us internal revenue service: p587--1997

8/14/2019 US Internal Revenue Service: p587--1997

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ContentsIntroduction ........................................................ 2

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

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

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

Depreciating Your Home ................................... 9

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

Sale or Exchange of Your Home ...................... 11

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

Recordkeeping ................................................... 14

Where To Deduct ............................................... 14

Schedule C Example .......................................... 16

Worksheet To Figure the Deduction ................ 20

Instructions for the Worksheet ......................... 21

How To Get More Information .......................... 22

Index .................................................................... 23

Important Change for 1997

Increase 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. Beginningafter 1996, the total cost of section 179 property thatyou can deduct increases. For 1997, the total is in-creased to $18,000. In 1998 the total will increase to$18,500. For more information on the increases, getPublication 553, Highlights of 1997 Tax Changes. Formore information on the section 179 deduction, getPublication 946, How To Depreciate Property.

Important Change for 1999

Definition of principal place of business. Beginningin 1999, your home office generally will qualify as aprincipal place of business if:

1) You use it exclusively and regularly for the admin-istrative or management activities of your trade orbusiness, and

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

The expanded definition of principal place of busi-ness does not take effect until 1999. For more infor-mation about this, see Publication 553, Highlights of1997 Tax Changes. For the current definition, seePrincipal Place of Businessunder Qualifying for a De-duction.

Department of the TreasuryInternal Revenue Service

Publication 587Cat. No. 15154T

Business Useof Your Home(Including Use byDay-Care Providers

For use in preparing

1997 Returns

Get f orms and other informat ion faster a nd easier by:COMPUTER

World Wide Web www.irs.ustreas.gov FTP ftp.irs.ustreas.gov IRIS at FedWorld (703) 321-8020

FAX From your FAX machine, dial (703) 368-9694See How To Get More Informationin this publication.


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Important Reminder

Storage of product samples. For tax years beginningafter 1995, you may be able to deduct expenses for thepart of your home you use to store product samples.For more information, see Storage of inventory orproduct samples, later.

IntroductionThe purpose of this publication is to provide you withinformation on figuring and claiming the deduction forbusiness use of your home. The publication will helpyou determine:

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, and

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 does notinclude any part of your property used exclusively as ahotel or inn.

The publication also includes information on thespecial rules for:

Day-care providers,

Computing gain or loss on the sale of a home thatwas used for business, and

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 the

end of this publication, to help you figure your de-duction. If you file Schedule C (Form 1040), you mustuse Form 8829, Expenses for Business Use of YourHome. The Schedule C Exampleshows how to reportthe deduction.

If you need information on deductions for renting outyour property, get 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 a

home by a partner or S corporation shareholder.

Useful ItemsYou may want to see:

Publication

523 Selling Your Home

534 Depreciating Property Placed in Service

Before 1987 551 Basis of Assets

583 Starting a Business and Keeping Records

911 Direct Sellers

946 How To Depreciate Property

Form (and Instructions)

2106 Employee Business Expenses

2106EZ Unreimbursed Employee Business Ex-penses

4562 Depreciation and Amortization 8829 Expenses for Business Use of Your Home

See How To Get More Informationnear the end ofthis publication for information about getting thesepublications and forms.

Help from the Problem Resolution Program. TheProblem Resolution Program (administered by theTaxpayer Advocate) can often help you with unresolvedtax problems. It may be able to offer you special helpif you have a significant hardship as a result of a taxproblem. For more information, write to the TaxpayerAdvocate at the district office or service center where

you have the problem, or call 18008291040(18008294059 for TTY/TDD users).

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 use

of your home, you must meet the following tests.

1) Your use must be:

a) Exclusive (however, see Exceptions to Exclu-sive Use),

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 for your tradeor business, or

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b) A place of business where you meet or dealwith patients, clients, or customers in thenormal course of your trade or business, or

c) A separate structure (not attached to yourhome) that you use in connection with yourtrade or 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 above 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.

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

use is not considered for your employer's conveniencemerely 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 space identified as separate. The space doesnot need to be marked off by a permanent partition.

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 client tax returns.

Your family also uses the den for recreation. Since theden is not used exclusively in your profession, youcannotclaim a business deduction for its use.

Exceptions to Exclusive UseYou do not have to meet the exclusive use test if:

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

2) 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 five tests.

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

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

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

4) You use the storage space on a regular basis.

5) The space you use is identifiably separate spacesuitable for storage.

Example. Your home is the sole fixed location ofyour 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 continu-ingbasis. You do not meet the test if your business useof the area is only occasional or incidental, even if youdo 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-seeking

activity 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 ofbusiness for that trade or business. To determine yourprincipal place of business, you must consider all of thefacts and circumstances. If, after considering yourbusiness locations, one cannot be identified as yourprincipal place of business, you cannot deduct homeoffice expenses. The two primary factors are:

1) The relative importance of the activities performedat each location, and

2) The time spent at each location.

Relative importance. To determine whether yourhome is the principal place of business, consider therelative importance of the activities carried out at eachbusiness location. The relative importance of the activ-ities performed at each business location is determinedby the basic characteristics of the business.

If your business requires that you meet or confer withclients or patients, or that you deliver goods or servicesto a customer, then:

The place where you make contact must be givengreat weight in determining where the most impor-tant activities are performed, and

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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.

