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E file taxes free 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. E file taxes free 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. E file taxes free However, you may be able to deduct expenses related to the business use of part of your home if you meet specific requirements. E file taxes free Even then, the deductible amount of these types of expenses may be limited. E file taxes free Use this section and Figure A, later, to decide if you can deduct expenses for the business use of your home. E file taxes free 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). E file taxes free Additional tests for employee use. E file taxes free   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. E file taxes free 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. E file taxes free If the use of the home office is merely appropriate and helpful, you cannot deduct expenses for the business use of your home. E file taxes free Exclusive Use To qualify under the exclusive use test, you must use a specific area of your home only for your trade or business. E file taxes free The area used for business can be a room or other separately identifiable space. E file taxes free The space does not need to be marked off by a permanent partition. E file taxes free 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. E file taxes free Example. E file taxes free You are an attorney and use a den in your home to write legal briefs and prepare clients' tax returns. E file taxes free Your family also uses the den for recreation. E file taxes free The den is not used exclusively in your trade or business, so you cannot claim a deduction for the business use of the den. E file taxes free Exceptions to Exclusive Use You do not have to meet the exclusive use test if either of the following applies. E file taxes free You use part of your home for the storage of inventory or product samples (discussed next). E file taxes free You use part of your home as a daycare facility, discussed later under Daycare Facility . E file taxes free Note. E file taxes free With the exception of these two uses, any portion of the home used for business purposes must meet the exclusive use test. E file taxes free Storage of inventory or product samples. E file taxes free    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. E file taxes free However, you must meet all the following tests. E file taxes free You sell products at wholesale or retail as your trade or business. E file taxes free You keep the inventory or product samples in your home for use in your trade or business. E file taxes free Your home is the only fixed location of your trade or business. E file taxes free You use the storage space on a regular basis. E file taxes free The space you use is a separately identifiable space suitable for storage. E file taxes free Example. E file taxes free Your home is the only fixed location of your business of selling mechanics' tools at retail. E file taxes free You regularly use half of your basement for storage of inventory and product samples. E file taxes free You sometimes use the area for personal purposes. E file taxes free The expenses for the storage space are deductible even though you do not use this part of your basement exclusively for business. E file taxes free Regular Use To qualify under the regular use test, you must use a specific area of your home for business on a regular basis. E file taxes free Incidental or occasional business use is not regular use. E file taxes free You must consider all facts and circumstances in determining whether your use is on a regular basis. E file taxes free 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. E file taxes free 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. E file taxes free Example. E file taxes free 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. E file taxes free You do not make investments as a broker or dealer. E file taxes free So, your activities are not part of a trade or business and you cannot take a deduction for the business use of your home. E file taxes free Principal Place of Business You can have more than one business location, including your home, for a single trade or business. E file taxes free 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. E file taxes free 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. E file taxes free Your home office will qualify as your principal place of business if you meet the following requirements. E file taxes free You use it exclusively and regularly for administrative or management activities of your trade or business. E file taxes free You have no other fixed location where you conduct substantial administrative or management activities of your trade or business. E file taxes free If, after considering your business locations, your home cannot be identified as your principal place of business, you cannot deduct home office expenses. E file taxes free 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. E file taxes free Administrative or management activities. E file taxes free   There are many activities that are administrative or managerial in nature. E file taxes free The following are a few examples. E file taxes free Billing customers, clients, or patients. E file taxes free Keeping books and records. E file taxes free Ordering supplies. E file taxes free Setting up appointments. E file taxes free Forwarding orders or writing reports. E file taxes free Administrative or management activities performed at other locations. E file taxes free   The following activities performed by you or others will not disqualify your home office from being your principal place of business. E file taxes free You have others conduct your administrative or management activities at locations other than your home. E file taxes free (For example, another company does your billing from its place of business. E file taxes free ) 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. E file taxes free You occasionally conduct minimal administrative or management activities at a fixed location outside your home. E file taxes free You conduct substantial nonadministrative or nonmanagement business activities at a fixed location outside your home. E file taxes free (For example, you meet with or provide services to customers, clients, or patients at a fixed location of the business outside your home. E file taxes free ) You have suitable space to conduct administrative or management activities outside your home, but choose to use your home office for those activities instead. E file taxes free Please click here