Filing Your Taxes Online is Fast, Easy and Secure.
Start now and receive your tax refund in as little as 7 days.

1. Get Answers

Your online questions are customized to your unique tax situation.

2. Maximize your Refund

Find tax credits for everything from school tuition to buying a hybri

3. E-File for FREE

E-file free with direct deposit to get your refund in as few as 7 days.

Filing your taxes with paper mail can be difficult and it could take weeks for your refund to arrive. IRS e-file is easy, fast and secure. There is no paperwork going to the IRS so tax refunds can be processed in as little as 7 days with direct deposit. As you prepare your taxes online, you can see your tax refund in real time.

FREE audit support and representation from an enrolled agent – NEW and only from H&R Block

2011 Irs Forms 1040

How Do I Amend My 2010 Tax ReturnFile Taxes Online For FreeIrs Forms 1040Mi 1040xWww H&rblock Com2011 Form 1040xH&r Block 2011 Tax Software1040nr EzFree Online Tax Filing1040ez Instructions 2012How Amend A Tax ReturnFile Amended Tax Return OnlineE File 2012 Tax ReturnFree State Tax Preparation SoftwareHrblock LoginIrs 1040xFile Free State TaxFree Federal Tax ReturnFile 2012 Taxes For Free1040x FreeFree Taxes1040 Ez File Online Free1040x Form 2012Military Tax FormHow To File Military Taxes1040ezformsFree Turbo Tax 2011File 2012 Taxes NowState Income Taxes 2012How To File 1040x OnlineAmended 2011 Tax Return1040easyTax Forms Ez2011 Income Tax Forms 1040ezHandr Block Free FileWww Irs Gov EitcFree Tax FilingTaxes 2012 FormsPrior Year Tax ReturnsTax Forms Download Ez 1040