The performance of necessary or essential activitiesin your home office (such as planning for servicesor the delivery of goods, or the accounting or billingfor those activities or goods) is notas important.

Time. If the relative importance of your activities doesnot clearly establish the principal place of business,such as when you deliver goods or services at both theoffice in your home and elsewhere, then consider thetime you spend. Compare the time you spend on busi-

ness at your home office with the time you spend atother locations.

Examples of determining the principal place ofbusiness. The following are five examples that willhelp you determine the principal place of business.

Example 1. Jane Williams is a self-employed an-esthesiologist. Her only office is a room in her homeused regularly and exclusively to:

Contact patients, surgeons, and hospitals by tele-phone;

Maintain billing records and patient logs;

Prepare for treatments and presentations;

Satisfy continuing medical education requirements;and

Read medical journals and books.

Jane spends approximately 10 to 15 hours a weekworking in her home office. She spends 30 to 35 hoursper week administering anesthesia and postoperativecare in three hospitals, none of which provide her withan office.

The essence of Jane's business as an anesthesiol-ogist requires her to treat patients in hospitals. Thehome office activities, although essential, are less im-portant to Jane's business and take less time than theservices she performs in the hospitals. Since her homeoffice is not her principal place of business, she cannotdeduct expenses for the business use of her home.

Example 2. Sam Stone is a self-employed plumber.His only office is a room in his home, which he usesregularly and exclusively to phone customers, decide

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what supplies to order, and review the books of thebusiness. He also employs Helen Green, a full-timeunrelated employee, to perform administrative servicesin his office such as answering the telephone, sched-uling his appointments, ordering supplies, and keepinghis books.

Sam spends approximately 40 hours a week at hiscustomers' homes and offices, installing and repairingplumbing. He spends approximately 10 hours a weekdoing work in his home office.

The essence of Sam's trade or business as aplumber requires him to perform services and delivergoods at the homes or offices of his customers. Hishome office activities, although essential, are less im-portant and take less time than the work he does in thecustomers' homes and offices. Therefore, his office inthe home is not his principal place of business and hecannot deduct expenses for the business use of thehome. The fact that Helen performs administrative ac-tivities at his office does not alter this result.

Example 3. Joe Smith is a salesperson. His onlyoffice is a room in his house used regularly and exclu-sively to set up appointments, store product samples,

and write up orders and other reports for the companieswhose products he sells.

Joe's business is selling products to customers atvarious locations within the metropolitan area where helives. To make these sales, he regularly visits the cus-tomers to explain the available products and to takeorders. He makes only a few sales from his home office.He spends an average of 30 hours a week visitingcustomers and 12 hours a week working at his homeoffice.

The essence of his business as a salesperson re-quires him to meet with customers primarily at thecustomer's place of business. The home office activ-ities, although essential, are less important to Joe's

business and take less time than the sales activities heperforms when visiting customers. Therefore, his homeoffice is not his principal place of business and hecannot deduct expenses for the business use of hishome.

Example 4. Fred Jones, a salesperson, performsthe same activities in his home office as does Joe Smithin Example 3, except that Fred makes most of his salesto customers by telephone or mail from his home office.He spends an average of 30 hours a week working athis home office and 12 hours a week visiting prospec-tive customers to deliver products and occasionally takeorders.

The essence of Fred's business as a salespersonrequires him to make telephone or mail contact withcustomers primarily from his office, which is in hishome. Actually visiting customers is less important tohis business and takes less time than the sales activ-ities he performs from his home office. Therefore, hecan deduct expenses for the business use of his home.

Example 5. Nelson Lewis is employed as a teacher.He is required to teach and meet with students at theschool and to grade papers and tests. In addition to asmall shared office at the school, he maintains a homeoffice for use in class preparation and for grading pa-

pers and tests. He spends about 25 hours per week atthe school, and 30 to 35 hours per week at his homeoffice.

The essence of Nelson's work as a teacher requireshim to teach and meet with students at the school. Al-though the class preparation and grading take moretime and are essential, they are less important than theactivities at the school. He cannot deduct expenses forthe business use of his home. Because his home officeis not the principal place of business, it is not necessary

to determine whether he maintains the office for theconvenience of his employer.

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 may deduct expenses for business useof her home for the jewelry business.

If Tracy makes any use of the office for work relatedto her teaching, she would not meet the exclusive usetest for the jewelry business. She may not take anyhome office deduction for either activity because her jobas a teacher does not meet the tests for the deduction.

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

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

Occasional meetings and telephone calls do not qualifyyou to deduct expenses for the business use of yourhome.

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, an attorney, works 3 days aweek in her city office. She works 2 days a week in herhome office used only for business. She regularlymeets clients there. Her home office qualifies for a

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business deduction because she meets clients there inthe normal course of her business.

Separate StructuresYou 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 the home, butyour deduction is limited by the:

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

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.

Although you can use any reasonable method todetermine the business percentage, two methods are:

1) The area (length multiplied by the width) used forbusiness divided by the total area of your home,or

2) The number of rooms used for business divided bythe total number of rooms in your home. You canuse this method if the rooms in your home are aboutthe 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.

Therefore, 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.

Therefore, your business percentage is 25%.

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Use lines 17 of Form 8829, or lines 13 on the

worksheet near the end of this publication tofigure your business percentage.