for the text description of the image. E file taxes free Can you deduct business use of the home expenses? Example 1. E file taxes free John is a self-employed plumber. E file taxes free Most of John's time is spent at customers' homes and offices installing and repairing plumbing. E file taxes free 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. E file taxes free John writes up estimates and records of work completed at his customers' premises. E file taxes free He does not conduct any substantial administrative or management activities at any fixed location other than his home office. E file taxes free John does not do his own billing. E file taxes free He uses a local bookkeeping service to bill his customers. E file taxes free John's home office qualifies as his principal place of business for deducting expenses for its use. E file taxes free 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. E file taxes free His choice to have his billing done by another company does not disqualify his home office from being his principal place of business. E file taxes free 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. E file taxes free Example 2. E file taxes free Pamela is a self-employed sales representative for several different product lines. E file taxes free 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. E file taxes free She occasionally writes up orders and sets up appointments from her hotel room when she is away on business overnight. E file taxes free Pamela's business is selling products to customers at various locations throughout her territory. E file taxes free To make these sales, she regularly visits customers to explain the available products and take orders. E file taxes free Pamela's home office qualifies as her principal place of business for deducting expenses for its use. E file taxes free She conducts administrative or management activities there and she has no other fixed location where she conducts substantial administrative or management activities. E file taxes free 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. E file taxes free 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. E file taxes free Example 3. E file taxes free Paul is a self-employed anesthesiologist. E file taxes free He spends the majority of his time administering anesthesia and postoperative care in three local hospitals. E file taxes free One of the hospitals provides him with a small shared office where he could conduct administrative or management activities. E file taxes free Paul very rarely uses the office the hospital provides. E file taxes free He uses a room in his home that he has converted to an office. E file taxes free He uses this room exclusively and regularly to conduct all the following activities. E file taxes free Contacting patients, surgeons, and hospitals regarding scheduling. E file taxes free Preparing for treatments and presentations. E file taxes free Maintaining billing records and patient logs. E file taxes free Satisfying continuing medical education requirements. E file taxes free Reading medical journals and books. E file taxes free Paul's home office qualifies as his principal place of business for deducting expenses for its use. E file taxes free 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. E file taxes free 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. E file taxes free 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. E file taxes free 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. E file taxes free Example 4. E file taxes free Kathleen is employed as a teacher. E file taxes free She is required to teach and meet with students at the school and to grade papers and tests. E file taxes free 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. E file taxes free The school does not require her to work at home. E file taxes free Kathleen prefers to use the office she has set up in her home and does not use the one provided by the school. E file taxes free She uses this home office exclusively and regularly for the administrative duties of her teaching job. E file taxes free 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. E file taxes free 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. E file taxes free More Than One Trade or Business The same home office can be the principal place of business for two or more separate business activities. E file taxes free 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. E file taxes free You must use the home office exclusively and regularly for one or more of the following purposes. E file taxes free As the principal place of business for one or more of your trades or businesses. E file taxes free 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. E file taxes free If your home office is a separate structure, in connection with one or more of your trades or businesses. E file taxes free You can use your home office for more than one business activity, but you cannot use it for any nonbusiness (i. E file taxes free e. E file taxes free , personal) activities. E file taxes free If you are an employee, any use of the home office in connection with your employment must be for the convenience of your employer. E file taxes free See Rental to employer , later, if you rent part of your home to your employer. E file taxes free Example. E file taxes free Tracy White is employed as a teacher. E file taxes free Her principal place of work is the school, which provides her office space to do her school work. E file taxes free She also has a mail order jewelry business. E file taxes free All her work in the jewelry business is done in her home office and the office is used exclusively for that business. E file taxes free If she meets all the other tests, she can deduct expenses for the business use of her home for the jewelry business. E file taxes free 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. E file taxes free As an employee, Tracy must also meet the convenience-of-the-employer test to qualify for the deduction. E file taxes free 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. E file taxes free 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. E file taxes free You physically meet with patients, clients, or customers on your premises. E file taxes free Their use of your home is substantial and integral to the conduct of your business. E file taxes free Doctors, dentists, attorneys, and other professionals who maintain offices in their homes generally will meet this requirement. E file taxes free Using your home for occasional meetings and telephone calls will not qualify you to deduct expenses for the