2011 Irs Forms 1040

2011 irs forms 1040 3. 2011 irs forms 1040   Investment Expenses Table of Contents Topics - This chapter discusses: Useful Items - You may want to see: Limits on DeductionsPassive activity. 2011 irs forms 1040 Other income (nonpassive income). 2011 irs forms 1040 Expenses. 2011 irs forms 1040 Additional information. 2011 irs forms 1040 Interest ExpensesInvestment Interest Limit on Deduction Bond Premium AmortizationSpecial rules to determine amounts payable on a bond. 2011 irs forms 1040 Basis. 2011 irs forms 1040 How To Figure Amortization Choosing To Amortize How To Report Amortization Expenses of Producing IncomeFees to buy or sell. 2011 irs forms 1040 Including mutual fund or REMIC expenses in income. 2011 irs forms 1040 Nondeductible ExpensesUsed as collateral. 2011 irs forms 1040 Short-sale expenses. 2011 irs forms 1040 Expenses for both tax-exempt and taxable income. 2011 irs forms 1040 State income taxes. 2011 irs forms 1040 Nondeductible amount. 2011 irs forms 1040 Basis adjustment. 2011 irs forms 1040 How To Report Investment Expenses When To Report Investment Expenses Topics - This chapter discusses: Limits on Deductions , Interest Expenses , Bond Premium Amortization , Expenses of Producing Income , Nondeductible Expenses , How To Report Investment Expenses , and When To Report Investment Expenses . 2011 irs forms 1040 Useful Items - You may want to see: Publication 535 Business Expenses 925 Passive Activity and At-Risk Rules 929 Tax Rules for Children and Dependents Form (and Instructions) Schedule A (Form 1040) Itemized Deductions 4952 Investment Interest Expense Deduction See chapter 5, How To Get Tax Help , for information about getting these publications and forms. 2011 irs forms 1040 Limits on Deductions Your deductions for investment expenses may be limited by: The at-risk rules, The passive activity loss limits, The limit on investment interest, or The 2% limit on certain miscellaneous itemized deductions. 2011 irs forms 1040 The at-risk rules and passive activity rules are explained briefly in this section. 2011 irs forms 1040 The limit on investment interest is explained later in this chapter under Interest Expenses . 2011 irs forms 1040 The 2% limit is explained later in this chapter under Expenses of Producing Income . 2011 irs forms 1040 At-risk rules. 2011 irs forms 1040   Special at-risk rules apply to most income-producing activities. 2011 irs forms 1040 These rules limit the amount of loss you can deduct to the amount you risk losing in the activity. 2011 irs forms 1040 Generally, this is the cash and the adjusted basis of property you contribute to the activity. 2011 irs forms 1040 It also includes money you borrow for use in the activity if you are personally liable for repayment or if you use property not used in the activity as security for the loan. 2011 irs forms 1040 For more information, see Publication 925. 2011 irs forms 1040 Passive activity losses and credits. 2011 irs forms 1040   The amount of losses and tax credits you can claim from passive activities is limited. 2011 irs forms 1040 Generally, you are allowed to deduct passive activity losses only up to the amount of your passive activity income. 2011 irs forms 1040 Also, you can use credits from passive activities only against tax on the income from passive activities. 2011 irs forms 1040 There are exceptions for certain activities, such as rental real estate activities. 2011 irs forms 1040 Passive activity. 2011 irs forms 1040   A passive activity generally is any activity involving the conduct of any trade or business in which you do not materially participate and any rental activity. 2011 irs forms 1040 However, if you are involved in renting real estate, the activity is not a passive activity if both of the following are true. 2011 irs forms 1040 More than one-half of the personal services you perform during the year in all trades or businesses are performed in real property trades or businesses in which you materially participate. 2011 irs forms 1040 You perform more than 750 hours of services during the year in real property trades or businesses in which you materially participate. 2011 irs forms 1040  The term “trade or business” generally means any activity that involves the conduct of a trade or business, is conducted in anticipation of starting a trade or business, or involves certain research or experimental expenditures. 2011 irs forms 1040 However, it does not include rental activities or certain activities treated as incidental to holding property for investment. 2011 irs forms 1040   You are considered to materially participate in an activity if you are involved on a regular, continuous, and substantial basis in the operations of the activity. 2011 irs forms 1040 Other income (nonpassive income). 2011 irs forms 1040    Generally, you can use losses from passive activities only to offset income from passive activities. 2011 irs forms 1040 You cannot use passive activity losses to offset your other income, such as your wages or your portfolio income. 2011 irs forms 1040 Portfolio income includes gross income from interest, dividends, annuities, or royalties that is not derived in the ordinary course of a trade or business. 2011 irs forms 1040 It also includes gains or losses (not derived in the ordinary course of a trade or business) from the sale or trade of property (other than an interest in a passive activity) producing portfolio income or held for investment. 2011 irs forms 1040 This includes capital gain distributions from mutual funds (and other regulated investment companies) and real estate investment trusts. 2011 irs forms 1040   You cannot use passive activity losses to offset Alaska Permanent Fund dividends. 2011 irs forms 1040 Expenses. 2011 irs forms 1040   Do not include in the computation of your passive activity income or loss: Expenses (other than interest) that are clearly and directly allocable to your portfolio income, or Interest expense properly allocable to portfolio income. 2011 irs forms 1040 However, this interest and other expenses may be subject to other limits. 2011 irs forms 1040 These limits are explained in the rest of this chapter. 2011 irs forms 1040 Additional information. 2011 irs forms 1040   For more information about determining and reporting income and losses from passive activities, see Publication 925. 2011 irs forms 1040 Interest Expenses This section discusses interest expenses you may be able to deduct as an investor. 2011 irs forms 1040 For information on business interest, see chapter 4 of Publication 535. 2011 irs forms 1040 You cannot deduct personal interest expenses other than qualified home mortgage interest, as explained in Publication 936, Home Mortgage Interest Deduction, and interest on certain student loans, as explained in Publication 970. 2011 irs forms 1040 Investment Interest If you borrow money to buy property you hold for investment, the interest you pay is investment interest. 2011 irs forms 1040 You can deduct investment interest subject to the limit discussed later. 2011 irs forms 1040 However, you cannot deduct interest you incurred to produce tax-exempt income. 2011 irs forms 1040 See Tax-exempt income under Nondeductible Expenses, later. 2011 irs forms 1040 You also cannot deduct interest expenses on straddles discussed under Interest expense and carrying charges on straddles , later. 2011 irs forms 1040 Investment interest does not include any qualified home mortgage interest or any interest taken into account in computing income or loss from a passive activity. 2011 irs forms 1040 Investment property. 2011 irs forms 1040   Property held for investment includes property that produces interest, dividends, annuities, or royalties not derived in the ordinary course of a trade or business. 2011 irs forms 1040 It also includes property that produces gain or loss (not derived in the ordinary course of a trade or business) from the sale or trade of property producing these types of income or held for investment (other than an interest in a passive activity). 2011 irs forms 1040 Investment property also includes an interest in a trade or business activity in which you did not materially participate (other than a passive activity). 2011 irs forms 1040 Partners, shareholders, and beneficiaries. 2011 irs forms 1040   To determine your investment interest, combine your share of investment interest from a partnership, S corporation, estate, or trust with your other investment interest. 2011 irs forms 1040 Allocation of Interest Expense If you borrow money for business or personal purposes as well as for investment, you must allocate the debt among those purposes. 2011 irs forms 1040 Only the interest expense on the part of the debt used for investment purposes is treated as investment interest. 2011 irs forms 1040 The allocation is not affected by the use of property that secures the debt. 2011 irs forms 1040 Example 1. 2011 irs forms 1040 You borrow $10,000 and use $8,000 to buy stock. 2011 irs forms 1040 You use the other $2,000 to buy items for your home. 2011 irs forms 1040 Since 80% of the debt is used for, and allocated to, investment purposes, 80% of the interest on that debt is investment interest. 2011 irs forms 1040 The other 20% is nondeductible personal interest. 2011 irs forms 1040 Debt proceeds received in cash. 2011 irs forms 1040   If you receive debt proceeds in cash, the proceeds are generally not treated as investment property. 2011 irs forms 1040 Debt proceeds deposited in account. 2011 irs forms 1040   If you deposit debt proceeds in an account, that deposit is treated as investment property, regardless of whether the account bears interest. 2011 irs forms 1040 But, if you withdraw the funds and use them for another purpose, you must reallocate the debt to determine the amount considered to be for investment purposes. 2011 irs forms 1040 Example 2. 2011 irs forms 1040 Assume in Example 1 that you borrowed the money on March 1 and immediately bought the stock for $8,000. 2011 irs forms 1040 You did not buy the household items until June 1. 2011 irs forms 1040 You had deposited the $2,000 in the bank. 2011 irs forms 1040 You had no other transactions on the bank account until June. 2011 irs forms 1040 You did not sell the stock, and you made no principal payments on the debt. 2011 irs forms 1040 You paid interest from another account. 2011 irs forms 1040 The $8,000 is treated as being used for an investment purpose. 2011 irs forms 1040 The $2,000 is treated as being used for an investment purpose for the 3-month period. 2011 irs forms 1040 Your total interest expense for 3 months on this debt is investment interest. 2011 irs forms 1040 In June, when you spend the $2,000 for household items, you must begin to allocate 80% of the debt and the interest expense to investment purposes and 20% to personal purposes. 2011 irs forms 1040 Amounts paid within 30 days. 2011 irs forms 1040   If you receive loan proceeds in cash or if the loan proceeds are deposited in an account, you can treat any payment (up to the amount of the proceeds) made from any account you own, or from cash, as made from those proceeds. 2011 irs forms 1040 This applies to any payment made within 30 days before or after the proceeds are received in cash or deposited in your account. 2011 irs forms 1040   If you received the loan proceeds in cash, you can treat the payment as made on the date you received the cash instead of the date you actually made the payment. 2011 irs forms 1040 Payments on debt may require new allocation. 2011 irs forms 1040   As you repay a debt used for more than one purpose, you must reallocate the balance. 2011 irs forms 1040 You must first reduce the amount allocated to personal purposes by the repayment. 2011 irs forms 1040 You then reallocate the rest of the debt to find what part is for investment purposes. 2011 irs forms 1040 Example 3. 2011 irs forms 1040 If, in Example 2 , you repay $500 on November 1, the entire repayment is applied against the amount allocated to personal purposes. 2011 irs forms 1040 The debt balance is now allocated as $8,000 for investment purposes and $1,500 for personal purposes. 2011 irs forms 1040 Until the next reallocation is necessary, 84% ($8,000 ÷ $9,500) of the debt and the interest expense is allocated to investment. 2011 irs forms 1040 Pass-through entities. 2011 irs forms 1040   If you use borrowed funds to buy an interest in a partnership or S corporation, then the interest on those funds must be allocated based on the assets of the entity. 2011 irs forms 1040 If you contribute to the capital of the entity, you can make the allocation using any reasonable method. 2011 irs forms 1040 Additional allocation rules. 2011 irs forms 1040   For more information about allocating interest expense, see chapter 4 of Publication 535. 2011 irs forms 1040 When To Deduct Investment Interest If you use the cash method of accounting, you must pay the interest before you can deduct it. 2011 irs forms 1040 If you use an accrual method of accounting, you can deduct interest over the period it accrues, regardless of when you pay it. 2011 irs forms 1040 For an exception, see Unpaid expenses owed to related party under When To Report Investment Expenses, later in this chapter. 2011 irs forms 1040 Example. 2011 irs forms 1040 You borrowed $1,000 on August 26, 2013, payable in 90 days at 12% interest. 2011 irs forms 1040 On November 26, 2013, you paid this with a new note for $1,030, due on February 26, 2014. 2011 irs forms 1040 If you use the cash method of accounting, you cannot deduct any part of the $30 interest on your return for 2013 because you did not actually pay it. 2011 irs forms 1040 If you use an accrual method, you may be able to deduct a portion of the interest on the loans through December 31, 2013, on your return for 2013. 2011 irs forms 1040 Interest paid in advance. 2011 irs forms 1040   Generally, if you pay interest in advance for a period that goes beyond the end of the tax year, you must spread the interest over the tax years to which it belongs under the OID rules discussed in chapter 1. 2011 irs forms 1040 You can deduct in each year only the interest for that year. 2011 irs forms 1040 Interest on margin accounts. 2011 irs forms 1040   If you are a cash method taxpayer, you can deduct interest on margin accounts to buy taxable securities as investment interest in the year you paid it. 2011 irs forms 1040 You are considered to have paid interest on these accounts only when you actually pay the broker or when payment becomes available to the broker through your account. 2011 irs forms 1040 Payment may become available to the broker through your account when the broker collects dividends or interest for your account, or sells securities held for you or received from you. 2011 irs forms 1040   You cannot deduct any interest on money borrowed for personal reasons. 2011 irs forms 1040 Limit on interest deduction for market discount bonds. 2011 irs forms 1040   The amount you can deduct for interest expense you paid or accrued during the year to buy or carry a market discount bond may be limited. 2011 irs forms 1040 This limit does not apply if you accrue the market discount and include it in your income currently. 2011 irs forms 1040   Under this limit, the interest is deductible only to the extent it is more than: The total interest and OID includible in gross income for the bond for the year, plus The market discount for the number of days you held the bond during the year. 2011 irs forms 1040 Figure the amount in (2) above using the rules for figuring accrued market discount in chapter 1 under Market Discount Bonds . 2011 irs forms 1040 Interest not deducted due to limit. 2011 irs forms 1040   In the year you dispose of the bond, you can deduct any interest expense you were not allowed to deduct in earlier years because of the limit. 2011 irs forms 1040 Choosing to deduct disallowed interest expense before the year of disposition. 2011 irs forms 1040   You can choose to deduct disallowed interest expense in any year before the year you dispose of the bond, up to your net interest income from the bond during the year. 2011 irs forms 1040 The rest of the disallowed interest expense remains deductible in the year you dispose of the bond. 2011 irs forms 1040 Net interest income. 2011 irs forms 1040   This is the interest income (including OID) from the bond that you include in income for the year, minus the interest expense paid or accrued during the year to purchase or carry the bond. 2011 irs forms 1040 Limit on interest deduction for short-term obligations. 2011 irs forms 1040   If the current income inclusion rules discussed in chapter 1 under Discount on Short-Term Obligations do not apply to you, the amount you can deduct for interest expense you paid or accrued during the year to buy or carry a short-term obligation is limited. 2011 irs forms 1040   The interest is deductible only to the extent it is more than: The amount of acquisition discount or OID on the obligation for the tax year, plus The amount of any interest payable on the obligation for the year that is not included in income because of your accounting method (other than interest taken into account in determining the amount of acquisition discount or OID). 2011 irs forms 1040 The method of determining acquisition discount and OID for short-term obligations is discussed in chapter 1 under Discount on Short-Term Obligations . 2011 irs forms 1040 Interest not deducted due to limit. 2011 irs forms 1040   In the year you dispose of the obligation, or, if you choose, in another year in which you have net interest income from the obligation, you can deduct any interest expense you were not allowed to deduct for an earlier year because of the limit. 2011 irs forms 1040 Follow the same rules provided in the earlier discussion under Limit on interest deduction for market discount bonds , earlier. 2011 irs forms 1040 Limit on Deduction Generally, your deduction for investment interest expense is limited to your net investment income. 2011 irs forms 1040 You can carry over the amount of investment interest you could not deduct because of this limit to the next tax year. 2011 irs forms 1040 The interest carried over is treated as investment interest paid or accrued in that next year. 2011 irs forms 1040 You can carry over disallowed investment interest to the next tax year even if it is more than your taxable income in the year the interest was paid or accrued. 2011 irs forms 1040 Net Investment Income Determine the amount of your net investment income by subtracting your investment expenses (other than interest expense) from your investment income. 2011 irs forms 1040 Investment income. 2011 irs forms 1040   This generally includes your gross income from property held for investment (such as interest, dividends, annuities, and royalties). 2011 irs forms 1040 Investment income does not include Alaska Permanent Fund dividends. 2011 irs forms 1040 It also does not include qualified dividends or net capital gain unless you choose to include them. 2011 irs forms 1040 Choosing to include qualified dividends. 2011 irs forms 1040   Investment income generally does not include qualified dividends, discussed in chapter 1. 