Part-year use. You cannot take a deduction for busi-ness use of the home expenses incurred during anypart of the year you did not use your home for businesspurposes. For example, if you begin using part of yourhome for business on July 1, and you meet all the testsfrom that date until the end of the year, consider onlyyour expenses for the last half of the calendar year infiguring 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. But if your gross income from that useis less than your total business expenses, your de-duction for certain expenses for the business use ofyour home is limited.

Your deduction of otherwise nondeductible ex-penses, such as insurance, utilities, and depreciation(with depreciation taken last), allocable to business islimited to your gross income from the business use ofyour home minus:

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 morefully under Deducting Expenses, later), and

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. You can carryover to your next tax year deductions over the currentyear's limit. These deductions are subject to the grossincome limit from the business use of your home for thenext tax year. The amount carried over will be allowableonly up to your gross income in the next tax year fromthe business in which the deduction arose, whether ornot you live in the home during that year.

Figuring deduction limit and carryover. If you arean employee or file Schedule F, Profit or Loss FromFarming, use the worksheet near the end of this publi-cation to figure your deduction limit and carryover. If you

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file Schedule C, figure your deduction limit and carry-over on Form 8829.

Example. You meet the requirements for deductingexpenses for the business use of your home. You use20% of your home for this business. In 1997, your grossincome, business expenses, and expenses for thebusiness use of your home are as follows:

You can deduct all the business part of yourdeductible mortgage interest and real estate taxes($3,000). You also can deduct all your business ex-penses other than for the use of your home ($2,000).Additionally, you can deduct all the business part ofyour expenses for maintenance, insurance, and utilities,because the total ($800) is not more than the $1,000gross income limit. But your deduction for depreciationfor the business use of your home is limited to $200($1,000 minus $800) for 1997 because of the grossincome limit. You can carry over the $1,400 balanceand add it to your depreciation for 1998, subject to your1998 gross income limit.

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 Expenses

If 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:

Whether the expense is direct, indirect, or unrelated,and

The percentage of your home that is used for busi-ness.

The table below describes the types of expenses youmay have and the extent to which they are deductible.

*Subject to the deduction limit.

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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 rules thatapply without regard to the business use of your home.No deduction is allowed for other expenses related tothe 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 qualify toclaim business use of the home expenses, you can usethe business part of these expenses to figure yourbusiness use of the home deduction. These expensesinclude:

Real estate taxes,

Deductible mortgage interest, and

Casualty losses.

ExpenseType

Description Deductibility

Direct Expenses only forthe business part

of your home.

Deductible in full.*Gross income from business $6,000

Less: Deductible mortgage interest and real estate taxes(20% allowable as business part) 3,000

Example:Painting or repairsonly in the areaused for business.

Exception:May be onlypartially deductible in aday-care facility. SeeDay-Care Facility, later.

Balance $3,000

Less: Business expenses other than for use of home(business phone, supplies and depreciationon office equipment) 2,000

Indirect Expenses forrunning yourentire home.

Deductible based on thepercentage of your homethat is used for busi-ness.*

Gross income limit $1,000

Less: Other expenses allocable to business use of home:

1) Maintenance, insurance,and utilities (20%) 800 Examples:

Real estate taxes,utilities, andgeneral repairs.

Limit on further deduction $200

2) Depreciation (20%) 1,600

Unrelated Expenses only forthe parts of yourhome notusedfor business.

Not deductible.Depreciation carryover to 1998 subject to grossincome limit in 1998 $1,400

Examples:Lawn care, paintinga room not usedfor business.

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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):

Depreciation (covered under Depreciating YourHome, later),

Insurance,

Rent, Repairs,

Security system, and

Utilities and services.

Real Estate TaxesTo figure the business part of your real estate taxes,multiply the real estate taxes paid by the percentageof your home used for business.

For more information on the deduction for taxes, getPublication 530, Tax Information for First-Time Home-owners.

Deductible Mortgage InterestTo figure the business part of your deductible mortgageinterest, multiply this interest by the percentage of yourhome used in 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, get Publication 936, Home Mortgage Inter-est Deduction.

Casualty Losses

If you have a casualty loss on your home that you usein 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 usefor bothbusiness and personal purposes, use onlythe business portion to figure the deduction.

3) Unrelated expense. If the loss is on property you

do notuse in your business, you do not use anyof the loss 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 get Form 4684, Casualtiesand Thefts.

For more information on casualty losses to businessand 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, rather than own, a home 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 DepreciatingYour Home.

Security System

If 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 home

used 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 may deduct these expenses even if youdo not qualify to deduct expenses for the business useof your home. Deduct these charges separately on theappropriate schedule. Do not include them in yourhome office deduction.

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Depreciating Your HomeIf you qualify to deduct expenses for the business useof your home, you can claim a deduction for depreci-ation on the business part of your home. The cost ofproperty that can be used for more than one year, suchas a building, a permanent improvement, or furniture,is a capital expenditure. You generally cannot deductits entire cost in one year. However, you may be ableto recover this cost by taking annual deductions fordepreciation.

Land is not depreciable property. You generallycannot recover the cost of land until you dispose of it.