business use of your home. E file taxes free 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. E file taxes free Example. E file taxes free June Quill, a self-employed attorney, works 3 days a week in her city office. E file taxes free She works 2 days a week in her home office used only for business. E file taxes free She regularly meets clients there. E file taxes free Her home office qualifies for a business deduction because she meets clients there in the normal course of her business. E file taxes free 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. E file taxes free The structure does not have to be your principal place of business or a place where you meet patients, clients, or customers. E file taxes free Example. E file taxes free John Berry operates a floral shop in town. E file taxes free He grows the plants for his shop in a greenhouse behind his home. E file taxes free 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. E file taxes free 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. E file taxes free 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. E file taxes free Electing to use the simplified method. E file taxes free   The simplified method is an alternative to the calculation, allocation, and substantiation of actual expenses. E file taxes free You choose whether or not to figure your deduction using the simplified method each taxable year. E file taxes free See Using the Simplified Method , later. E file taxes free Rental to employer. E file taxes free   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. E file taxes free You can deduct mortgage interest, qualified mortgage insurance premiums, real estate taxes, and personal casualty losses for the rented part, subject to any limitations. E file taxes free 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. E file taxes free 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. E file taxes free You will also need to figure the percentage of your home used for business and the limit on the deduction. E file taxes free 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. E file taxes free 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. E file taxes free Part-year use. E file taxes free   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. E file taxes free 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. E file taxes free Expenses related to tax-exempt income. E file taxes free   Generally, you cannot deduct expenses that are related to tax-exempt allowances. E file taxes free 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. E file taxes free No deduction is allowed for other expenses related to the tax-exempt allowance. E file taxes free   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. E file taxes free Actual Expenses You must divide the expenses of operating your home between personal and business use. E file taxes free The part of a home operating expense you can use to figure your deduction depends on both of the following. E file taxes free Whether the expense is direct, indirect, or unrelated. E file taxes free The percentage of your home used for business. E file taxes free Table 1, next, describes the types of expenses you may have and the extent to which they are deductible. E file taxes free Table 1. E file taxes free Types of Expenses  Expense  Description  Deductibility Direct Expenses only for  the business part  of your home. E file taxes free Deductible in full. E file taxes free *   Examples:  Painting or repairs  only in the area  used for business. E file taxes free Exception: May be only partially  deductible in a daycare facility. E file taxes free See Daycare Facility , later. E file taxes free Indirect Expenses for  keeping up and running your  entire home. E file taxes free Deductible based on the percentage of your home used for business. E file taxes free *   Examples:  Insurance, utilities, and  general repairs. E file taxes free   Unrelated Expenses only for  the parts of your  home not used  for business. E file taxes free Not deductible. E file taxes free   Examples:  Lawn care or painting  a room not used  for business. E file taxes free   *Subject to the deduction limit, discussed later. E file taxes free Form 8829 and the Worksheet To Figure the Deduction for Business Use of Your Home have separate columns for direct and indirect expenses. E file taxes free Certain expenses are deductible whether or not you use your home for business. E file taxes free 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. E file taxes free These expenses include the following. E file taxes free Real estate taxes. E file taxes free Qualified mortgage insurance premiums. E file taxes free Deductible mortgage interest. E file taxes free Casualty losses. E file taxes free Other expenses are deductible only if you use your home for business. E file taxes free You can use the business percentage of these expenses to figure your total business use of the home deduction. E file taxes free These expenses generally include (but are not limited to) the following. E file taxes free Depreciation (covered under Depreciating Your Home , later). E file taxes free Insurance. E file taxes free Rent paid for the use of property you do not own but use in your trade or business. E file taxes free Repairs. E file taxes free Security system. E file taxes free Utilities and services. E file taxes free Real estate taxes. E file taxes free   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. E file taxes free   For more information on the deduction for real estate taxes, see Publication 530, Tax Information for Homeowners. E file taxes free Deductible mortgage interest. E file taxes free   To figure the business part of your deductible mortgage interest, multiply this interest by the percentage of your home used for business. E file taxes free You can include interest on a second mortgage in this computation. E file taxes free 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. E file taxes free For more information on what interest is deductible, see Publication 936, Home Mortgage Interest Deduction. E file taxes free Qualified mortgage insurance premiums. E file taxes free   To figure the business part of your qualified mortgage insurance premiums, multiply the premiums by the percentage of your home used for business. E file taxes free You can include premiums for insurance on a second mortgage in this computation. E file taxes free 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. E file taxes free For more information, see Publication 936, and Line 13 in the Instructions for Schedule A (Form 1040). E file taxes free Casualty