2011 irs forms 1040 However, you can choose to include all or part of your qualified dividends in investment income. 2011 irs forms 1040   You make this choice by completing Form 4952, line 4g, according to its instructions. 2011 irs forms 1040   If you choose to include any of your qualified dividends in investment income, you must reduce your qualified dividends that are eligible for the lower capital gains tax rates by the same amount. 2011 irs forms 1040 Choosing to include net capital gain. 2011 irs forms 1040    Investment income generally does not include net capital gain from disposing of investment property (including capital gain distributions from mutual funds). 2011 irs forms 1040 However, you can choose to include all or part of your net capital gain in investment income. 2011 irs forms 1040   You make this choice by completing Form 4952, line 4g, according to its instructions. 2011 irs forms 1040   If you choose to include any of your net capital gain in investment income, you must reduce your net capital gain that is eligible for the lower capital gains tax rates by the same amount. 2011 irs forms 1040   For more information about the capital gains rates, see Capital Gain Tax Rates in chapter 4. 2011 irs forms 1040    Before making either choice, consider the overall effect on your tax liability. 2011 irs forms 1040 Compare your tax if you make one or both of these choices with your tax if you do not. 2011 irs forms 1040 Investment income of child reported on parent's return. 2011 irs forms 1040   Investment income includes the part of your child's interest and dividend income you choose to report on your return. 2011 irs forms 1040 If the child does not have qualified dividends, Alaska Permanent Fund dividends, or capital gain distributions, this is the amount on line 6 of Form 8814. 2011 irs forms 1040 Include it on line 4a of Form 4952. 2011 irs forms 1040 Example. 2011 irs forms 1040 Your 8-year-old son has interest income of $2,200, which you choose to report on your own return. 2011 irs forms 1040 You enter $2,200 on Form 8814, lines 1a and 4, and $200 on lines 6 and 12 and complete Part II. 2011 irs forms 1040 Also enter $200 on Form 1040, line 21. 2011 irs forms 1040 Your investment income includes this $200. 2011 irs forms 1040 Child's qualified dividends. 2011 irs forms 1040   If part of the amount you report is your child's qualified dividends, that part (which is reported on Form 1040, line 9b) generally does not count as investment income. 2011 irs forms 1040 However, you can choose to include all or part of it in investment income, as explained under Choosing to include qualified dividends , earlier. 2011 irs forms 1040   Your investment income also includes the amount on Form 8814, line 12 (or, if applicable, the reduced amount figured next under Child's Alaska Permanent Fund dividends). 2011 irs forms 1040 Child's Alaska Permanent Fund dividends. 2011 irs forms 1040   If part of the amount you report is your child's Alaska Permanent Fund dividends, that part does not count as investment income. 2011 irs forms 1040 To figure the amount of your child's income that you can consider your investment income, start with the amount on Form 8814, line 6. 2011 irs forms 1040 Multiply that amount by a percentage that is equal to the Alaska Permanent Fund dividends divided by the total amount on Form 8814, line 4. 2011 irs forms 1040 Subtract the result from the amount on Form 8814, line 12. 2011 irs forms 1040 Example. 2011 irs forms 1040 Your 10-year-old child has taxable interest income of $4,000 and Alaska Permanent Fund dividends of $2,000. 2011 irs forms 1040 You choose to report this on your return. 2011 irs forms 1040 You enter $4,000 on Form 8814, line 1a, $2,000 on line 2a, and $6,000 on line 4. 2011 irs forms 1040 You then enter $4,000 on Form 8814, lines 6 and 12, and Form 1040, line 21. 2011 irs forms 1040 You figure the amount of your child's income that you can consider your investment income as follows: $4,000 − ($4,000 × ($2,000 ÷ $6,000)) = $2,667 You include the result, $2,667, on Form 4952, line 4a. 2011 irs forms 1040 Child's capital gain distributions. 2011 irs forms 1040   If part of the amount you report is your child's capital gain distributions, that part (which is reported on Schedule D (Form 1040), line 13, or Form 1040, line 13) generally does not count as investment income. 2011 irs forms 1040 However, you can choose to include all or part of it in investment income, as explained in Choosing to include net capital gain , earlier. 2011 irs forms 1040   Your investment income also includes the amount on Form 8814, line 12 (or, if applicable, the reduced amount figured under Child's Alaska Permanent Fund dividends , earlier). 2011 irs forms 1040 Investment expenses. 2011 irs forms 1040   Investment expenses are your allowed deductions (other than interest expense) directly connected with the production of investment income. 2011 irs forms 1040 Investment expenses that are included as a miscellaneous itemized deduction on Schedule A (Form 1040) are allowable deductions after applying the 2% limit that applies to miscellaneous itemized deductions. 2011 irs forms 1040 Use the smaller of: The investment expenses included on Schedule A (Form 1040), line 23, or The amount on Schedule A (Form 1040), line 27. 2011 irs forms 1040 See Expenses of Producing Income , later, for a discussion of the 2% limit. 2011 irs forms 1040 Losses from passive activities. 2011 irs forms 1040   Income or expenses that you used in computing income or loss from a passive activity are not included in determining your investment income or investment expenses (including investment interest expense). 2011 irs forms 1040 See Publication 925 for information about passive activities. 2011 irs forms 1040 Example. 2011 irs forms 1040 Ted is a partner in a partnership that operates a business. 2011 irs forms 1040 However, he does not materially participate in the partnership's business. 2011 irs forms 1040 Ted's interest in the partnership is considered a passive activity. 2011 irs forms 1040 Ted's investment income from interest and dividends (other than qualified dividends) is $10,000. 2011 irs forms 1040 His investment expenses (other than interest) are $3,200 after taking into account the 2% limit on miscellaneous itemized deductions. 2011 irs forms 1040 His investment interest expense is $8,000. 2011 irs forms 1040 Ted also has income from the partnership of $2,000. 2011 irs forms 1040 Ted figures his net investment income and the limit on his investment interest expense deduction in the following way: Total investment income $10,000 Minus: Investment expenses (other than interest) 3,200 Net investment income $6,800 Deductible investment interest expense for the year $6,800 The $2,000 of income from the passive activity is not used in determining Ted's net investment income. 2011 irs forms 1040 His investment interest deduction for the year is limited to $6,800, the amount of his net investment income. 2011 irs forms 1040 Form 4952 Use Form 4952 to figure your deduction for investment interest. 2011 irs forms 1040 See Form 4952 for more information. 2011 irs forms 1040 Exception to use of Form 4952. 2011 irs forms 1040   You do not have to complete Form 4952 or attach it to your return if you meet all of the following tests. 2011 irs forms 1040 Your investment interest expense is not more than your investment income from interest and ordinary dividends minus any qualified dividends. 2011 irs forms 1040 You do not have any other deductible investment expenses. 2011 irs forms 1040 You have no carryover of investment interest expense from 2012. 2011 irs forms 1040   If you meet all of these tests, you can deduct all of your investment interest. 2011 irs forms 1040    Bond Premium Amortization If you pay a premium to buy a bond, the premium is part of your basis in the bond. 2011 irs forms 1040 If the bond yields taxable interest, you can choose to amortize the premium. 2011 irs forms 1040 This generally means that each year, over the life of the bond, you use a part of the premium to reduce the amount of interest includible in your income. 2011 irs forms 1040 If you make this choice, you must reduce your basis in the bond by the amortization for the year. 2011 irs forms 1040 If the bond yields tax-exempt interest, you must amortize the premium. 2011 irs forms 1040 This amortized amount is not deductible in determining taxable income. 2011 irs forms 1040 However, each year you must reduce your basis in the bond (and tax-exempt interest otherwise reportable on Form 1040, line 8b) by the amortization for the year. 2011 irs forms 1040 Bond premium. 2011 irs forms 1040   Bond premium is the amount by which your basis in the bond right after you get it is more than the total of all amounts payable on the bond after you get it (other than payments of qualified stated interest). 2011 irs forms 1040 For example, a bond with a maturity value of $1,000 generally would have a $50 premium if you buy it for $1,050. 2011 irs forms 1040 Special rules to determine amounts payable on a bond. 2011 irs forms 1040   For special rules that apply to determine the amounts payable on a variable rate bond, an inflation-indexed debt instrument, a bond that provides for certain alternative payment schedules (for example, a bond callable prior to the stated maturity date of the bond), or a bond that provides for remote or incidental contingencies, see Regulations section 1. 2011 irs forms 1040 171-3. 2011 irs forms 1040 Basis. 2011 irs forms 1040   In general, your basis for figuring bond premium amortization is the same as your basis for figuring any loss on the sale of the bond. 2011 irs forms 1040 However, you may need to use a different basis for: Convertible bonds, Bonds you got in a trade, and Bonds whose basis has to be determined using the basis of the person who transferred the bond to you. 2011 irs forms 1040 See Regulations section 1. 2011 irs forms 1040 171-1(e). 2011 irs forms 1040 Dealers. 2011 irs forms 1040   A dealer in taxable bonds (or anyone who holds them mainly for sale to customers in the ordinary course of a trade or business or who would properly include bonds in inventory at the close of the tax year) cannot claim a deduction for amortizable bond premium. 2011 irs forms 1040   See section 75 of the Internal Revenue Code for the treatment of bond premium by a dealer in tax-exempt bonds. 2011 irs forms 1040 How To Figure Amortization For bonds issued after September 27, 1985, you must amortize bond premium using a constant yield method on the basis of the bond's yield to maturity, determined by using the bond's basis and compounding at the close of each accrual period. 2011 irs forms 1040 Constant yield method. 2011 irs forms 1040   Figure the bond premium amortization for each accrual period as follows. 2011 irs forms 1040 Step 1: Determine your yield. 2011 irs forms 1040   Your yield is the discount rate that, when used in figuring the present value of all remaining payments to be made on the bond (including payments of qualified stated interest), produces an amount equal to your basis in the bond. 2011 irs forms 1040 Figure the yield as of the date you got the bond. 2011 irs forms 1040 It must be constant over the term of the bond and must be figured to at least two decimal places when expressed as a percentage. 2011 irs forms 1040   If you do not know the yield, consult your broker or tax advisor. 2011 irs forms 1040 Databases available to them are likely to show the yield at the date of purchase. 2011 irs forms 1040 Step 2: Determine the accrual periods. 2011 irs forms 1040   You can choose the accrual periods to use. 2011 irs forms 1040 They may be of any length and may vary in length over the term of the bond, but each accrual period can be no longer than 1 year and each scheduled payment of principal or interest must occur either on the first or the final day of an accrual period. 2011 irs forms 1040 The computation is simplest if accrual periods are the same as the intervals between interest payment dates. 2011 irs forms 1040 Step 3: Determine the bond premium for the accrual period. 2011 irs forms 1040   To do this, multiply your adjusted acquisition price at the beginning of the accrual period by your yield. 2011 irs forms 1040 Then subtract the result from the qualified stated interest for the period. 2011 irs forms 1040   Your adjusted acquisition price at the beginning of the first accrual period is the same as your basis. 2011 irs forms 1040 After that, it is your basis decreased by the amount of bond premium amortized for earlier periods and the amount of any payment previously made on the bond other than a payment of qualified stated interest. 2011 irs forms 1040 Example. 2011 irs forms 1040 On February 1, 2012, you bought a taxable bond for $110,000. 2011 irs forms 1040 The bond has a stated principal amount of $100,000, payable at maturity on February 1, 2019, making your premium $10,000 ($110,000 − $100,000). 2011 irs forms 1040 The bond pays qualified stated interest of $10,000 on February 1 of each year. 2011 irs forms 1040 Your yield is 8. 2011 irs forms 1040 07439% compounded annually. 2011 irs forms 1040 You choose to use annual accrual periods ending on February 1 of each year. 2011 irs forms 1040 To find your bond premium amortization for the accrual period ending on February 1, 2013, you multiply the adjusted acquisition price at the beginning of the period ($110,000) by your yield. 2011 irs forms 1040 When you subtract the result ($8,881. 2011 irs forms 1040 83) from the qualified stated interest for the period ($10,000), you find that your bond premium amortization for the period is $1,118. 2011 irs forms 1040 17. 2011 irs forms 1040 Special rules to figure amortization. 2011 irs forms 1040   For special rules to figure the bond premium amortization on a variable rate bond, an inflation-indexed debt instrument, a bond that provides for certain alternative payment schedules (for example, a bond callable prior to the stated maturity date of the bond), or a bond that provides for remote or incidental contingencies, see Regulations section 1. 2011 irs forms 1040 171-3. 2011 irs forms 1040 Bonds Issued Before September 28, 1985 For these bonds, you can amortize bond premium using any reasonable method. 2011 irs forms 1040 Reasonable methods include: The straight-line method, and The Revenue Ruling 82-10 method. 2011 irs forms 1040 Straight-line method. 2011 irs forms 1040   Under this method, the amount of your bond premium amortization is the same each month. 2011 irs forms 1040 Divide the number of months you held the bond during the year by the number of months from the beginning of the tax year (or, if later, the date of acquisition) to the date of maturity or earlier call date. 2011 irs forms 1040 Then multiply the result by the bond premium (reduced by any bond premium amortization claimed in earlier years). 2011 irs forms 1040 This gives you your bond premium amortization for the year. 2011 irs forms 1040 Revenue Ruling 82-10 method. 2011 irs forms 1040   Under this method, the amount of your bond premium amortization increases each month over the life of the bond. 2011 irs forms 1040 This method is explained in Revenue Ruling 82-10, 1982-1 C. 2011 irs forms 1040 B. 2011 irs forms 1040 46. 2011 irs forms 1040 Choosing To Amortize You choose to amortize the premium on taxable bonds by reporting the amortization for the year on your income tax return for the first tax year you want the choice to apply. 2011 irs forms 1040 You should attach a statement to your return that you are making this choice under section 171. 2011 irs forms 1040 See How To Report Amortization, next. 2011 irs forms 1040 This choice is binding for the year you make it and for later tax years. 2011 irs forms 1040 It applies to all taxable bonds you own in the year you make the choice and also to those you acquire in later years. 2011 irs forms 1040 You can change your decision to amortize bond premium only with the written approval of the IRS. 2011 irs forms 1040 To request approval, use Form 3115. 2011 irs forms 1040 For more information on requesting approval, see section 5 of the Appendix to Revenue Procedure 2011-14 in Internal Revenue Bulletin 2011-4. 2011 irs forms 1040 You can find Revenue Procedure 2011-14 at www. 2011 irs forms 1040 irs. 2011 irs forms 1040 gov/irb/2011-04_IRB/ar08. 2011 irs forms 1040 html. 2011 irs forms 1040 How To Report Amortization Subtract the bond premium amortization from your interest income from these bonds. 2011 irs forms 1040 Report the bond's interest on Schedule B (Form 1040A or 1040), line 1. 2011 irs forms 1040 Under your last entry on line 1, put a subtotal of all interest listed on line 1. 2011 irs forms 1040 Below this subtotal, print “ABP Adjustment,” and the total interest you received. 2011 irs forms 1040 Subtract this amount from the subtotal, and enter the result on line 2. 2011 irs forms 1040 Bond premium amortization more than interest. 2011 irs forms 1040   If the amount of your bond premium amortization for an accrual period is more than the qualified stated interest for the period, you can deduct the difference as a miscellaneous itemized deduction on Schedule A (Form 1040), line 28. 2011 irs forms 1040    But your deduction is limited to the amount by which your total interest inclusions on the bond in prior accrual periods is more than your total bond premium deductions on the bond in prior periods. 2011 irs forms 1040 Any amount you cannot deduct because of this limit can be carried forward to the next accrual period. 2011 irs forms 1040 Pre-1998 election to amortize bond premium. 2011 irs forms 1040   Generally, if you first elected to amortize bond premium before 1998, the above treatment of the premium does not apply to bonds you acquired before 1988. 2011 irs forms 1040 Bonds acquired before October 23, 1986. 2011 irs forms 1040   The amortization of the premium on these bonds is a miscellaneous itemized deduction not subject to the 2%-of-adjusted-gross-income limit. 2011 irs forms 1040 Bonds acquired after October 22, 1986, but before 1988. 2011 irs forms 1040    The amortization of the premium on these bonds is investment interest expense subject to the investment interest limit, unless you choose to treat it as an offset to interest income on the bond. 2011 irs forms 1040 Expenses of Producing Income You deduct investment expenses (other than interest expenses) as miscellaneous itemized deductions on Schedule A (Form 1040). 2011 irs forms 1040 To be deductible, these expenses must be ordinary and necessary expenses paid or incurred: To produce or collect income, or To manage property held for producing income. 2011 irs forms 1040 The expenses must be directly related to the income or income-producing property, and the income must be taxable to you. 2011 irs forms 1040 The deduction for most income-producing expenses is subject to a 2% limit that also applies to certain other miscellaneous itemized deductions. 2011 irs forms 1040 The amount deductible is limited to the total of these miscellaneous deductions that is more than 2% of your adjusted gross income. 