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 that you made to it, minus the costof the land and any casualty losses or depreciationdeducted in earlier tax years. For a discussion of ad-

justed basis, get 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 expenditures. These records willhelp you decide whether an expenditure is a deductibleexpense or a capital expenditure.

Example. You buy an older home and fix up tworooms as a beauty salon. You patch the plaster on the

ceilings and walls, paint, repair the floor, install an out-side door, and install new wiring, plumbing, and otherequipment. Normally, the plaster patching, painting,and floor work are repairs and the other expenses arepermanent improvements. However, since the workgives your property a new use, the entire remodeling

job is a permanent improvement and its cost is addedto the basis of the property. You cannot deduct anyportion of it as a 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, decreasethe basis by the amount you could have taken underthat method.

If you deducted more depreciation than you shouldhave, decrease your basis by the amount you should

have 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, get 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 similar

property, on or about the same date, may be helpful infiguring the property's fair market value.

Figuring the Depreciation Deductionfor the Current YearIf you began to use part of your home for businessbefore 1997, continue to use the same depreciationmethod you used in past tax years.

If you began to use part of your home for businessin 1997, depreciate that 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, get Publication 946.

To figure the depreciation deduction, you must firstfigure 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 adjusted basis of your home (excluding land)on the date you began using your home for busi-ness, or

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

Depreciation table. If 1997 was the first year youused your home for business, you may figure your 1997depreciation for the business part of your home by us-ing the appropriate percentage from the following table.

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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 A7a in Appendix A in Publication946 for the percentages for the remaining tax years ofthe recovery period.

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. The house had a fair market value of$165,000 in May. He multiplies his adjusted basis(which is less than fair market value) by 8%. The resultis $9,200, his depreciable basis for the business partof 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), the

percentage 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 above. 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-ple the cost of the improvement by the business-usepercentage and depreciate the result over the appro-priate recovery period. For more information on what

recovery period to use, see Property Classes and Re-covery Periodsin chapter 3 of Publication 946.

Day-Care FacilityTo deduct business expenses for a day-care facility

in your home, you must meet the tests discussed earlierunder Qualifying for a Deduction, except that:

You must meet day-care licensing requirements,

You do nothave to use the space exclusively forday care, and

Month of Tax Year If an area is not used exclusively for day care, youmust reduce any expenses by the percentage oftime the area is not available for business use.

What is a day-care facility? To deduct expenses forusing part of your home to provide day-care services,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 applicablestate law. You do not meet this requirement if yourapplication was rejected or your license or otherauthorization was revoked.

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 eachbusiness 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.

TIP

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

of your home can be used for all purposes. You maycompare the hours of business use in a week with thenumber of hours in a week (168). Or you may comparethe hours of business use for the tax year with thenumber of hours in your tax year (8,760 in 1997).

Example 1. Mary Lake uses her basement to op-erate a day-care business for children. Her home totals3,200 square feet. The basement is 1,600 square feet,or 50% of the total area of the home (1,600 3,200).She uses the basement for day care an average of 12

hours a day, 5 days a week, for 50 weeks. During theother 12 hours, the family can use the basement. Dur-ing the year, the basement is used for day care for atotal of 3,000 hours (250 days 12 hours). The base-ment can be used 8,760 hours (24 hours 365 days)during the year. Only 34.25% (3,000 8,760) of theexpenses of her basement are business expenses.Mary can deduct 34.25% of any directexpenses for thebasement. However, only 34.25% of the basement partof her indirectexpenses are business expenses. Be-cause the basement is 50% of the total area of herhome, she can deduct 17.13% (50% of 34.25%) of herindirect expenses.

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%

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Mary Lake 412 0 0 1234

1,60 03,200

50

3,000

3425

17.13

Expenses 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 24hours). 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

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


AttachmentSequence No. 66

Form 8829

Name(s) of p roprietor(s)

1

2

3

4

5

6

7

hr.

8,760 hr.

.

Part I

Your social security number

%

%

(99)

97

Figure B

Mary completes Part I of Form 8829 as shown in

Figure B.

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 numberof 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. In figuring her expenses, 34.25% of any di-rect expenses of the basement and room aredeductible. In addition, 34.25% of the indirect expenses

of the basement and room are business expenses.Because the basement and room are 60% of the totalarea of her home, Mary can deduct 20.55% (60% of34.25%) of her indirect expenses.

Meals. If you provide food for your day-care business,do not include the expense as a cost of using yourhome for business. Claim it as a separate deductionon your Schedule C (Form 1040). You can deduct asa business expense 100% of the cost of food consumedby your day-care recipients and 50% of the cost of foodconsumed by your employees. But you can never de-duct the cost of food consumed by you or your family.

If you deduct the cost of food for your day-carebusiness, 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 only taxable 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 a

Form 1099 reporting a payment from the sponsor.

Sale or Exchange of YourHomeIf you are claiming deductions for the business use ofyour home and you sell or exchange it, you generallymust treat the gain or loss from the sale or exchangeof the business and nonbusiness parts of your homedifferently.

Sales before May 7, 1997. If you sold your home be-fore May 7, 1997, and within 2 years you buy one thatcosts at least as much as the adjusted sales price ofyour old home, you must postpone recognizing gain onthe sale.