losses. E file taxes free    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. E file taxes free A direct expense is the loss on the portion of the property you use only in your business. E file taxes free Use the entire loss to figure the business use of the home deduction. E file taxes free An indirect expense is the loss on property you use for both business and personal purposes. E file taxes free Use only the business portion to figure the deduction. E file taxes free An unrelated expense is the loss on property you do not use in your business. E file taxes free Do not use any of the loss to figure the deduction. E file taxes free Example. E file taxes free You meet the rules to take a deduction for an office in your home that is 10% of the total area of your house. E file taxes free A storm damages your roof. E file taxes free 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. E file taxes free You would complete Form 4684, Casualties and Thefts, to report your loss. E file taxes free 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. E file taxes free 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. E file taxes free 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. E file taxes free Forms and worksheets to use. E file taxes free   If you are filing Schedule C (Form 1040), get Form 8829 and follow the instructions for casualty losses. E file taxes free 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. E file taxes free You will also need to get Form 4684. E file taxes free More information. E file taxes free   For more information on casualty losses, see Publication 547, Casualties, Disasters, and Thefts. E file taxes free Insurance. E file taxes free   You can deduct the cost of insurance that covers the business part of your home. E file taxes free 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. E file taxes free You can deduct the business percentage of the part that applies to the following year in that year. E file taxes free Rent. E file taxes free   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. E file taxes free To figure your deduction, multiply your rent payments by the percentage of your home used for business. E file taxes free   If you own your home, you cannot deduct the fair rental value of your home. E file taxes free However, see Depreciating Your Home , later. E file taxes free Repairs. E file taxes free   The cost of repairs that relate to your business, including labor (other than your own labor), is a deductible expense. E file taxes free For example, a furnace repair benefits the entire home. E file taxes free If you use 10% of your home for business, you can deduct 10% of the cost of the furnace repair. E file taxes free   Repairs keep your home in good working order over its useful life. E file taxes free Examples of common repairs are patching walls and floors, painting, wallpapering, repairing roofs and gutters, and mending leaks. E file taxes free However, repairs are sometimes treated as a permanent improvement and are not deductible. E file taxes free See Permanent improvements , later, under Depreciating Your Home. E file taxes free Security system. E file taxes free   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. E file taxes free 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. E file taxes free Utilities and services. E file taxes free   Expenses for utilities and services, such as electricity, gas, trash removal, and cleaning services, are primarily personal expenses. E file taxes free However, if you use part of your home for business, you can deduct the business part of these expenses. E file taxes free Generally, the business percentage for utilities is the same as the percentage of your home used for business. E file taxes free Telephone. E file taxes free   The basic local telephone service charge, including taxes, for the first telephone line into your home (i. E file taxes free e. E file taxes free , landline) is a nondeductible personal expense. E file taxes free 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. E file taxes free Do not include these expenses as a cost of using your home for business. E file taxes free Deduct these charges separately on the appropriate form or schedule. E file taxes free 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). E file taxes free Depreciating Your Home If you own your home and qualify to deduct expenses for its business use, you can claim a deduction for depreciation. E file taxes free Depreciation is an allowance for the wear and tear on the part of your home used for business. E file taxes free You cannot depreciate the cost or value of the land. E file taxes free You recover its cost when you sell or otherwise dispose of the property. E file taxes free Before you figure your depreciation deduction, you need to know the following information. E file taxes free The month and year you started using your home for business. E file taxes free The adjusted basis and fair market value of your home (excluding land) at the time you began using it for business. E file taxes free The cost of any improvements before and after you began using the property for business. E file taxes free The percentage of your home used for business. E file taxes free See Business Percentage , later. E file taxes free Adjusted basis defined. E file taxes free   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. E file taxes free For a discussion of adjusted basis, see Publication 551. E file taxes free Permanent improvements. E file taxes free   A permanent improvement increases the value of property, adds to its life, or gives it a new or different use. E file taxes free Examples of improvements are replacing electric wiring or plumbing, adding a new roof or addition, paneling, or remodeling. E file taxes free    You must carefully distinguish between repairs and improvements. E file taxes free See Repairs , earlier, under Actual Expenses. E file taxes free You also must keep accurate records of these expenses. E file taxes free These records will help you decide whether an expense is a deductible or a capital (added to the basis) expense. E file taxes free However, if you make repairs as part of an extensive remodeling or restoration of your home, the entire job is an improvement. E file taxes free Example. E file taxes free You buy an older home and fix up two rooms as a beauty salon. E file taxes free 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. E file taxes free Normally, the patching, painting, and floor work are repairs and the other expenses are permanent improvements. E file taxes free 