2011 irs forms 1040 For information on how to report expenses of producing income, see How To Report Investment Expenses , later. 2011 irs forms 1040 Attorney or accounting fees. 2011 irs forms 1040   You can deduct attorney or accounting fees that are necessary to produce or collect taxable income. 2011 irs forms 1040 However, in some cases, attorney or accounting fees are part of the basis of property. 2011 irs forms 1040 See Basis of Investment Property in chapter 4. 2011 irs forms 1040 Automatic investment service and dividend reinvestment plans. 2011 irs forms 1040   A bank may offer its checking account customers an automatic investment service so that, for a charge, each customer can choose to invest a part of the checking account each month in common stock. 2011 irs forms 1040 Or a bank that is a dividend disbursing agent for a number of publicly-owned corporations may set up an automatic dividend reinvestment service. 2011 irs forms 1040 Through that service, cash dividends are reinvested in more shares of stock after the bank deducts a service charge. 2011 irs forms 1040   A corporation in which you own stock also may have a dividend reinvestment plan. 2011 irs forms 1040 This plan lets you choose to use your dividends to buy more shares of stock in the corporation instead of receiving the dividends in cash. 2011 irs forms 1040   You can deduct the monthly service charge you pay to a bank to participate in an automatic investment service. 2011 irs forms 1040 If you participate in a dividend reinvestment plan, you can deduct any service charge subtracted from your cash dividends before the dividends are used to buy more shares of stock. 2011 irs forms 1040 Deduct the charges in the year you pay them. 2011 irs forms 1040 Clerical help and office rent. 2011 irs forms 1040   You can deduct office expenses, such as rent and clerical help, you incurred in connection with your investments and collecting the taxable income on your investments. 2011 irs forms 1040 Cost of replacing missing securities. 2011 irs forms 1040   To replace your taxable securities that are mislaid, lost, stolen, or destroyed, you may have to post an indemnity bond. 2011 irs forms 1040 You can deduct the premium you pay to buy the indemnity bond and the related incidental expenses. 2011 irs forms 1040   You may, however, get a refund of part of the bond premium if the missing securities are recovered within a specified time. 2011 irs forms 1040 Under certain types of insurance policies, you can recover some of the expenses. 2011 irs forms 1040   If you receive the refund in the tax year you pay the amounts, you can deduct only the difference between the expenses paid and the amount refunded. 2011 irs forms 1040 If the refund is made in a later tax year, you must include the refund in income in the year you received it, but only to the extent that the expenses decreased your tax in the year you deducted them. 2011 irs forms 1040 Fees to collect income. 2011 irs forms 1040   You can deduct fees you pay to a broker, bank, trustee, or similar agent to collect investment income, such as your taxable bond or mortgage interest, or your dividends on shares of stock. 2011 irs forms 1040 Fees to buy or sell. 2011 irs forms 1040   You cannot deduct a fee you pay to a broker to acquire investment property, such as stocks or bonds. 2011 irs forms 1040 You must add the fee to the cost of the property. 2011 irs forms 1040 See Basis of Investment Property in chapter 4. 2011 irs forms 1040    You cannot deduct any broker's fees, commissions, or option premiums you pay (or that were netted out) in connection with the sale of investment property. 2011 irs forms 1040 They can be used only to figure gain or loss from the sale. 2011 irs forms 1040 See Reporting Capital Gains and Losses , in chapter 4, for more information about the treatment of these sale expenses. 2011 irs forms 1040 Investment counsel and advice. 2011 irs forms 1040   You can deduct fees you pay for counsel and advice about investments that produce taxable income. 2011 irs forms 1040 This includes amounts you pay for investment advisory services. 2011 irs forms 1040 Safe deposit box rent. 2011 irs forms 1040   You can deduct rent you pay for a safe deposit box if you use the box to store taxable income-producing stocks, bonds, or other investment-related papers and documents. 2011 irs forms 1040 If you also use the box to store tax-exempt securities or personal items, you can deduct only part of the rent. 2011 irs forms 1040 See Tax-exempt income under Nondeductible Expenses, later, to figure what part you can deduct. 2011 irs forms 1040 State and local transfer taxes. 2011 irs forms 1040   You cannot deduct the state and local transfer taxes you pay when you buy or sell securities. 2011 irs forms 1040 If you pay these transfer taxes when you buy securities, you must treat them as part of the cost of the property. 2011 irs forms 1040 If you pay these transfer taxes when you sell securities, you must treat them as a reduction in the amount realized. 2011 irs forms 1040 Trustee's commissions for revocable trust. 2011 irs forms 1040   If you set up a revocable trust and have its income distributed to you, you can deduct the commission you pay the trustee for managing the trust to the extent it is to produce or collect taxable income or to manage property. 2011 irs forms 1040 However, you cannot deduct any part of the commission used for producing or collecting tax-exempt income or for managing property that produces tax-exempt income. 2011 irs forms 1040   If you are a cash-basis taxpayer and pay the commissions for several years in advance, you must deduct a part of the commission each year. 2011 irs forms 1040 You cannot deduct the entire amount in the year you pay it. 2011 irs forms 1040 Investment expenses from pass-through entities. 2011 irs forms 1040   If you hold an interest in a partnership, S corporation, real estate mortgage investment conduit (REMIC), or a nonpublicly offered mutual fund, you can deduct your share of that entity's investment expenses. 2011 irs forms 1040 A partnership or S corporation will show your share of these expenses on your Schedule K-1 (Form 1065) or Schedule K-1 (Form 1120S). 2011 irs forms 1040 A nonpublicly offered mutual fund will indicate your share of these expenses in box 5 of Form 1099-DIV (or substitute statement). 2011 irs forms 1040 Publicly-offered mutual funds are discussed later. 2011 irs forms 1040   If you hold an interest in a REMIC, any expenses relating to your residual interest investment will be shown on Schedule Q (Form 1066), line 3b. 2011 irs forms 1040 Any expenses relating to your regular interest investment will appear in box 5 of Form 1099-INT (or substitute statement) or box 9 of Form 1099-OID (or substitute statement). 2011 irs forms 1040   Report your share of these investment expenses on Schedule A (Form 1040), subject to the 2% limit, in the same manner as your other investment expenses. 2011 irs forms 1040 Including mutual fund or REMIC expenses in income. 2011 irs forms 1040   Your share of the investment expenses of a REMIC or a nonpublicly offered mutual fund, as described above, are considered to be indirect deductions through that pass-through entity. 2011 irs forms 1040 You must include in your gross income an amount equal to the expenses allocated to you, whether or not you are able to claim a deduction for those expenses. 2011 irs forms 1040 If you are a shareholder in a nonpublicly offered mutual fund, you must include on your return the full amount of ordinary dividends or other distributions of stock, as shown in box 1a of Form 1099-DIV (or substitute statement). 2011 irs forms 1040 If you are a residual interest holder in a REMIC, you must report as ordinary income on Schedule E (Form 1040) the total amounts shown on Schedule Q (Form 1066), lines 1b and 3b. 2011 irs forms 1040 If you are a REMIC regular interest holder, you must include the amount of any expense allocation you received on Form 1040, line 8a. 2011 irs forms 1040 Publicly-offered mutual funds. 2011 irs forms 1040   Most mutual funds are publicly offered. 2011 irs forms 1040 These mutual funds, generally, are traded on an established securities exchange. 2011 irs forms 1040 These funds do not pass investment expenses through to you. 2011 irs forms 1040 Instead, the dividend income they report to you in box 1a of Form 1099-DIV (or substitute statement) is already reduced by your share of investment expenses. 2011 irs forms 1040 As a result, you cannot deduct the expenses on your return. 2011 irs forms 1040   Include the amount from box 1a of Form 1099-DIV (or substitute statement) in your income. 2011 irs forms 1040    A publicly offered mutual fund is one that: Is continuously offered pursuant to a public offering, Is regularly traded on an established securities market, and Is held by or for no fewer than 500 persons at any time during the year. 2011 irs forms 1040 Contact your mutual fund if you are not sure whether it is publicly offered. 2011 irs forms 1040 Nondeductible Expenses Some expenses that you incur as an investor are not deductible. 2011 irs forms 1040 Stockholders' meetings. 2011 irs forms 1040   You cannot deduct transportation and other expenses you pay to attend stockholders' meetings of companies in which you have no interest other than owning stock. 2011 irs forms 1040 This is true even if your purpose in attending is to get information that would be useful in making further investments. 2011 irs forms 1040 Investment-related seminar. 2011 irs forms 1040   You cannot deduct expenses for attending a convention, seminar, or similar meeting for investment purposes. 2011 irs forms 1040 Single-premium life insurance, endowment, and annuity contracts. 2011 irs forms 1040   You cannot deduct interest on money you borrow to buy or carry a single-premium life insurance, endowment, or annuity contract. 2011 irs forms 1040 Used as collateral. 2011 irs forms 1040   If you use a single premium annuity contract as collateral to obtain or continue a mortgage loan, you cannot deduct any interest on the loan that is collateralized by the annuity contract. 2011 irs forms 1040 Figure the amount of interest expense disallowed by multiplying the current interest rate on the mortgage loan by the lesser of the amount of the annuity contract used as collateral or the amount of the loan. 2011 irs forms 1040 Borrowing on insurance. 2011 irs forms 1040   Generally, you cannot deduct interest on money you borrow to buy or carry a life insurance, endowment, or annuity contract if you plan to systematically borrow part or all of the increases in the cash value of the contract. 2011 irs forms 1040 This rule applies to the interest on the total amount borrowed to buy or carry the contract, not just the interest on the borrowed increases in the cash value. 2011 irs forms 1040 Tax-exempt income. 2011 irs forms 1040   You cannot deduct expenses you incur to produce tax-exempt income. 2011 irs forms 1040 Nor can you deduct interest on money you borrow to buy tax-exempt securities or shares in a mutual fund or other regulated investment company that distributes only exempt-interest dividends. 2011 irs forms 1040 Short-sale expenses. 2011 irs forms 1040   The rule disallowing a deduction for interest expenses on tax-exempt securities applies to amounts you pay in connection with personal property used in a short sale or amounts paid by others for the use of any collateral in connection with the short sale. 2011 irs forms 1040 However, it does not apply to the expenses you incur if you deposit cash as collateral for the property used in the short sale and the cash does not earn a material return during the period of the sale. 2011 irs forms 1040 Short sales are discussed in Short Sales in chapter 4. 2011 irs forms 1040 Expenses for both tax-exempt and taxable income. 2011 irs forms 1040   You may have expenses that are for both tax-exempt and taxable income. 2011 irs forms 1040 If you cannot specifically identify what part of the expenses is for each type of income, you can divide the expenses, using reasonable proportions based on facts and circumstances. 2011 irs forms 1040 You must attach a statement to your return showing how you divided the expenses and stating that each deduction claimed is not based on tax-exempt income. 2011 irs forms 1040   One accepted method for dividing expenses is to do it in the same proportion that each type of income is to the total income. 2011 irs forms 1040 If the expenses relate in part to capital gains and losses, include the gains, but not the losses, in figuring this proportion. 2011 irs forms 1040 To find the part of the expenses that is for the tax-exempt income, divide your tax-exempt income by the total income and multiply your expenses by the result. 2011 irs forms 1040 Example. 2011 irs forms 1040 You received $6,000 interest; $4,800 was tax-exempt and $1,200 was taxable. 2011 irs forms 1040 In earning this income, you had $500 of expenses. 2011 irs forms 1040 You cannot specifically identify the amount of each expense item that is for each income item, so you must divide your expenses. 2011 irs forms 1040 80% ($4,800 tax-exempt interest divided by $6,000 total interest) of your expenses is for the tax-exempt income. 2011 irs forms 1040 You cannot deduct $400 (80% of $500) of the expenses. 2011 irs forms 1040 You can deduct $100 (the rest of the expenses) because they are for the taxable interest. 2011 irs forms 1040 State income taxes. 2011 irs forms 1040   If you itemize your deductions, you can deduct, as taxes, state income taxes on interest income that is exempt from federal income tax. 2011 irs forms 1040 But you cannot deduct, as either taxes or investment expenses, state income taxes on other exempt income. 2011 irs forms 1040 Interest expense and carrying charges on straddles. 2011 irs forms 1040   You cannot deduct interest and carrying charges allocable to personal property that is part of a straddle. 2011 irs forms 1040 The nondeductible interest and carrying charges are added to the basis of the straddle property. 2011 irs forms 1040 However, this treatment does not apply if: All the offsetting positions making up the straddle either consist of one or more qualified covered call options and the optioned stock, or consist of section 1256 contracts (and the straddle is not part of a larger straddle); or The straddle is a hedging transaction. 2011 irs forms 1040  For information about straddles, including definitions of the terms used in this discussion, see Straddles in chapter 4. 2011 irs forms 1040   Interest includes any amount you pay or incur in connection with personal property used in a short sale. 2011 irs forms 1040 However, you must first apply the rules discussed in Payments in lieu of dividends under Short Sales in chapter 4. 2011 irs forms 1040   To determine the interest on market discount bonds and short-term obligations that are part of a straddle, you must first apply the rules discussed under Limit on interest deduction for market discount bonds and Limit on interest deduction for short-term obligations (both under Interest Expenses, earlier). 2011 irs forms 1040 Nondeductible amount. 2011 irs forms 1040   Figure the nondeductible interest and carrying charges on straddle property as follows. 2011 irs forms 1040 Add: Interest on indebtedness incurred or continued to buy or carry the personal property, and All other amounts (including charges to insure, store, or transport the personal property) paid or incurred to carry the personal property. 2011 irs forms 1040 Subtract from the amount in (1): Interest (including OID) includible in gross income for the year on the personal property, Any income from the personal property treated as ordinary income on the disposition of short-term government obligations or as ordinary income under the market discount and short-term bond provisions — see Discount on Debt Instruments in chapter 1, The dividends includible in gross income for the year from the personal property, and Any payment on a loan of the personal property for use in a short sale that is includible in gross income. 2011 irs forms 1040 Basis adjustment. 2011 irs forms 1040   Add the nondeductible amount to the basis of your straddle property. 2011 irs forms 1040 How To Report Investment Expenses To deduct your investment expenses, you must itemize deductions on Schedule A (Form 1040). 2011 irs forms 1040 Enter your deductible investment interest expense on Schedule A (Form1040), line 14. 2011 irs forms 1040 Include any deductible short sale expenses. 2011 irs forms 1040 (See Short Sales in chapter 4 for information on these expenses. 2011 irs forms 1040 ) Also attach a completed Form 4952 if you used that form to figure your investment interest expense. 2011 irs forms 1040 Enter the total amount of your other investment expenses (other than interest expenses) on Schedule A (Form 1040), line 23. 2011 irs forms 1040 List the type and amount of each expense on the dotted lines next to line 23. 2011 irs forms 1040 (If necessary, you can show the required information on an attached statement. 2011 irs forms 1040 ) For information on how to report amortizable bond premium, see Bond Premium Amortization , earlier in this chapter. 2011 irs forms 1040 When To Report Investment Expenses If you use the cash method to report income and expenses, you generally deduct your expenses, except for certain prepaid interest, in the year you pay them. 2011 irs forms 1040 If you use an accrual method, you generally deduct your expenses when you incur a liability for them, rather than when you pay them. 2011 irs forms 1040 Also see When To Deduct Investment Interest , earlier in this chapter. 2011 irs forms 1040 Unpaid expenses owed to related party. 2011 irs forms 1040   If you use an accrual method, you cannot deduct interest and other expenses owed to a related cash-basis person until payment is made and the amount is includible in the gross income of that person. 2011 irs forms 1040 The relationship, for purposes of this rule, is determined as of the end of the tax year for which the interest or expense would otherwise be deductible. 2011 irs forms 1040 If a deduction is denied under this rule, this rule will continue to apply even if your relationship with the person ceases to exist before the amount is includible in the gross income of that person. 2011 irs forms 1040   This rule generally applies to those relationships listed in chapter 4 under Related Party Transactions . 2011 irs forms 1040 It also applies to accruals by partnerships to partners, partners to partnerships, shareholders to S corporations, and S corporations to shareholders. 2011 irs forms 1040   The postponement of deductions for unpaid expenses and interest under the related party rule does not apply to OID, regardless of when payment is made. 2011 irs forms 1040 This rule also does not apply to loans with below-market interest rates or to certain payments for the use of property and services when the lender or recipient has to include payments periodically in income, even if a payment has not been made. 2011 irs forms 1040 Prev  Up  Next   Home   More Online Publications
Español