If you sold your home before May 7, 1997, and in theyear of the sale you were able to deduct expenses forthe business use of your home, treat the sale as twoseparate sales. Report on Form 4797 the part of thesale that applies to the business use. Report on Form2119 only the sale of the personal part of your home.Generally, you have to recognize any gain on thebusiness part. Similarly, if you have a loss on the saleof your home, you can deduct the loss only on the

business part. You cannot deduct any loss on thenonbusiness part.

To figure whether the cost of your new home is atleast as much as the adjusted sales price of your oldhome, compare the nonbusiness part of your oldhome's adjusted sales price with the nonbusiness partof your new home's cost.

If your business use does not meet the requirementsfor the allowance of a business deduction for the yearof sale, do not divide the gain on the sale between thebusiness and nonbusiness parts. Under these circum-stances, all your gain can be postponed if you meet allthe other requirements for postponing gain.

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Sales after May 6, 1997. If you sold your home afterMay 6, 1997, you may be able to exclude the gain upto $250,000 ($500,000 for certain married persons filinga joint return). However, you cannot exclude the partof your gain that is equal to any depreciation allowedor allowable for the business use of your home afterMay 6, 1997.

For more information on the sale or exchange of ahome, get Publication 523.

Depreciation. If you used any part of your home forbusiness, you must adjust the basis of your home forany 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. Formore information, get Publications 551 and 946.

If you used ACRS, MACRS, or some other acceler-ated method to figure your depreciation, some of thegain on the sale of the business part of your home mayhave to be treated as ordinary income.

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.

If you placed furniture or equipment in service in yourbusiness before this year, you continue to claim de-preciation deductions over its recovery period.

This section will explain the different rules for:

1) Listed property,

2) Property bought for business use, and

3) Personal property converted to business use.

Listed PropertyIf you use certain types of property, called listedproperty, in your home, special rules apply to allowabledepreciation. Listed property includes any property ofa type generally used for entertainment, recreation, andamusement (including photographic, phonographic,communication, and video recording equipment). Listed

property also includes computers and related equip-ment unless they are used in a qualifying office in yourhome. If you use your computer in a qualifying office inyour home, see Property Bought for Business Use,later. For more information on listed property, seechapter 4 in Publication 946.

More-than-50% test. If you bought listed property andplaced it in service in 1997, special rules apply. Morethan 50% of your use of the listed property must be forbusiness (including work as an employee) during thetax year for you to claim a section 179 or an accelerateddepreciation deduction. If your business use is 50% or

less, you cannot take a section 179 deduction. Youmust figure the depreciation for it using the AlternateDepreciation System (ADS) (straight line method), asexplained in Publication 946.

If you use listed property more than 50% in a busi-ness in the tax year the property is placed in servicebut not in a later year of the recovery period, you mayhave to recapture (include in gross income) excessdepreciation. See Publication 534 for property placedin service before 1987. See Publication 946 for property

placed in service after 1986. For property placed inservice after 1986, you must use the ADS method.Figure your depreciation for the tax year and any latertax years as if that listed property were not used morethan 50% for business in the year it was placed in ser-vice.

Employee. If you use listed property, such as ahome computer, in your work as an employee, it willnot be treated as used for business for themore-than-50% test unless:

1) The use is for the convenience of your employer,and

2) The use is required as a condition of your 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 isrequired for this purpose depends on all the facts andcircumstances. Your employer does not have to tell youspecifically to have a computer in your home. Nor is astatement by your employer to that effect sufficient.

Investment time. The time you use the computerfor investments does not count as business-use timefor the more-than-50% test. However, if you meet themore-than-50% test, you can take into account the

combined business and investment time to figure yourdepreciation deduction under MACRS. If you do notmeet the test, you can use the combined time to figurethe depreciation deduction under the straight linemethod.

If you use your computer to produce income frominvestments, get Publication 529, Miscellaneous De-ductions.

Reporting and substantiation 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.

You must keep adequate records to prove yourbusiness use of any listed property. For information onwhat records to keep, see What Records Must Be Keptunder Listed Propertyin chapter 4 of Publication 946.

Property Bought for Business UseIf you bought certain property to use in your business,you can elect to deduct all or part of its cost as a sec-tion 179 deduction. You can generally claim the sec-tion 179 deduction on depreciable tangible personalproperty bought for use in the active conduct of yourbusiness. You cannot take a section 179 deduction forthe basis of the business part of your home.

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The total cost you can deduct cannot exceed$18,000. But there are certain provisions that can re-duce this maximum.

The total cost that you can deduct each tax year islimited to your total taxable income from the activeconduct of all your trade or business activities, includingwages, during the tax year. Figure taxable income forthis purpose in the usual way, but without regard to thesection 179 deduction, the self-employment tax de-duction, and any net operating loss carryback or

carryforward. See How To Figure the Deduction, inchapter 2 of Publication 946, for more information.

You choose how much (subject to the limit) of thecost you want to deduct under section 179 and howmuch you want to depreciate. You do not have to de-duct the full cost of the property. You can deduct partof its cost under section 179 and depreciate the restover its recovery period. You can spread the section179 deduction over several items of property in any wayyou choose as long as the total does not exceed themaximum allowable.

You elect to take the section 179 deduction bycompleting Part I of Form 4562.

Depreciation. Use Part II of Form 4562 to depreci-

ate, under MACRS, the cost of depreciable propertybought in 1997 that is not deducted under section 179.Most business property used in a home office is either5-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 andequipment such as desks, files, and safes.