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. E file taxes free You cannot deduct any portion of it as a repair expense. E file taxes free Adjusting for depreciation deducted in earlier years. E file taxes free   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. E file taxes free 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. E file taxes free If you did not deduct any depreciation, decrease the basis by the amount you could have deducted. E file taxes free   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. E file taxes free   If you deducted the incorrect amount of depreciation, see Publication 946. E file taxes free Fair market value defined. E file taxes free   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. E file taxes free 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. E file taxes free Figuring the depreciation deduction for the current year. E file taxes free   If you began using your home for business before 2013, continue to use the same depreciation method you used in past tax years. E file taxes free   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). E file taxes free Under MACRS, nonresidential real property is depreciated using the straight line method over 39 years. E file taxes free For more information on MACRS and other methods of depreciation, see Publication 946. E file taxes free   To figure the depreciation deduction, you must first figure the part of the cost of your home that can be depreciated (depreciable basis). E file taxes free The depreciable basis is figured by multiplying the percentage of your home used for business by the smaller of the following. E file taxes free The adjusted basis of your home (excluding land) on the date you began using your home for business. E file taxes free The fair market value of your home (excluding land) on the date you began using your home for business. E file taxes free Depreciation table. E file taxes free   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. E file taxes free Table 2. E file taxes free MACRS Percentage Table for 39-Year Nonresidential Real Property Month First Used for Business Percentage To Use 1 2. E file taxes free 461% 2 2. E file taxes free 247% 3 2. E file taxes free 033% 4 1. E file taxes free 819% 5 1. E file taxes free 605% 6 1. E file taxes free 391% 7 1. E file taxes free 177% 8 0. E file taxes free 963% 9 0. E file taxes free 749% 10 0. E file taxes free 535% 11 0. E file taxes free 321% 12 0. E file taxes free 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. E file taxes free See Publication 946 for the percentages for the remaining tax years of the recovery period. E file taxes free Example. E file taxes free In May, George Miller began to use one room in his home exclusively and regularly to meet clients. E file taxes free This room is 8% of the square footage of his home. E file taxes free He bought the home in 2003 for $125,000. E file taxes free He determined from his property tax records that his adjusted basis in the house (exclusive of land) is $115,000. E file taxes free In May, the house had a fair market value of $165,000. E file taxes free He multiplies his adjusted basis of $115,000 (which is less than the fair market value) by 8%. E file taxes free The result is $9,200, his depreciable basis for the business part of the house. E file taxes free George files his return based on the calendar year. E file taxes free May is the 5th month of his tax year. E file taxes free He multiplies his depreciable basis of $9,200 by 1. E file taxes free 605% (. E file taxes free 01605), the percentage from the table for the 5th month. E file taxes free His depreciation deduction is $147. E file taxes free 66. E file taxes free Depreciating permanent improvements. E file taxes free   Add the costs of permanent improvements made before you began using your home for business to the basis of your property. E file taxes free Depreciate these costs as part of the cost of your home as explained earlier. E file taxes free 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. E file taxes free 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. E file taxes free For improvements made this year, the recovery period is 39 years. E file taxes free For the percentage to use for the first year, see Table 2, earlier. E file taxes free For more information on recovery periods, see Publication 946. E file taxes free 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. E file taxes free Use the resulting percentage to figure the business part of the expenses for operating your entire home. E file taxes free You can use any reasonable method to determine the business percentage. E file taxes free The following are two commonly used methods for figuring the percentage. E file taxes free Divide the area (length multiplied by the width) used for business by the total area of your home. E file taxes free 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. E file taxes free Example 1. E file taxes free Your office is 240 square feet (12 feet × 20 feet). E file taxes free Your home is 1,200 square feet. E file taxes free Your office is 20% (240 ÷ 1,200) of the total area of your home. E file taxes free Your business percentage is 20%. E file taxes free Example 2. E file taxes free You use one room in your home for business. E file taxes free Your home has 10 rooms, all about equal size. E file taxes free Your office is 10% (1 ÷ 10) of the total area of your home. E file taxes free Your business percentage is 10%. E file taxes free 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. E file taxes free 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. E file taxes free 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. E file taxes free 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. E file taxes free 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)). E file taxes free These expenses are discussed in detail under Actual Expenses , earlier. E file taxes free 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. E file taxes free If you are self-employed, do not include in (2) above your deduction for one-half of your self-employment tax. E file taxes free Carryover of unallowed expenses. E file taxes free   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. E file taxes free They are subject to the deduction limit for that year, whether or not you live in the same home during that year. E file taxes free Figuring the deduction limit and carryover. E file taxes free   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. E file taxes free If you file Schedule C (Form 1040), figure your deduction limit and carryover on Form 8829. E file