Contact the Agency or Department

Website: Public Affairs

Address: Department of Energy
1000 Independence Ave., SW

Washington, DC 20585

Phone Number: 202-586-5575

Toll-free: 1-800-342-5363

The 2011 Irs Forms 1040

2011 irs forms 1040 Publication 587 - Main Content Table of Contents Qualifying for a DeductionExclusive Use Regular Use Trade or Business Use Principal Place of Business Place To Meet Patients, Clients, or Customers Separate Structure Figuring the DeductionUsing Actual Expenses Using the Simplified Method Daycare Facility Standard meal and snack rates. 2011 irs forms 1040 Sale or Exchange of Your HomeGain on Sale Depreciation Basis Adjustment Reporting the Sale More Information Business Furniture and EquipmentListed Property Property Bought for Business Use Personal Property Converted to Business Use Recordkeeping Where To DeductSelf-Employed Persons Employees Partners How To Get Tax HelpLow Income Taxpayer Clinics Worksheet To Figure the Deduction for Business Use of Your HomeInstructions for the Worksheet Worksheets To Figure the Deduction for Business Use of Your Home (Simplified Method) Instructions for the Simplified Method Worksheet Instructions for the Daycare Facility Worksheet Instructions for the Area Adjustment Worksheet Qualifying for a Deduction Generally, you cannot deduct items related to your home, such as mortgage interest, real estate taxes, utilities, maintenance, rent, depreciation, or property insurance, as business expenses. 2011 irs forms 1040 However, you may be able to deduct expenses related to the business use of part of your home if you meet specific requirements. 2011 irs forms 1040 Even then, the deductible amount of these types of expenses may be limited. 2011 irs forms 1040 Use this section and Figure A, later, to decide if you can deduct expenses for the business use of your home. 2011 irs forms 1040 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). 2011 irs forms 1040 Additional tests for employee use. 2011 irs forms 1040   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. 2011 irs forms 1040 You must meet the tests discussed earlier 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. 2011 irs forms 1040 If the use of the home office is merely appropriate and helpful, you cannot deduct expenses for the business use of your home. 2011 irs forms 1040 Exclusive Use To qualify under the exclusive use test, you must use a specific area of your home only for your trade or business. 2011 irs forms 1040 The area used for business can be a room or other separately identifiable space. 2011 irs forms 1040 The space does not need to be marked off by a permanent partition. 2011 irs forms 1040 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. 2011 irs forms 1040 Example. 2011 irs forms 1040 You are an attorney and use a den in your home to write legal briefs and prepare clients' tax returns. 2011 irs forms 1040 Your family also uses the den for recreation. 2011 irs forms 1040 The den is not used exclusively in your trade or business, so you cannot claim a deduction for the business use of the den. 2011 irs forms 1040 Exceptions to Exclusive Use You do not have to meet the exclusive use test if either of the following applies. 2011 irs forms 1040 You use part of your home for the storage of inventory or product samples (discussed next). 2011 irs forms 1040 You use part of your home as a daycare facility, discussed later under Daycare Facility . 2011 irs forms 1040 Note. 2011 irs forms 1040 With the exception of these two uses, any portion of the home used for business purposes must meet the exclusive use test. 2011 irs forms 1040 Storage of inventory or product samples. 2011 irs forms 1040    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. 2011 irs forms 1040 However, you must meet all the following tests. 2011 irs forms 1040 You sell products at wholesale or retail as your trade or business. 2011 irs forms 1040 You keep the inventory or product samples in your home for use in your trade or business. 2011 irs forms 1040 Your home is the only fixed location of your trade or business. 2011 irs forms 1040 You use the storage space on a regular basis. 2011 irs forms 1040 The space you use is a separately identifiable space suitable for storage. 2011 irs forms 1040 Example. 2011 irs forms 1040 Your home is the only fixed location of your business of selling mechanics' tools at retail. 2011 irs forms 1040 You regularly use half of your basement for storage of inventory and product samples. 2011 irs forms 1040 You sometimes use the area for personal purposes. 2011 irs forms 1040 The expenses for the storage space are deductible even though you do not use this part of your basement exclusively for business. 2011 irs forms 1040 Regular Use To qualify under the regular use test, you must use a specific area of your home for business on a regular basis. 2011 irs forms 1040 Incidental or occasional business use is not regular use. 2011 irs forms 1040 You must consider all facts and circumstances in determining whether your use is on a regular basis. 2011 irs forms 1040 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. 2011 irs forms 1040 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. 2011 irs forms 1040 Example. 2011 irs forms 1040 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. 2011 irs forms 1040 You do not make investments as a broker or dealer. 2011 irs forms 1040 So, your activities are not part of a trade or business and you cannot take a deduction for the business use of your home. 2011 irs forms 1040 Principal Place of Business You can have more than one business location, including your home, for a single trade or business. 2011 irs forms 1040 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. 2011 irs forms 1040 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. 2011 irs forms 1040 Your home office will qualify as your principal place of business if you meet the following requirements. 2011 irs forms 1040 You use it exclusively and regularly for administrative or management activities of your trade or business. 2011 irs forms 1040 You have no other fixed location where you conduct substantial administrative or management activities of your trade or business. 2011 irs forms 1040 If, after considering your business locations, your home cannot be identified as your principal place of business, you cannot deduct home office expenses. 2011 irs forms 1040 However, see the later discussions under Place To Meet Patients, Clients, or Customers and Separate Structure for other ways to qualify to deduct home office expenses. 2011 irs forms 1040 Administrative or management activities. 2011 irs forms 1040   There are many activities that are administrative or managerial in nature. 2011 irs forms 1040 The following are a few examples. 2011 irs forms 1040 Billing customers, clients, or patients. 2011 irs forms 1040 Keeping books and records. 2011 irs forms 1040 Ordering supplies. 2011 irs forms 1040 Setting up appointments. 2011 irs forms 1040 Forwarding orders or writing reports. 2011 irs forms 1040 Administrative or management activities performed at other locations. 2011 irs forms 1040   The following activities performed by you or others will not disqualify your home office from being your principal place of business. 2011 irs forms 1040 You have others conduct your administrative or management activities at locations other than your home. 2011 irs forms 1040 (For example, another company does your billing from its place of business. 2011 irs forms 1040 ) 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. 2011 irs forms 1040 You occasionally conduct minimal administrative or management activities at a fixed location outside your home. 2011 irs forms 1040 You conduct substantial nonadministrative or nonmanagement business activities at a fixed location outside your home. 2011 irs forms 1040 (For example, you meet with or provide services to customers, clients, or patients at a fixed location of the business outside your home. 2011 irs forms 1040 ) You have suitable space to conduct administrative or management activities outside your home, but choose to use your home office for those activities instead. 2011 irs forms 1040 Please click here for the text description of the image. 2011 irs forms 1040 Can you deduct business use of the home expenses? Example 1. 2011 irs forms 1040 John is a self-employed plumber. 2011 irs forms 1040 Most of John's time is spent at customers' homes and offices installing and repairing plumbing. 2011 irs forms 1040 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. 2011 irs forms 1040 John writes up estimates and records of work completed at his customers' premises. 2011 irs forms 1040 He does not conduct any substantial administrative or management activities at any fixed location other than his home office. 2011 irs forms 1040 John does not do his own billing. 2011 irs forms 1040 He uses a local bookkeeping service to bill his customers. 2011 irs forms 1040 John's home office qualifies as his principal place of business for deducting expenses for its use. 2011 irs forms 1040 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. 2011 irs forms 1040 His choice to have his billing done by another company does not disqualify his home office from being his principal place of business. 2011 irs forms 1040 He meets all the qualifications, including principal place of business, so he can deduct expenses (subject to certain limitations, explained later) for the business use of his home. 2011 irs forms 1040 Example 2. 2011 irs forms 1040 Pamela is a self-employed sales representative for several different product lines. 2011 irs forms 1040 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. 2011 irs forms 1040 She occasionally writes up orders and sets up appointments from her hotel room when she is away on business overnight. 2011 irs forms 1040 Pamela's business is selling products to customers at various locations throughout her territory. 2011 irs forms 1040 To make these sales, she regularly visits customers to explain the available products and take orders. 2011 irs forms 1040 Pamela's home office qualifies as her principal place of business for deducting expenses for its use. 2011 irs forms 1040 She conducts administrative or management activities there and she has no other fixed location where she conducts substantial administrative or management activities. 2011 irs forms 1040 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. 2011 irs forms 1040 She meets all the qualifications, including principal place of business, so she can deduct expenses (subject to certain limitations, explained later) for the business use of her home. 2011 irs forms 1040 Example 3. 2011 irs forms 1040 Paul is a self-employed anesthesiologist. 2011 irs forms 1040 He spends the majority of his time administering anesthesia and postoperative care in three local hospitals. 2011 irs forms 1040 One of the hospitals provides him with a small shared office where he could conduct administrative or management activities. 2011 irs forms 1040 Paul very rarely uses the office the hospital provides. 2011 irs forms 1040 He uses a room in his home that he has converted to an office. 2011 irs forms 1040 He uses this room exclusively and regularly to conduct all the following activities. 2011 irs forms 1040 Contacting patients, surgeons, and hospitals regarding scheduling. 2011 irs forms 1040 Preparing for treatments and presentations. 2011 irs forms 1040 Maintaining billing records and patient logs. 2011 irs forms 1040 Satisfying continuing medical education requirements. 2011 irs forms 1040 Reading medical journals and books. 2011 irs forms 1040 Paul's home office qualifies as his principal place of business for deducting expenses for its use. 2011 irs forms 1040 He conducts administrative or management activities for his business as an anesthesiologist there and he has no other fixed location where he conducts substantial administrative or management activities for this business. 2011 irs forms 1040 His choice to use his home office instead of the one provided by the hospital does not disqualify his home office from being his principal place of business. 2011 irs forms 1040 His performance of substantial nonadministrative or nonmanagement activities at fixed locations outside his home also does not disqualify his home office from being his principal place of business. 2011 irs forms 1040 He meets all the qualifications, including principal place of business, so he can deduct expenses (subject to certain limitations, explained later) for the business use of his home. 2011 irs forms 1040 Example 4. 2011 irs forms 1040 Kathleen is employed as a teacher. 2011 irs forms 1040 She is required to teach and meet with students at the school and to grade papers and tests. 2011 irs forms 1040 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. 2011 irs forms 1040 The school does not require her to work at home. 2011 irs forms 1040 Kathleen prefers to use the office she has set up in her home and does not use the one provided by the school. 2011 irs forms 1040 She uses this home office exclusively and regularly for the administrative duties of her teaching job. 2011 irs forms 1040 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. 2011 irs forms 1040 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. 2011 irs forms 1040 More Than One Trade or Business The same home office can be the principal place of business for two or more separate business activities. 2011 irs forms 1040 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. 2011 irs forms 1040 You must use the home office exclusively and regularly for one or more of the following purposes. 2011 irs forms 1040 As the principal place of business for one or more of your trades or businesses. 2011 irs forms 1040 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. 2011 irs forms 1040 If your home office is a separate structure, in connection with one or more of your trades or businesses. 2011 irs forms 1040 You can use your home office for more than one business activity, but you cannot use it for any nonbusiness (i. 2011 irs forms 1040 e. 2011 irs forms 1040 , personal) activities. 2011 irs forms 1040 If you are an employee, any use of the home office in connection with your employment must be for the convenience of your employer. 2011 irs forms 1040 See Rental to employer , later, if you rent part of your home to your employer. 2011 irs forms 1040 Example. 2011 irs forms 1040 Tracy White is employed as a teacher. 2011 irs forms 1040 Her principal place of work is the school, which provides her office space to do her school work. 2011 irs forms 1040 She also has a mail order jewelry business. 2011 irs forms 1040 All her work in the jewelry business is done in her home office and the office is used exclusively for that business. 2011 irs forms 1040 If she meets all the other tests, she can deduct expenses for the business use of her home for the jewelry business. 2011 irs forms 1040 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. 2011 irs forms 1040 As an employee, Tracy must also meet the convenience-of-the-employer test to qualify for the deduction. 2011 irs forms 1040 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. 2011 irs forms 1040 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. 2011 irs forms 1040 You physically meet with patients, clients, or customers on your premises. 2011 irs forms 1040 Their use of your home is substantial and integral to the conduct of your business. 2011 irs forms 1040 Doctors, dentists, attorneys, and other professionals who maintain offices in their homes generally will meet this requirement. 2011 irs forms 1040 Using your home for occasional meetings and telephone calls will not qualify you to deduct expenses for the business use of your home. 2011 irs forms 1040 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. 2011 irs forms 1040 Example. 2011 irs forms 1040 June Quill, a self-employed attorney, works 3 days a week in her city office. 2011 irs forms 1040 She works 2 days a week in her home office used only for business. 2011 irs forms 1040 She regularly meets clients there. 2011 irs forms 1040 Her home office qualifies for a business deduction because she meets clients there in the normal course of her business. 2011 irs forms 1040 Separate Structure You can deduct expenses for a separate free-standing structure, such as a studio, workshop, garage, or barn, if you use it exclusively and regularly for your business. 2011 irs forms 1040 The structure does not have to be your principal place of business or a place where you meet patients, clients, or customers. 2011 irs forms 1040 Example. 