Under MACRS, you generally use the half-yearconvention, which allows you to deduct a half year of

depreciation in the first year you use the property inyour business. If you place in service more than 40%of your depreciable basis during the last 3 months ofyour tax year, you must use the mid-quarter conventioninstead of the half-year convention.

After you have determined the cost of the deprecia-ble property (minus any section 179 deduction takenon the property) and whether it is 5-year or 7-yearproperty, use the table, shown next, to figure your de-preciation.

Get 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 for

the 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) Not take a section 179 deduction and depreciatethe full cost of the office furniture.

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

Personal Property Converted to BusinessUseIf you began to use property in your home office thatwas used previously for personal purposes, you cannottake a section 179 deduction. The method of depreci-ation you use depends on when you first used theproperty for personal purposes.

If you began to use the property for personal pur-

poses before 1981 and change it to business use in1997, depreciate the property by the straight line ordeclining balance method based on salvage value anduseful life.

If you began to use the property for personal pur-poses after 1981 and before 1987 and change it tobusiness use in 1997, 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. For adiscussion of depreciation methods for property usedfor personal purposes before 1987, get Publication 534.

If you began to use the property for personal pur-poses after 1986 and change it to business use in 1997,depreciate the property under MACRS.

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

1) The adjusted basis of the property on the date ofchange, or

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

Example 1. James Roe bought a desk for $1,000on November 1, 1986. He began to use it in his homeoffice on February 5, 1997, when it had a fair market

value of $600. The depreciable basis of the desk is thefair market value of $600, which is less than its cost.Under ACRS, a desk is 5-year property. Under MACRS,it is 7-year property. Under ACRS, its depreciation is$90 (15%, the first year ACRS percentage for 5-yearproperty, of $600). Under MACRS, its depreciation is$85.74 (14.29%, the first year percentage for 7-yearproperty, of $600). Since the depreciation is greaterusing ACRS, James must use MACRS to depreciatehis desk.

Example 2. Assume the same facts as in Example1 except that the property is a computer. Under bothACRS and MACRS, a computer is 5-year property.

PercentagesRecovery 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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Under ACRS, its depreciation is $90. Under MACRS,its depreciation is $120 (20%, the first year percentagefor 5-year property, of $600). Since its depreciation isgreater using MACRS, James must use ACRS to de-preciate his computer.

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:

1) The part of your home you use for business,

2) That you use the part in (1) exclusively and regu-larly for business as either your principal place ofbusiness or as the place where you meet or dealwith clients or customers in the normal course ofyour business (however, see the earlier discussion,Exceptions to Exclusive Use), and

3) 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:

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

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

Keep records that support your basis in your homefor as long as they are needed to figure the correct

basis of your original or replacement home. For exam-ple, this includes records of your original purchaseprice, any improvements to your home and any depre-ciation you are allowed because you maintained an of-fice in your home. You can keep copies of Forms 8829or the Publication 587 worksheets as records of de-preciation.

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

Where To DeductDeduct expenses for the business use of your home

on Form 1040. Where you deduct these expenses onForm 1040 depends on whether you are:

1) An employee, or

2) A self-employed person.

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 a

statutory employee, use Schedule C (Form 1040) toclaim the expenses. Follow the instructions given laterunder Self-Employed Persons. The Statutory Employeebox within box 15 on your Form W-2 will be checked ifyou 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:

1) You claim any travel, transportation, meal, or

entertainment expenses, or2) 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 W2 are notconsidered paid by your employer).

However, you may use a simpler form, Form2106EZ, instead of Form 2106, if:

1) You were not reimbursed for your expenses by youremployer, or if you were reimbursed, the re-imbursement was included in box 1 of your FormW2, and

2) You use the standard mileage rate if you claim carexpenses.

When your employer pays for your expenses, thepayments generally should not be on your Form W2if you:

1) Are required to account, and do account, to youremployer for the expenses, and

2) Are required to return, and do return, any paymentsnot spent for business expenses.

If you account to your employer and your businessexpenses equal your reimbursement, do not report the

reimbursement as income and do not deduct the ex-penses.

Accounting to employer. You account to your em-ployer when you give your employer documentary evi-dence and an account book, diary, or similar statementto verify the amount, time, place, and business purposeof each expense. You are also treated as accountingto your employer if your employer gives you a fixedallowance under an accountable plan that is similar inform to an allowance specified by the federal govern-ment and you verify the time, place, and business pur-pose of each expense. For more information, get 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, even

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though you use part of your home for business. Todetermine if the limits on home mortgage interest applyto you, get the instructions for Schedule A or Publication936.

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 taxes, get Publication 530,Tax Information for First-Time Homeowners.

Casualty losses. Compute the deductible businesspart of casualty losses in Section B of Form 4684,Casualties and Thefts. Enter the business part of cas-ualty losses (line 31 of the worksheet) on line 27 ofForm 4684, Section B. Also complete lines 19 through26. Write See attached statement above line 27.

