the standard mileage rate.
When your employer pays for your expenses using a reimbursement or allowance arrangement, the payments generally should not be on your Form W-2 if all the following rules for an accountable plan are met.
- You adequately account to your employer for the expenses within a reasonable period of time.
- You return any payments not spent for business expenses (excess reimbursements) within a reasonable period of time.
- You must have paid or incurred deductible expenses while performing services as an employee.
If you meet the accountable plan rules and your business expenses equal your reimbursement, do not report the reimbursement as income and do not deduct the expenses.
Adequately accounting to employer
You adequately account to your employer when you give your employer documentary evidence of your travel, mileage, and other employee business expenses, such as receipts, along with an account book, diary, or similar record in which you entered each expense at or near the time you had it. You also may be treated as adequately accounting to your employer if your employer gives you a per diem or car allowance similar in form to, and not more than, the federal rate and you verify the time, place, and business purpose of each expense. For more information, see Publication 463 and the instructions for Form 2106.
Deductible mortgage interest
Although you generally deduct expenses for the business use of your home on Schedule A (Form 1040), line 21, 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 expense on Schedule A, line 21, even though you use part of your home for business. To determine if the limits on home mortgage interest apply to you, see Publication 936 or the instructions for Schedule A.
Qualified mortgage insurance premiums
Although you generally deduct expenses for the business use of your home on Schedule A (Form 1040), line 21, do not include any deductible qualified mortgage insurance premiums on that line. Instead, deduct both the business and nonbusiness parts of these premiums on line 13 of Schedule A. If the qualified mortgage insurance premiums you can deduct on line 13 is limited, you cannot deduct the excess as an employee business expense on Schedule A, line 21, even though you use part of your home for business. To determine if you can deduct mortgage insurance premiums and if any limits apply to you, see Publication 936 and Line 13 in the instructions for Schedule A (Form 1040).
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 real estate taxes, see Publication 530, Tax Information for First-Time Homeowners.
Casualty losses
Enter the business part of casualty losses (line 32 of the Worksheet To Figure the Deduction for Business Use of Your Home, later,) on Form 4684, Section B, line 27. Enter “See attached statement” above line 27.
Other expenses
If you file Form 2106 or Form 2106-EZ, report on line 4 the following expenses.
- The business part of your otherwise nondeductible expenses (utilities, maintenance, insurance, depreciation, etc.) that do not exceed the deduction limit.
- The employee business expenses not related to the use of your home, such as advertising.
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 expenses 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.
The percentage of expenses due to the business use of your home is 20%. You have the following expenses.
| Deductible mortgage interest (20%) | $1,500 |
| Real estate taxes (20%) | 1,000 |
| Total | $2,500 |
| Expenses not related to business use of the home (100%): | |
| Supplies | $500 |
| Advertising | 1,300 |
| Telephone | 200 |
| Total | $2,000 |
| Otherwise nondeductible expenses: | |
| Maintenance (20%) | $200 |
| Utilities (20%) | 350 |
| Insurance (20%) | 250 |
| Total | $800 |
| Depreciation (20%) | $1,600 |
Based on the above expenses, you figure your deduction limit as follows.
| Gross income | $6,000 | |
| Less: | ||
| Deductible mortgage interest (20%) | $1,500 | |
| Real estate taxes (20%) | 1,000 | |
| Expenses not related to business use of the home (100%) | 2,000 | 4,500 |
| Deduction limit | $1,500 |
Your deduction for otherwise nondeductible expenses and depreciation is limited to $1,500. You can deduct all your otherwise nondeductible expenses ($800) and $700 ($1,500 - $800) of your depreciation.
You deduct your expenses for business use of your home on Schedule A (Form 1040) as shown in the following table.
| Expense | Amount | Schedule A |
|---|---|---|
| Deductible mortgage interest | $1,500 | Line 10 or 11* |
| Real estate taxes | $1,000 | Line 6* |
| Expenses not related to the business use of the home | $2,000 | Line 21** |
| Otherwise nondeductible expenses | $800 | Line 21** |
| Depreciation | $700 | Line 21** |
| *In addition to the 80% nonbusiness part of the expense. | ||
| **Subject to the 2%-of-adjusted-gross-income limit. | ||
You can carry over the $900 of depreciation that exceeds the deduction limit to next year, subject to the deduction limit for that year.