2011 irs forms 1040 John Berry operates a floral shop in town. 2011 irs forms 1040 He grows the plants for his shop in a greenhouse behind his home. 2011 irs forms 1040 He uses the greenhouse exclusively and regularly in his business, so he can deduct the expenses for its use, subject to certain limitations, explained later. 2011 irs forms 1040 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. 2011 irs forms 1040 When figuring the amount you can deduct for the business use of your home, you will use either your actual expenses or a simplified method. 2011 irs forms 1040 Electing to use the simplified method. 2011 irs forms 1040   The simplified method is an alternative to the calculation, allocation, and substantiation of actual expenses. 2011 irs forms 1040 You choose whether or not to figure your deduction using the simplified method each taxable year. 2011 irs forms 1040 See Using the Simplified Method , later. 2011 irs forms 1040 Rental to employer. 2011 irs forms 1040   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. 2011 irs forms 1040 You can deduct mortgage interest, qualified mortgage insurance premiums, real estate taxes, and personal casualty losses for the rented part, subject to any limitations. 2011 irs forms 1040 However, you cannot deduct otherwise allowable trade or business expenses, business casualty losses, or depreciation related to the use of your home (or use the simplified method as an alternative to deducting these actual expenses) in performing services for your employer. 2011 irs forms 1040 Using Actual Expenses If you do not or cannot elect to use the simplified method for a home, you will figure your deduction for that home using your actual expenses. 2011 irs forms 1040 You will also need to figure the percentage of your home used for business and the limit on the deduction. 2011 irs forms 1040 If you are an employee or a partner, or you use your home in your farming business and you file Schedule F (Form 1040), you can use the Worksheet To Figure the Deduction for Business Use of Your Home, near the end of this publication, to help you figure your deduction. 2011 irs forms 1040 If you use your home in a trade or business and you file Schedule C (Form 1040), you will use Form 8829 to figure your deduction. 2011 irs forms 1040 Part-year use. 2011 irs forms 1040   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. 2011 irs forms 1040 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. 2011 irs forms 1040 Expenses related to tax-exempt income. 2011 irs forms 1040   Generally, you cannot deduct expenses that are related to tax-exempt allowances. 2011 irs forms 1040 However, if you receive a tax-exempt parsonage allowance or a tax-exempt military allowance, your expenses for mortgage interest and real estate taxes are deductible under the normal rules. 2011 irs forms 1040 No deduction is allowed for other expenses related to the tax-exempt allowance. 2011 irs forms 1040   If your housing is provided free of charge and the value of the housing is tax exempt, you cannot deduct the rental value of any portion of the housing. 2011 irs forms 1040 Actual Expenses You must divide the expenses of operating your home between personal and business use. 2011 irs forms 1040 The part of a home operating expense you can use to figure your deduction depends on both of the following. 2011 irs forms 1040 Whether the expense is direct, indirect, or unrelated. 2011 irs forms 1040 The percentage of your home used for business. 2011 irs forms 1040 Table 1, next, describes the types of expenses you may have and the extent to which they are deductible. 2011 irs forms 1040 Table 1. 2011 irs forms 1040 Types of Expenses  Expense  Description  Deductibility Direct Expenses only for  the business part  of your home. 2011 irs forms 1040 Deductible in full. 2011 irs forms 1040 *   Examples:  Painting or repairs  only in the area  used for business. 2011 irs forms 1040 Exception: May be only partially  deductible in a daycare facility. 2011 irs forms 1040 See Daycare Facility , later. 2011 irs forms 1040 Indirect Expenses for  keeping up and running your  entire home. 2011 irs forms 1040 Deductible based on the percentage of your home used for business. 2011 irs forms 1040 *   Examples:  Insurance, utilities, and  general repairs. 2011 irs forms 1040   Unrelated Expenses only for  the parts of your  home not used  for business. 2011 irs forms 1040 Not deductible. 2011 irs forms 1040   Examples:  Lawn care or painting  a room not used  for business. 2011 irs forms 1040   *Subject to the deduction limit, discussed later. 2011 irs forms 1040 Form 8829 and the Worksheet To Figure the Deduction for Business Use of Your Home have separate columns for direct and indirect expenses. 2011 irs forms 1040 Certain expenses are deductible whether or not you use your home for business. 2011 irs forms 1040 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. 2011 irs forms 1040 These expenses include the following. 2011 irs forms 1040 Real estate taxes. 2011 irs forms 1040 Qualified mortgage insurance premiums. 2011 irs forms 1040 Deductible mortgage interest. 2011 irs forms 1040 Casualty losses. 2011 irs forms 1040 Other expenses are deductible only if you use your home for business. 2011 irs forms 1040 You can use the business percentage of these expenses to figure your total business use of the home deduction. 2011 irs forms 1040 These expenses generally include (but are not limited to) the following. 2011 irs forms 1040 Depreciation (covered under Depreciating Your Home , later). 2011 irs forms 1040 Insurance. 2011 irs forms 1040 Rent paid for the use of property you do not own but use in your trade or business. 2011 irs forms 1040 Repairs. 2011 irs forms 1040 Security system. 2011 irs forms 1040 Utilities and services. 2011 irs forms 1040 Real estate taxes. 2011 irs forms 1040   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. 2011 irs forms 1040   For more information on the deduction for real estate taxes, see Publication 530, Tax Information for Homeowners. 2011 irs forms 1040 Deductible mortgage interest. 2011 irs forms 1040   To figure the business part of your deductible mortgage interest, multiply this interest by the percentage of your home used for business. 2011 irs forms 1040 You can include interest on a second mortgage in this computation. 2011 irs forms 1040 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. 2011 irs forms 1040 For more information on what interest is deductible, see Publication 936, Home Mortgage Interest Deduction. 2011 irs forms 1040 Qualified mortgage insurance premiums. 2011 irs forms 1040   To figure the business part of your qualified mortgage insurance premiums, multiply the premiums by the percentage of your home used for business. 2011 irs forms 1040 You can include premiums for insurance on a second mortgage in this computation. 2011 irs forms 1040 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. 2011 irs forms 1040 For more information, see Publication 936, and Line 13 in the Instructions for Schedule A (Form 1040). 2011 irs forms 1040 Casualty losses. 2011 irs forms 1040    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. 2011 irs forms 1040 A direct expense is the loss on the portion of the property you use only in your business. 2011 irs forms 1040 Use the entire loss to figure the business use of the home deduction. 2011 irs forms 1040 An indirect expense is the loss on property you use for both business and personal purposes. 2011 irs forms 1040 Use only the business portion to figure the deduction. 2011 irs forms 1040 An unrelated expense is the loss on property you do not use in your business. 2011 irs forms 1040 Do not use any of the loss to figure the deduction. 2011 irs forms 1040 Example. 2011 irs forms 1040 You meet the rules to take a deduction for an office in your home that is 10% of the total area of your house. 2011 irs forms 1040 A storm damages your roof. 2011 irs forms 1040 This is an indirect expense as the roof is part of the whole house and is considered to be used both for business and personal purposes. 2011 irs forms 1040 You would complete Form 4684, Casualties and Thefts, to report your loss. 2011 irs forms 1040 You complete both section A (Personal Use Property) and section B (Business and Income-Producing Property) as your home is used both for business and personal purposes. 2011 irs forms 1040 Since you use 90% of your home for personal purposes, use 90% of the cost or adjusted basis of your home, insurance or other reimbursement, and fair market value, both before and after the storm, to figure the amounts to enter on lines 2, 3, 5, and 6 of Form 4684. 2011 irs forms 1040 Since you use 10% of your home for business purposes, use 10% of the cost or adjusted basis of your home, insurance or other reimbursement, and fair market value, both before and after the storm, to figure the amounts to enter on lines 20, 21, 23, and 24 of Form 4684. 2011 irs forms 1040 Forms and worksheets to use. 2011 irs forms 1040   If you are filing Schedule C (Form 1040), get Form 8829 and follow the instructions for casualty losses. 2011 irs forms 1040 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. 2011 irs forms 1040 You will also need to get Form 4684. 2011 irs forms 1040 More information. 2011 irs forms 1040   For more information on casualty losses, see Publication 547, Casualties, Disasters, and Thefts. 2011 irs forms 1040 Insurance. 2011 irs forms 1040   You can deduct the cost of insurance that covers the business part of your home. 2011 irs forms 1040 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. 2011 irs forms 1040 You can deduct the business percentage of the part that applies to the following year in that year. 2011 irs forms 1040 Rent. 2011 irs forms 1040   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. 2011 irs forms 1040 To figure your deduction, multiply your rent payments by the percentage of your home used for business. 2011 irs forms 1040   If you own your home, you cannot deduct the fair rental value of your home. 2011 irs forms 1040 However, see Depreciating Your Home , later. 2011 irs forms 1040 Repairs. 2011 irs forms 1040   The cost of repairs that relate to your business, including labor (other than your own labor), is a deductible expense. 2011 irs forms 1040 For example, a furnace repair benefits the entire home. 2011 irs forms 1040 If you use 10% of your home for business, you can deduct 10% of the cost of the furnace repair. 2011 irs forms 1040   Repairs keep your home in good working order over its useful life. 2011 irs forms 1040 Examples of common repairs are patching walls and floors, painting, wallpapering, repairing roofs and gutters, and mending leaks. 2011 irs forms 1040 However, repairs are sometimes treated as a permanent improvement and are not deductible. 2011 irs forms 1040 See Permanent improvements , later, under Depreciating Your Home. 2011 irs forms 1040 Security system. 2011 irs forms 1040   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. 2011 irs forms 1040 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. 2011 irs forms 1040 Utilities and services. 2011 irs forms 1040   Expenses for utilities and services, such as electricity, gas, trash removal, and cleaning services, are primarily personal expenses. 2011 irs forms 1040 However, if you use part of your home for business, you can deduct the business part of these expenses. 2011 irs forms 1040 Generally, the business percentage for utilities is the same as the percentage of your home used for business. 2011 irs forms 1040 Telephone. 2011 irs forms 1040   The basic local telephone service charge, including taxes, for the first telephone line into your home (i. 2011 irs forms 1040 e. 2011 irs forms 1040 , landline) is a nondeductible personal expense. 2011 irs forms 1040 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. 2011 irs forms 1040 Do not include these expenses as a cost of using your home for business. 2011 irs forms 1040 Deduct these charges separately on the appropriate form or schedule. 2011 irs forms 1040 For example, if you file Schedule C (Form 1040), deduct these expenses on line 25, Utilities (instead of line 30, Expenses for business use of your home). 2011 irs forms 1040 Depreciating Your Home If you own your home and qualify to deduct expenses for its business use, you can claim a deduction for depreciation. 2011 irs forms 1040 Depreciation is an allowance for the wear and tear on the part of your home used for business. 2011 irs forms 1040 You cannot depreciate the cost or value of the land. 2011 irs forms 1040 You recover its cost when you sell or otherwise dispose of the property. 2011 irs forms 1040 Before you figure your depreciation deduction, you need to know the following information. 2011 irs forms 1040 The month and year you started using your home for business. 2011 irs forms 1040 The adjusted basis and fair market value of your home (excluding land) at the time you began using it for business. 2011 irs forms 1040 The cost of any improvements before and after you began using the property for business. 2011 irs forms 1040 The percentage of your home used for business. 2011 irs forms 1040 See Business Percentage , later. 2011 irs forms 1040 Adjusted basis defined. 2011 irs forms 1040   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. 2011 irs forms 1040 For a discussion of adjusted basis, see Publication 551. 2011 irs forms 1040 Permanent improvements. 2011 irs forms 1040   A permanent improvement increases the value of property, adds to its life, or gives it a new or different use. 2011 irs forms 1040 Examples of improvements are replacing electric wiring or plumbing, adding a new roof or addition, paneling, or remodeling. 2011 irs forms 1040    You must carefully distinguish between repairs and improvements. 2011 irs forms 1040 See Repairs , earlier, under Actual Expenses. 2011 irs forms 1040 You also must keep accurate records of these expenses. 2011 irs forms 1040 These records will help you decide whether an expense is a deductible or a capital (added to the basis) expense. 2011 irs forms 1040 However, if you make repairs as part of an extensive remodeling or restoration of your home, the entire job is an improvement. 2011 irs forms 1040 Example. 2011 irs forms 1040 You buy an older home and fix up two rooms as a beauty salon. 2011 irs forms 1040 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. 2011 irs forms 1040 Normally, the patching, painting, and floor work are repairs and the other expenses are permanent improvements. 2011 irs forms 1040 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. 2011 irs forms 1040 You cannot deduct any portion of it as a repair expense. 2011 irs forms 1040 Adjusting for depreciation deducted in earlier years. 2011 irs forms 1040   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. 2011 irs forms 1040 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. 2011 irs forms 1040 If you did not deduct any depreciation, decrease the basis by the amount you could have deducted. 2011 irs forms 1040   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. 2011 irs forms 1040   If you deducted the incorrect amount of depreciation, see Publication 946. 2011 irs forms 1040 Fair market value defined. 2011 irs forms 1040   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. 2011 irs forms 1040 Sales of similar property, on or about the date you begin using your home for business, may be helpful in determining the property's fair market value. 2011 irs forms 1040 Figuring the depreciation deduction for the current year. 2011 irs forms 1040   If you began using your home for business before 2013, continue to use the same depreciation method you used in past tax years. 2011 irs forms 1040   If you began using your home for business for the first time in 2013, depreciate the business part as nonresidential real property under the modified accelerated cost recovery system (MACRS). 2011 irs forms 1040 Under MACRS, nonresidential real property is depreciated using the straight line method over 39 years. 2011 irs forms 1040 For more information on MACRS and other methods of depreciation, see Publication 946. 2011 irs forms 1040   To figure the depreciation deduction, you must first figure the part of the cost of your home that can be depreciated (depreciable basis). 2011 irs forms 1040 The depreciable basis is figured by multiplying the percentage of your home used for business by the smaller of the following. 2011 irs forms 1040 The adjusted basis of your home (excluding land) on the date you began using your home for business. 2011 irs forms 1040 The fair market value of your home (excluding land) on the date you began using your home for business. 2011 irs forms 1040 Depreciation table. 