Other expenses. If you file Form 2106 or Form2106EZ, report the business part of your other ex-penses (utilities, maintenance, insurance, depreciation,etc.) that do not exceed the limit on line 4 of Form 2106(or Form 2106EZ). Add these to your other employee

business expenses and complete the rest of the form.Enter the total from line 10, Form 2106, or line 6, Form2106EZ, on line 20 of Schedule A, where it is subjectto the 2% of adjusted gross income limit. If you do nothave to file Form 2106 or Form 2106EZ, enter yourtotal expenses directly on line 20 of Schedule A.

Business expenses not for the use of your home.If you have any employee business expenses not at-tributable to the use of your home, such as advertising,and you were not reimbursed for them, and you are notclaiming travel, transportation, meal, or entertainmentexpenses, do not fill out Form 2106 or Form 2106EZ.Enter these expenses directly on line 20 of ScheduleA (Form 1040), where they are included with amountssubject to the 2% of adjusted gross income limit.

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 2106EZ.

As an employee, you do not have gross receipts,cost of goods sold, etc. You begin with gross incomefrom the business use of your home, which you deter-mine to be $6,000.

The percentage of expenses attributable to the

business use of your home is 20%. The business partof your mortgage interest and real estate taxes is$2,500. Deduct this amount on the lines of yourSchedule A (Form 1040) for interest and taxes. Subtractthis $2,500 from your gross income from the businessuse of your home. Your balance is $3,500.

Your total employee business expense related to thebusiness activity in your home, but not attributable tothe use of your home itself, such as advertising, sup-plies, and telephone use, is $2,000. Subtract this $2000from your balance of $3,500. Your other expenses forthe business use of your home cannot be more than$1,500.

The business part of your maintenance, insurance,and utilities expense for your home is $800. The busi-ness part of your depreciation is $1,600. Add $1,500($800 plus $700 of the depreciation expense) to the$2,000 for your other business expenses, and deductthe $3,500 total as a miscellaneous deduction on line20, Schedule A (Form 1040). It is then included withamounts subject to the 2% of adjusted gross incomelimit. Carry over the $900 of your depreciation expensethat exceeds the deduction limit to the next tax year,

subject to the deduction limit for that year.

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 34of 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 interest

on line 10 of Form 8829. After you have figured thebusiness part of the mortgage interest on Form 8829,subtract that amount from the total mortgage intereston line 10. The remainder is deductible on Schedule A(Form 1040), lines 10 and 11. Do not deduct any of thebusiness part on Schedule A. If the interest you deducton Schedule A for your home mortgage is limited, enterthe 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.

To determine if the limits on qualified home mortgageinterest apply to you, see the instructions for ScheduleA (Form 1040) or Publication 936.

Real estate taxes. If you file Schedule C (Form 1040),enter all your deductible real estate taxes on line 11 ofForm 8829. After you have figured the business partof your taxes on Form 8829, subtract that amount fromyour total real estate taxes on line 11. The remainderis deductible on Schedule A (Form 1040) 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 ofSchedule A (Form 1040).

Casualty losses. If you file Schedule F (Form 1040),enter the business part of casualty losses (line 31 if youuse the worksheet) on line 27 of Form 4684, SectionB. Also complete lines 19 through 26 of Section B. WriteSee attached statement above line 27.

If you are using Form 8829, refer to the specific in-structions for lines 9 and 27, and enter the amount fromline 33 on line 27 of Form 4684, Section B. Write SeeForm 8829 above line 27.

Page 15


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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 the gross income limit from thebusiness use of your home next year.

If you file Schedule F (Form 1040), include your other

home 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 the gross income limit from the business use of yourhome next year.

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 appropriate

lines 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.

Schedule C ExampleThe filled-in forms for John Stephens that follow showhow to report deductions for the business use of yourhome if you file Schedule C (Form 1040). The first pageof Schedule C, Form 8829, and Form 4562 are shownlater. Only the expenses and information that relate tothe business use of the home are discussed.

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

Line 13. John enters his section 179 expense de-duction for assets used in his home office on Form4562, shown later, and on line 13.

When John began using part of his home for busi-ness in 1986, his office furniture was 5-year propertyunder ACRS. Tax year 1990 was the last year of therecovery period for that property. He has recovered histotal depreciable basis in that property. He cannot de-duct any depreciation for that property in 1997.

In March 1997 he bought a file cabinet for $600 and

a copier for $2,500 to use in his business. He elects totake a section 179 deduction for both items.

John completes Part I of Form 4562. He enters thecost of both items, $3,100, on line 2 and completeslines 4 and 5. On line 6, he enters a description of eachitem, its cost and the cost he is electing to expense.He completes the remaining lines in Part I. He thenenters $3,100, the total section 179 deduction, on line13 of Schedule C.

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

Line 25. Because he had a separate telephone linein his home office that he used only for business, hecan deduct the expense for it of $347.

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

office deduction from line 34, Form 8829, on line 30 ofSchedule C.

Form 8829, Part I. John began to use one room of hishome exclusively and regularly to meet clients in Au-gust 1986. In Part I of Form 8829 he shows that, basedon the square footage, the room is 10% of his home.