Partners
You may be allowed to deduct unreimbursed ordinary and necessary expenses you paid on behalf of the partnership (including qualified expenses for the business use of your home) if you were required to pay these expenses under the partnership agreement.
Use the Worksheet To Figure the Deduction for Business Use of Your Home, near the end of this publication, to figure the deduction for the business use of your home.
Deducting unreimbursed partnership expenses
See the following forms and related instructions for information about deducting unreimbursed partnership expenses.
- Schedule E (Form 1040), Supplemental Income and Loss.
- Schedule SE (Form 1040), Self-Employment Tax.
- Schedule K-1 (Form 1065), Partner's Share of Income, Credits, Deductions, etc.
More information
For more information about partners and partnerships, see Publication 541, Partnerships.
Schedule C Example
The filled-in forms for John Stephens that follow show how to report deductions for the business use of your home if you file Schedule C (Form 1040).
Form 4562
Based on the following facts, John completes Form 4562 as follows: Part I, lines 1-13. John began using his home for business in January of this year. He purchased a new computer and filing cabinet to use in his business. The computer, used 100% for business, cost $3,200. The filing cabinet cost $600. John elects to take the section 179 deduction for both items. John completes Part I of Form 4562. He enters the cost of both the computer and filing cabinet, $3,800, on line 2 and completes lines 4 and 5. On line 6, he enters a description of each item, its cost, and the cost he elects to expense. Line 11 is the smaller of line 5 ($125,000) or the taxable income from all trades and businesses without regard to the section 179 deduction. Since he has no other business income, he adds line 31 of Schedule C and the amount of the section 179 deduction ($3,800) for a total business income of $27,871. This amount goes on line 11 since it is smaller than $125,000. He enters $3,800 on line 12.
Part III, line 19c
John converted to business use a desk and chair (furniture) he had purchased in 2000 for personal purposes. In 2000, he paid $1,500 for them. The total fair market value in 2007 is $550. The fair market value is less than the cost, so his depreciable basis is $550. Because the furniture is 7-year property under MACRS, John enters $550 in Part III, line 19c, column (c). He completes columns (d) through (f). He uses Table 4 in this publication or Table A-1 in Publication 946 to find the rate of 14.29% for property placed in service during the first month of the year. He multiplies $550 by 14.29% (.1429) and enters $79 in column (g).
Part III, line 19i
This is the first year John used his home for business, so he must figure the depreciation on line 19i. On line 19i, column (c), he enters $11,000, the depreciable basis of the business part of his home. He began using his home for business in January. (For a discussion on how he figures his depreciation deduction, see Step 3 under Form 8829, Part II, later.) He enters $271 in column (g).
Part IV, line 22
John totals the amounts on line 12 and line 19 in column (g) and enters the total on line 22. He enters both the section 179 deduction ($3,800) and the depreciation on the furniture ($79) on line 13 of Schedule C. He enters the depreciation on his home ($271) on Form 8829, line 29.
Schedule C
John completes Schedule C as follows:
Line 13
As discussed previously, John enters the amount from Form 4562 for his section 179 deduction ($3,800) and the depreciation deduction for his office furniture ($79) for a total of $3,879.
Line 16b
This amount is the interest on installment payments for the business assets John uses in his home office.
Line 25
John had a separate telephone line in his home office that he used only for business. He can deduct $347 for the line. Lines 28-30. On line 28, he totals all his expenses other than those for the business use of his home, and then 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 Form 8829, line 8, and then completes the form. He enters the amount of his home office deduction from Form 8829, line 35, on Schedule C, line 30.
Form 8829, Part I
John uses one room of his home exclusively and regularly to meet clients. In Part I of Form 8829 he shows that,