2011 irs forms 1040   If 2013 was the first year you used your home for business, you can figure your 2013 depreciation for the business part of your home by using the appropriate percentage from the following table. 2011 irs forms 1040 Table 2. 2011 irs forms 1040 MACRS Percentage Table for 39-Year Nonresidential Real Property Month First Used for Business Percentage To Use 1 2. 2011 irs forms 1040 461% 2 2. 2011 irs forms 1040 247% 3 2. 2011 irs forms 1040 033% 4 1. 2011 irs forms 1040 819% 5 1. 2011 irs forms 1040 605% 6 1. 2011 irs forms 1040 391% 7 1. 2011 irs forms 1040 177% 8 0. 2011 irs forms 1040 963% 9 0. 2011 irs forms 1040 749% 10 0. 2011 irs forms 1040 535% 11 0. 2011 irs forms 1040 321% 12 0. 2011 irs forms 1040 107%   Multiply the depreciable basis of the business part of your home by the percentage from the table for the first month you use your home for business. 2011 irs forms 1040 See Publication 946 for the percentages for the remaining tax years of the recovery period. 2011 irs forms 1040 Example. 2011 irs forms 1040 In May, George Miller began to use one room in his home exclusively and regularly to meet clients. 2011 irs forms 1040 This room is 8% of the square footage of his home. 2011 irs forms 1040 He bought the home in 2003 for $125,000. 2011 irs forms 1040 He determined from his property tax records that his adjusted basis in the house (exclusive of land) is $115,000. 2011 irs forms 1040 In May, the house had a fair market value of $165,000. 2011 irs forms 1040 He multiplies his adjusted basis of $115,000 (which is less than the fair market value) by 8%. 2011 irs forms 1040 The result is $9,200, his depreciable basis for the business part of the house. 2011 irs forms 1040 George files his return based on the calendar year. 2011 irs forms 1040 May is the 5th month of his tax year. 2011 irs forms 1040 He multiplies his depreciable basis of $9,200 by 1. 2011 irs forms 1040 605% (. 2011 irs forms 1040 01605), the percentage from the table for the 5th month. 2011 irs forms 1040 His depreciation deduction is $147. 2011 irs forms 1040 66. 2011 irs forms 1040 Depreciating permanent improvements. 2011 irs forms 1040   Add the costs of permanent improvements made before you began using your home for business to the basis of your property. 2011 irs forms 1040 Depreciate these costs as part of the cost of your home as explained earlier. 2011 irs forms 1040 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. 2011 irs forms 1040 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. 2011 irs forms 1040 For improvements made this year, the recovery period is 39 years. 2011 irs forms 1040 For the percentage to use for the first year, see Table 2, earlier. 2011 irs forms 1040 For more information on recovery periods, see Publication 946. 2011 irs forms 1040 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. 2011 irs forms 1040 Use the resulting percentage to figure the business part of the expenses for operating your entire home. 2011 irs forms 1040 You can use any reasonable method to determine the business percentage. 2011 irs forms 1040 The following are two commonly used methods for figuring the percentage. 2011 irs forms 1040 Divide the area (length multiplied by the width) used for business by the total area of your home. 2011 irs forms 1040 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. 2011 irs forms 1040 Example 1. 2011 irs forms 1040 Your office is 240 square feet (12 feet × 20 feet). 2011 irs forms 1040 Your home is 1,200 square feet. 2011 irs forms 1040 Your office is 20% (240 ÷ 1,200) of the total area of your home. 2011 irs forms 1040 Your business percentage is 20%. 2011 irs forms 1040 Example 2. 2011 irs forms 1040 You use one room in your home for business. 2011 irs forms 1040 Your home has 10 rooms, all about equal size. 2011 irs forms 1040 Your office is 10% (1 ÷ 10) of the total area of your home. 2011 irs forms 1040 Your business percentage is 10%. 2011 irs forms 1040 Use lines 1-7 of Form 8829, or lines 1-3 on the Worksheet To Figure the Deduction for Business Use of Your Home (near the end of this publication) to figure your business percentage. 2011 irs forms 1040 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. 2011 irs forms 1040 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. 2011 irs forms 1040 Your deduction of otherwise nondeductible expenses, such as insurance, utilities, and depreciation of your home (with depreciation of your home 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. 2011 irs forms 1040 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)). 2011 irs forms 1040 These expenses are discussed in detail under Actual Expenses , earlier. 2011 irs forms 1040 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. 2011 irs forms 1040 If you are self-employed, do not include in (2) above your deduction for one-half of your self-employment tax. 2011 irs forms 1040 Carryover of unallowed expenses. 2011 irs forms 1040   If your deductions are greater than the current year's limit, you can carry over the excess to the next year in which you use actual expenses. 2011 irs forms 1040 They are subject to the deduction limit for that year, whether or not you live in the same home during that year. 2011 irs forms 1040 Figuring the deduction limit and carryover. 2011 irs forms 1040   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. 2011 irs forms 1040 If you file Schedule C (Form 1040), figure your deduction limit and carryover on Form 8829. 2011 irs forms 1040 Example. 2011 irs forms 1040 You meet the requirements for deducting expenses for the business use of your home. 2011 irs forms 1040 You use 20% of your home for business. 2011 irs forms 1040 In 2013, your business expenses and the expenses for the business use of your home are deducted from your gross income in the following order. 2011 irs forms 1040    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 2014 ($1,600 − $200) (subject to deduction limit in 2014) $1,400   You can deduct all of the business part of your deductible mortgage interest and real estate taxes ($3,000). 2011 irs forms 1040 You also can deduct all of your business expenses not related to the use of your home ($2,000). 2011 irs forms 1040 Additionally, you can deduct all of the business part of your expenses for maintenance, insurance, and utilities, because the total ($800) is less than the $1,000 deduction limit. 2011 irs forms 1040 Your deduction for depreciation for the business use of your home is limited to $200 ($1,000 minus $800) because of the deduction limit. 2011 irs forms 1040 You can carry over the $1,400 balance and add it to your depreciation for 2014, subject to your deduction limit in 2014. 2011 irs forms 1040 More than one place of business. 2011 irs forms 1040   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. 2011 irs forms 1040 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. 2011 irs forms 1040 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. 2011 irs forms 1040 For more information on transportation costs, see Publication 463, Travel, Entertainment, Gift, and Car Expenses. 2011 irs forms 1040 Using the Simplified Method The simplified method is an alternative to the calculation, allocation, and substantiation of actual expenses. 2011 irs forms 1040 In most cases, you will figure your deduction by multiplying $5, the prescribed rate, by the area of your home used for a qualified business use. 2011 irs forms 1040 The area you use to figure your deduction is limited to 300 square feet. 2011 irs forms 1040 See Simplified Amount , later, for information about figuring the amount of the deduction. 2011 irs forms 1040 For more information about the simplified method, see Revenue Procedure 2013-13, 2013-06 I. 2011 irs forms 1040 R. 2011 irs forms 1040 B. 2011 irs forms 1040 478, available at www. 2011 irs forms 1040 irs. 2011 irs forms 1040 gov/irb/2013-06_IRB/ar09. 2011 irs forms 1040 html. 2011 irs forms 1040 Actual expenses and depreciation of your home. 2011 irs forms 1040   If you elect to use the simplified method, you cannot deduct any actual expenses for the business except for business expenses that are not related to the use of the home. 2011 irs forms 1040 You also cannot deduct any depreciation (including any additional first-year depreciation) or section 179 expense for the portion of the home that is used for a qualified business use. 2011 irs forms 1040 The depreciation deduction allowable for that portion of the home is deemed to be zero for a year you use the simplified method. 2011 irs forms 1040 If you figure your deduction for business use of the home using actual expenses in a subsequent year, you will have to use the appropriate optional depreciation table for MACRS to figure your depreciation. 2011 irs forms 1040 More information. 2011 irs forms 1040   For more information about claiming depreciation in a subsequent year, see Revenue Procedure 2013-13, 2013-06 I. 2011 irs forms 1040 R. 2011 irs forms 1040 B. 2011 irs forms 1040 478, available at www. 2011 irs forms 1040 irs. 2011 irs forms 1040 gov/irb/2013-06_IRB/ar09. 2011 irs forms 1040 html. 2011 irs forms 1040 See Publication 946 for the optional depreciation tables Although you cannot deduct any depreciation or section 179 expense for the portion of your home used for a qualified business use, you may still claim depreciation or the section 179 expense deduction on other assets used in the business (for example, furniture and equipment). 2011 irs forms 1040 Expenses deductible without regard to business use. 2011 irs forms 1040   When using the simplified method, treat as personal expenses those business expenses related to the use of the home that are deductible without regard to whether there is a qualified business use of the home. 2011 irs forms 1040 These expenses include mortgage interest, real estate taxes, and casualty losses, subject to any limitations. 2011 irs forms 1040 See Where To Deduct , later. 2011 irs forms 1040 If you also rent part of your home, you must still allocate these expenses between rental use and personal use (for this purpose, personal use includes business use reported using the simplified method). 2011 irs forms 1040 No deduction of carryover of actual expenses. 2011 irs forms 1040   If you used actual expenses to figure your deduction for business use of the home in a prior year and your deduction was limited, you cannot deduct the disallowed amount carried over from the prior year during a year you figure your deduction using the simplified method. 2011 irs forms 1040 Instead, you will continue to carry over the disallowed amount to the next year that you use actual expenses to figure your deduction. 2011 irs forms 1040 Electing the Simplified Method You choose whether or not to figure your deduction using the simplified method each taxable year. 2011 irs forms 1040 Make the election for a home by using the simplified method to figure the deduction for the qualified business use of that home on a timely filed, original federal income tax return. 2011 irs forms 1040 An election for a taxable year, once made, is irrevocable. 2011 irs forms 1040 A change from using the simplified method in one year to actual expenses in a succeeding taxable year, or vice-versa, is not a change in method of accounting and does not require the consent of the Commissioner. 2011 irs forms 1040 Shared use. 2011 irs forms 1040   If you share your home with someone else who also uses the home in a business that qualifies for this deduction, each of you make your own election. 2011 irs forms 1040 More than one qualified business use. 2011 irs forms 1040   If you conduct more than one business that qualifies for this deduction in your home, your election to use the simplified method applies to all your qualified business uses of that home. 2011 irs forms 1040 More than one home. 2011 irs forms 1040   If you used more than one home during the year (for example, you moved during the year), you can elect to use the simplified method for only one of the homes. 2011 irs forms 1040 You must figure the deduction for any other home using actual expenses. 2011 irs forms 1040 Simplified Amount Your deduction for the qualified business use of a home is the sum of each amount you figure for a separate qualified business use of your home. 2011 irs forms 1040 To figure your deduction for the business use of a home using the simplified method, you will need to know the following information for each qualified business use of the home. 2011 irs forms 1040 The allowable area of your home used in conducting the business. 2011 irs forms 1040 If you did not conduct the business for the entire year in the home or the area changed during the year, you will need to know the allowable area you used and the number of days you conducted the business for each month. 2011 irs forms 1040 The gross income from the business use of your home. 2011 irs forms 1040 The amount of the business expenses that are not related to the use of your home. 2011 irs forms 1040 If the qualified business use is for a daycare facility that uses space in your home on a regular (but not exclusive) basis, you will also need to know the percentage of time that part of your home is used for daycare. 2011 irs forms 1040 To figure the amount you can deduct for qualified business use of your home using the simplified method, follow these 3 steps. 2011 irs forms 1040 Multiply the allowable area by $5 (or less than $5 if the qualified business use is for a daycare that uses space in your home on a regular, but not exclusive, basis). 2011 irs forms 1040 See Allowable area and Space used regularly for daycare , later. 2011 irs forms 1040 Subtract the expenses from the business that are not related to the use of the home from the gross income related to the business use of the home. 2011 irs forms 1040 If these expenses are greater than the gross income from the business use of the home, then you cannot take a deduction for this business use of the home. 2011 irs forms 1040 See Gross income limitation , later. 2011 irs forms 1040 Take the smaller of the amounts from (1) and (2). 2011 irs forms 1040 This is the amount you can deduct for this qualified business use of your home using the simplified method. 2011 irs forms 1040 If you are an employee or a partner, or you use your home in your farming business and file Schedule F (Form 1040), you can use the Simplified Method Worksheet, near the end of this publication, to help you figure your deduction. 2011 irs forms 1040 If you use your home in a trade or business and you file Schedule C (Form 1040), you will use the Simplified Method Worksheet in your Instructions for Schedule C to figure your deduction. 2011 irs forms 1040 Allowable area. 2011 irs forms 1040   In most cases, the allowable area is the smaller of the actual area (in square feet) of your home used in conducting the business and 300 square feet. 2011 irs forms 1040 Your allowable area may be smaller if you conducted the business as a qualified joint venture with your spouse, the area used by the business was shared with another qualified business use, you used the home for the business for only part of the year, or the area used by the business changed during the year. 2011 irs forms 1040 You can use the Area Adjustment Worksheet (for simplified method), near the end of this publication, to help you figure your allowable area for a qualified business use. 2011 irs forms 1040 Area used by a qualified joint venture. 2011 irs forms 1040   If the qualified business use of the home is also a qualified joint venture, you and your spouse will figure the deduction for the business use separately. 2011 irs forms 1040 Split the actual area used in conducting business between you and your spouse in the same manner you split your other tax attributes. 2011 irs forms 1040 Then, each spouse will figure the allowable area separately. 2011 irs forms 1040 For more information about qualified joint ventures, see Qualified Joint Venture in the Instructions for Schedule C. 2011 irs forms 1040 Shared use. 2011 irs forms 1040   If you share your home with someone else who uses the home to conduct business that also qualifies for this deduction, you may not include the same square feet to figure your deduction as the other person. 2011 irs forms 1040 You must allocate the shared space between you and the other person in a reasonable manner. 2011 irs forms 1040 Example. 2011 irs forms 1040 Kristin and Lindsey are roommates. 2011 irs forms 1040 Kristin uses 300 square feet of their home for a qualified business use. 2011 irs forms 1040 Lindsey uses 200 square feet of their home for a separate qualified business use. 2011 irs forms 1040 The qualified business uses share 100 square feet. 2011 irs forms 1040 In addition to the portion that they do not share, Kristin and Lindsey can both claim 50 of the 100 square feet or divide the 100 square feet between them in any reasonable manner. 