Form 8829, Part II. He 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 real

estate taxes) relate to his entire home, he enters themin column (b) of lines 10 and 11. He then subtracts the$550 business part of these expenses (line 14) fromhis tentative business profit (line 8). The result, $25,781on 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 $25,121 balance of his deduction limit (line 26) isthe 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, he determines that the basis of his homeoffice (line 38) is $6,000. Because he began using theoffice in August 1986, it is 19-year real property underACRS. 1997 is the twelfth year of the recovery periodand, because he files his return based on the calendaryear, August is the eighth month of his tax year. UsingTable 6 in the Appendix of Publication 534, he finds that

the depreciation percentage for the twelfth year of therecovery period, for assets placed in service in theeighth month, is 4.2%. Therefore, his depreciation for1997 (line 40) is $252. He enters that amount in PartII on lines 28 and 30. Because it is less than the avail-able balance of his deduction limit (line 26), he candeduct the full depreciation.

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, $1,462,on lines 32 and 34, and on Schedule C, line 30.

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John St ephens

Tax Preparat ion

St ephens Tax Service

8 21 Union S t reetHomet own, IA 5276 1

46 5 0 0 0 0 0 1

7 6 3 3

34,280

34,280

34,280

34,280

25 3

310

25 6

347

26 7

7,949

26,3311,46 2

24,869

25 6

512

25 0

1,26 6

3 ,10 0

750

20 0

3506 0 0

0

0

0

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

Profit or Loss From Business(Sole Proprietorship)

Partnerships, joint ventures, etc., must file Form 1065.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 principal business code

(see page C-6)

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 1997? If No, see page C-2 for limit on losses

If you started or acquired this business during 1997, 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-2)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)

9

23

9

Taxes and licenses23

10

Travel, meals, and entertainment:24

Car and truck expenses

(see page C-3)

10

24a

11

Travela

Commissions and fees11

12Depletion12

Meals and en-

tertainment

b

Depreciation and section 179expense deduction (not included

in Part III) (see page C-3)

13

Enter 50% ofline 24b subjectto limitations(see page C-4)

c

13

14 Employee benefit programs

(other than on line 19)

24d

14

Subtract line 24c from line 24bd

25

15

Utilities25

Insurance (other than health)15

26Wages (less employment credits)26

Interest:16

16aMortgage (paid to banks, etc.)a

Other expenses (from line 48 on

page 2)

27

16bOtherb

17

Legal and professional

services

17

18Office expense18

19Pension and profit-sharing plans19

Rent or lease (see page C-4):20

20aVehicles, machinery, and equipmenta

b Other business property 20b

Total expenses before expenses for business use of home. Add lines 8 through 27 in columns 28 28

31

31

All investment is at risk.32a

32

Some investment is not

at risk.

32b

Schedule C (Form 1040) 1997For Paperwork Reduction Act Notice, see Form 1040 instructions.

(1) Cash (2) Accrual (3) Other (specify)

Business address (including suite or room no.)

City, town or post office, state, and ZIP code

Cat. No. 11334P

29

30

Tentative profit (loss). Subtract line 28 from line 7

Expenses for business use of your home. Attach Form 8829

29

30

Part I

Part II

27

Net profit or (loss). Subtract line 30 from line 29.

If a profit, enter on Form 1040, line 12, and ALSO on Schedule SE, line 2 (statutory employees,

see page C-5). Estates and trusts, enter on Form 1041, line 3.

If a loss, you MUST go on to line 32.

If you have a loss, check the box that describes your investment in this activity (see page C-5).

If you checked 32a, enter the loss on Form 1040, line 12, and ALSO on Schedule SE, line 2

(statutory employees, see page C-5). Estates and trusts, enter on Form 1041, line 3.

If you checked 32b, you MUST attach Form 6198.

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XX

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John St ephens 46 5 0 0 0 0 0 1

20 02,000

10

10

26,331

550

25,781

6 6 0

25,1216 6 0

25 225 2

1,46 2

1,46 2

75,00015,0 0 0

60,0006,000

25 24.2

25 2

4,5001,00 05,500

550

40 01,40 0

1,80 0

3,600

36 0

30 0

30 0

0

Expenses 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 inventory

or product samples. See instructions2 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


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 20

22 Multiply line 21, column (b) by line 7

23 Carryover of operating expenses from 1996 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 1996 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 instructions

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 1998

For Paperwork Reduction Act Notice, see page 3 of separate instructions. Cat. No. 13232M Form 8829 (1997)

12

3

4

5

6

7

24

25

26

30

31

32

33

34

35

36

37

38

39

40

41

42

27

28

29

2223

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) before

completing lines 920.

Printed on recycled paper

(99)

97

Page 18


19/23

John St ephens Tax Preparat ions 46 5-0 0 -0 0 0 1

3,10 0

18 ,0 0 0

3,10 03,10 0

0 18 ,0 0 0

3,10 0

6 0 02,500

6 0 02,500

File CabinetCopier

25 2

3,352

OMB No. 1545-0172Depreciat ion and Amort ization4562Form(Including Information on Listed Property)

Department of t he TreasuryInternal Revenue Service

AttachmentSequence No. 67 See separate instructions.

Identifying numberName(s) shown on return Business or activity to which this form relates

Election To Expense Certain Tangible Property (Section 179) (Note: If you have any listed property,complete Part V before you complete Part I.)

$18,0001Maximum dollar limitation. If an enterprise zone business, see page 2 of the instructions12Total cost of section 179 property placed in service. See page 2 of the instructions2

$200,0003Threshold cost of section 179 property before reduction in limitation34Reduction in limitation. Subtract

us internal revenue service: p587--1997

Documents