2011 irs forms 1040 If divided evenly, Kristin could claim 250 square feet using the simplified method and Lindsey could claim 150 square feet. 2011 irs forms 1040 More than one qualified business use. 2011 irs forms 1040   If you conduct more than one business qualifying for the deduction, you are limited to a maximum of 300 square feet for all of the businesses. 2011 irs forms 1040 Allocate the actual square footage used (up to the maximum of 300 square feet) among your qualified business uses in a reasonable manner. 2011 irs forms 1040 However, do not allocate more square feet to a qualified business use than you actually use for that business. 2011 irs forms 1040 Rental use. 2011 irs forms 1040   The simplified method does not apply to rental use. 2011 irs forms 1040 A rental use that qualifies for the deduction must be figured using actual expenses. 2011 irs forms 1040 If the rental use and a qualified business use share the same area, you will have to allocate the actual area used between the two uses. 2011 irs forms 1040 You cannot use the same area to figure a deduction for the qualified business use as you are using to figure the deduction for the rental use. 2011 irs forms 1040 Part-year use or area changes. 2011 irs forms 1040   If your qualified business use was for a portion of the taxable year (for example, a seasonal business or a business that begins during the taxable year) or you changed the square footage of your qualified business use, your deduction is limited to the average monthly allowable square footage. 2011 irs forms 1040 You calculate the average monthly allowable square footage by adding the amount of allowable square feet you used in each month and dividing the sum by 12. 2011 irs forms 1040 When determining the average monthly allowable square footage, you cannot take more than 300 square feet into account for any one month. 2011 irs forms 1040 Additionally, if your qualified business use was less than 15 days in a month, you must use -0- for that month. 2011 irs forms 1040 Example 1. 2011 irs forms 1040 Andy files his federal income tax return on a calendar year basis. 2011 irs forms 1040 On July 20, he began using 420 square feet of his home for a qualified business use. 2011 irs forms 1040 He continued to use the 420 square feet until the end of the year. 2011 irs forms 1040 His average monthly allowable square footage is 125 square feet, which is figured using 300 square feet for each month August through December divided by the number of months in the taxable year ((0 + 0 + 0 + 0 + 0 + 0 + 0 + 300 + 300 + 300 + 300 + 300)/12). 2011 irs forms 1040 Example 2. 2011 irs forms 1040 Amy files her federal income tax return on a calendar year basis. 2011 irs forms 1040 On April 20, she began using 100 square feet of her home for a qualified business use. 2011 irs forms 1040 On August 5, she expanded the area of her qualified use to 330 square feet. 2011 irs forms 1040 Amy continued to use the 330 square feet until the end of the year. 2011 irs forms 1040 Her average monthly allowable square footage is 150 square feet, which is figured using 100 square feet for May through July and 300 square feet for August through December divided by the number of months in the taxable year ((0 + 0 + 0 + 0 + 100 + 100 +100 + 300 + 300 + 300 + 300 + 300)/12). 2011 irs forms 1040 Gross income limitation. 2011 irs forms 1040   Your deduction for business use of the home is limited to an amount equal to the gross income derived from the qualified business use of the home reduced by the business deductions that are unrelated to the use of your home. 2011 irs forms 1040 If the business deductions that are unrelated to the use of your home are greater than the gross income derived from the qualified business use of your home, then you cannot take a deduction for this qualified business use of your home. 2011 irs forms 1040 Business expenses not related to use of the home. 2011 irs forms 1040   These expenses relate to the business activity in the home, but not to the use of the home itself. 2011 irs forms 1040 You can still deduct business expenses that are unrelated to the use of the home. 2011 irs forms 1040 See Where To Deduct , later. 2011 irs forms 1040 Examples of business expenses that are unrelated to the use of the home are advertising, wages, supplies, dues, and depreciation for equipment. 2011 irs forms 1040 Space used regularly for daycare. 2011 irs forms 1040   If you do not use the area of your home exclusively for daycare, you must reduce the prescribed rate (maximum $5 per square foot) before figuring your deduction. 2011 irs forms 1040 The reduced rate will equal the prescribed rate times a fraction. 2011 irs forms 1040 The numerator of the fraction is the number of hours that the space was used during the year for daycare and the denominator is the total number of hours during the year that the space was available for all uses. 2011 irs forms 1040 You can use the Daycare Facility Worksheet (for simplified method), near the end of this publication, to help you figure the reduced rate. 2011 irs forms 1040    If you used at least 300 square feet for daycare regularly and exclusively during the year, then you do not need to reduce the prescribed rate or complete the Daycare Facility Worksheet. 2011 irs forms 1040 Daycare Facility If you use space in your home on a regular basis for providing daycare, you may be able to claim a deduction for that part of your home even if you use the same space for nonbusiness purposes. 2011 irs forms 1040 To qualify for this exception to the exclusive use rule, you must meet both of the following requirements. 2011 irs forms 1040 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. 2011 irs forms 1040 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. 2011 irs forms 1040 You do not meet this requirement if your application was rejected or your license or other authorization was revoked. 2011 irs forms 1040 Figuring the deduction. 2011 irs forms 1040   If you elect to use the simplified method for your home, figure your deduction as described earlier in Using the Simplified Method under Figuring the Deduction. 2011 irs forms 1040    If you are figuring your deduction using actual expenses and you regularly use part of your home for daycare, figure what part is used for daycare, as explained in Business Percentage , earlier, under Figuring the Deduction. 2011 irs forms 1040 If you also use that part exclusively for daycare, deduct all the allocable expenses, subject to the deduction limit, as explained earlier. 2011 irs forms 1040   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. 2011 irs forms 1040 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. 2011 irs forms 1040 You do not have to keep records to show the specific hours the area was used for business. 2011 irs forms 1040 You can use the area occasionally for personal reasons. 2011 irs forms 1040 However, a room you use only occasionally for business does not qualify for the deduction. 2011 irs forms 1040 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. 2011 irs forms 1040 You can compare the hours of business use in a week with the number of hours in a week (168). 2011 irs forms 1040 Or you can compare the hours of business use for the year with the number of hours in the year (8,760 in 2013). 2011 irs forms 1040 If you started or stopped using your home for daycare in 2013, you must prorate the number of hours based on the number of days the home was available for daycare. 2011 irs forms 1040 Example 1. 2011 irs forms 1040 Mary Lake used her basement to operate a daycare business for children. 2011 irs forms 1040 She figures the business percentage of the basement as follows. 2011 irs forms 1040 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. 2011 irs forms 1040 During the other 12 hours a day, the family could use the basement. 2011 irs forms 1040 She figures the percentage of time the basement was used for daycare as follows. 2011 irs forms 1040 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. 2011 irs forms 1040 25%           Mary can deduct 34. 2011 irs forms 1040 25% of any direct expenses for the basement. 2011 irs forms 1040 However, because her indirect expenses are for the entire house, she can deduct only 17. 2011 irs forms 1040 13% of the indirect expenses. 2011 irs forms 1040 She figures the percentage for her indirect expenses as follows. 2011 irs forms 1040 Business percentage of the basement 50% Multiplied by: Percentage of time used for daycare × 34. 2011 irs forms 1040 25% Percentage for indirect expenses 17. 2011 irs forms 1040 13% Mary completes Form 8829, Part I, figuring the percentage of her home used for business, including the percentage of time the basement was used. 2011 irs forms 1040 In Part II, Mary figures her deductible expenses. 2011 irs forms 1040 She uses the following information to complete Part II. 2011 irs forms 1040 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. 2011 irs forms 1040 (This figure is the same as the amount on line 29 of her Schedule C (Form 1040). 2011 irs forms 1040 ) The expenses she paid for rent and utilities relate to her entire home. 2011 irs forms 1040 Therefore, she enters the amount paid for rent on line 18, column (b), and the amount paid for utilities on line 20, column (b). 2011 irs forms 1040 She shows the total of these expenses on line 22, column (b). 2011 irs forms 1040 For line 23, she multiplies the amount on line 22, column (b) by the percentage on line 7 and enters the result, $1,585. 2011 irs forms 1040 Mary paid $500 to have the basement painted. 2011 irs forms 1040 The painting is a direct expense. 2011 irs forms 1040 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. 2011 irs forms 1040 25% – line 6). 2011 irs forms 1040 She enters $171 (34. 2011 irs forms 1040 25% × $500) on line 19, column (a). 2011 irs forms 1040 She adds line 22, column (a), and line 23 and enters $1,756 ($171 + $1,585) on line 25. 2011 irs forms 1040 This is less than her deduction limit (line 15), so she can deduct the entire amount. 2011 irs forms 1040 She follows the instructions to complete the rest of Part II and enters $1,756 on lines 33 and 35. 2011 irs forms 1040 She then carries the $1,756 to line 30 of her Schedule C (Form 1040). 2011 irs forms 1040 Example 2. 2011 irs forms 1040 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. 2011 irs forms 1040 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. 2011 irs forms 1040 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. 2011 irs forms 1040 The basement and room are 60% of the total area of her home. 2011 irs forms 1040 In figuring her expenses, 34. 2011 irs forms 1040 25% of any direct expenses for the basement and room are deductible. 2011 irs forms 1040 In addition, 20. 2011 irs forms 1040 55% (34. 2011 irs forms 1040 25% × 60%) of her indirect expenses are deductible. 2011 irs forms 1040 Example 3. 2011 irs forms 1040 Assume the same facts as in Example 1 except that Mary stopped using her home for a daycare facility on June 24, 2013. 2011 irs forms 1040 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. 2011 irs forms 1040 During the other 12 hours a day, the family could still use the basement. 2011 irs forms 1040 She figures the percentage of time the basement was used for business as follows. 2011 irs forms 1040 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. 2011 irs forms 1040 71%           Mary can deduct 35. 2011 irs forms 1040 71% of any direct expenses for the basement. 2011 irs forms 1040 However, because her indirect expenses are for the entire house, she can deduct only 17. 2011 irs forms 1040 86% of the indirect expenses. 2011 irs forms 1040 She figures the percentage for her indirect expenses as follows. 2011 irs forms 1040 Business percentage of the basement 50% Multiplied by: Percentage of time used for daycare × 35. 2011 irs forms 1040 71% Percentage for indirect expenses 17. 2011 irs forms 1040 86% Meals. 2011 irs forms 1040   If you provide food for your daycare recipients, do not include the expense as a cost of using your home for business. 2011 irs forms 1040 Claim it as a separate deduction on your Schedule C (Form 1040). 2011 irs forms 1040 You can never deduct the cost of food consumed by you or your family. 2011 irs forms 1040 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. 2011 irs forms 1040 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. 2011 irs forms 1040 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. 2011 irs forms 1040   If you deduct the actual cost of food for your daycare business, keep a separate record (with receipts) of your family's food costs. 2011 irs forms 1040   Reimbursements you receive from a sponsor under the Child and Adult Care Food Program of the Department of Agriculture are taxable only to the extent they exceed your expenses for food for eligible children. 2011 irs forms 1040 If your reimbursements are more than your expenses for food, show the difference as income in Part I of Schedule C (Form 1040). 2011 irs forms 1040 If your food expenses are greater than the reimbursements, show the difference as an expense in Part V of Schedule C (Form 1040). 2011 irs forms 1040 Do not include payments or expenses for your own children if they are eligible for the program. 2011 irs forms 1040 Follow this procedure even if you receive a Form 1099-MISC, Miscellaneous Income, reporting a payment from the sponsor. 2011 irs forms 1040 Standard meal and snack rates. 2011 irs forms 1040   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. 2011 irs forms 1040 For these purposes: A family daycare provider is a person engaged in the business of providing family daycare. 2011 irs forms 1040 Family daycare is childcare provided to eligible children in the home of the family daycare provider. 2011 irs forms 1040 The care must be non-medical, not involve a transfer of legal custody, and generally last less than 24 hours each day. 2011 irs forms 1040 Eligible children are minor children receiving family daycare in the home of the family daycare provider. 2011 irs forms 1040 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. 2011 irs forms 1040 Eligible children do not include children who receive daycare services for personal reasons of the provider. 2011 irs forms 1040 For example, if a provider provides daycare services for a relative as a favor to that relative, that child is not an eligible child. 2011 irs forms 1040   You can compute the deductible cost of each meal and snack you actually purchased and served to an eligible child during the time period you provided family daycare using the standard meal and snack rates shown in Table 3, later. 2011 irs forms 1040 You can use the standard meal and snack rates for a maximum of one breakfast, one lunch, one dinner, and three snacks per eligible child per day. 2011 irs forms 1040 If you receive reimbursement for a particular meal or snack, you can deduct only the portion of the applicable standard meal or snack rate that is more than the amount of the reimbursement. 2011 irs forms 1040   You can use either the standard meal and snack rates or actual costs to calculate the deductible cost of food provided to eligible children in the family daycare for any particular tax year. 2011 irs forms 1040 If you choose to use the standard meal and snack rates for a particular tax year, you must use the rates for all your deductible food costs for eligible children during that tax year. 2011 irs forms 1040 However, if you use the standard meal and snack rates in any tax year, you can use actual costs to compute the deductible cost of food in any other tax year. 2011 irs forms 1040   If you use the standard meal and snack rates, you must maintain records to substantiate the computation of the total amount deducted for the cost of food provided to eligible children. 2011 irs forms 1040 The records kept should include the name of each child, dates and hours of attendance in the daycare, and the type and quantity of meals and snacks served. 2011 irs forms 1040 This information can be recorded in a log similar to the one shown in Exhibit A, near the end of this publication. 2011 irs forms 1040   The standard meal and snack rates include beverages, but do not include non-food supplies used for food preparation, service, or storage, such as containers, paper products, or utensils. 2011 irs forms 1040 These expenses can be claimed as a separate deduction on your Schedule C (Form 1040). 2011 irs forms 1040     Table 3. 2011 irs forms 1040 Standard Meal and Snack Rates1 Location of Family Daycare Provider Breakfast Lunch Dinner Snack States other than Alaska an