taxes free Example. E file taxes free You meet the requirements for deducting expenses for the business use of your home. E file taxes free You use 20% of your home for business. E file taxes free 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. E file taxes free    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). E file taxes free You also can deduct all of your business expenses not related to the use of your home ($2,000). E file taxes free 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. E file taxes free Your deduction for depreciation for the business use of your home is limited to $200 ($1,000 minus $800) because of the deduction limit. E file taxes free You can carry over the $1,400 balance and add it to your depreciation for 2014, subject to your deduction limit in 2014. E file taxes free More than one place of business. E file taxes free   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. E file taxes free 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. E file taxes free 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. E file taxes free For more information on transportation costs, see Publication 463, Travel, Entertainment, Gift, and Car Expenses. E file taxes free Using the Simplified Method The simplified method is an alternative to the calculation, allocation, and substantiation of actual expenses. E file taxes free 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. E file taxes free The area you use to figure your deduction is limited to 300 square feet. E file taxes free See Simplified Amount , later, for information about figuring the amount of the deduction. E file taxes free For more information about the simplified method, see Revenue Procedure 2013-13, 2013-06 I. E file taxes free R. E file taxes free B. E file taxes free 478, available at www. E file taxes free irs. E file taxes free gov/irb/2013-06_IRB/ar09. E file taxes free html. E file taxes free Actual expenses and depreciation of your home. E file taxes free   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. E file taxes free 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. E file taxes free The depreciation deduction allowable for that portion of the home is deemed to be zero for a year you use the simplified method. E file taxes free 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. E file taxes free More information. E file taxes free   For more information about claiming depreciation in a subsequent year, see Revenue Procedure 2013-13, 2013-06 I. E file taxes free R. E file taxes free B. E file taxes free 478, available at www. E file taxes free irs. E file taxes free gov/irb/2013-06_IRB/ar09. E file taxes free html. E file taxes free 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). E file taxes free Expenses deductible without regard to business use. E file taxes free   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. E file taxes free These expenses include mortgage interest, real estate taxes, and casualty losses, subject to any limitations. E file taxes free See Where To Deduct , later. E file taxes free 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). E file taxes free No deduction of carryover of actual expenses. E file taxes free   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. E file taxes free Instead, you will continue to carry over the disallowed amount to the next year that you use actual expenses to figure your deduction. E file taxes free Electing the Simplified Method You choose whether or not to figure your deduction using the simplified method each taxable year. E file taxes free 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. E file taxes free An election for a taxable year, once made, is irrevocable. E file taxes free 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. E file taxes free Shared use. E file taxes free   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. E file taxes free More than one qualified business use. E file taxes free   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. E file taxes free More than one home. E file taxes free   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. E file taxes free You must figure the deduction for any other home using actual expenses. E file taxes free 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. E file taxes free 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. E file taxes free The allowable area of your home used in conducting the business. E file taxes free 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. E file taxes free The gross income from the business use of your home. E file taxes free The amount of the business expenses that are not related to the use of your home. E file taxes free 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. E file taxes free To figure the amount you can deduct for qualified business use of your home using the simplified method, follow these 3 steps. E file taxes free 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). E file taxes free See Allowable area and Space used regularly for daycare , later. E file taxes free 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. E file taxes free 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. E file taxes free See Gross income limitation , later. E file taxes free Take the smaller of the amounts from (1) and (2). E file taxes free This is the amount you can deduct for this qualified business use of your home using the simplified method. E file taxes free 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. E file taxes free 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. E file taxes free Allowable area. E file taxes free   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. E file taxes free 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. E file taxes free 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. E file taxes free Area used by a qualified joint venture. E file taxes free   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. E file taxes free Split the actual area used in conducting business between you and your spouse in the same manner you split your other tax attributes. E file taxes free Then, each spouse will figure the allowable area separately. E file taxes free For more information about qualified joint ventures, see Qualified Joint Venture in the Instructions for Schedule C. E file taxes free Shared use. E file taxes free   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. E file taxes free You must allocate the shared space between you and the other person in a reasonable manner. E file taxes free Example. E file taxes free Kristin and Lindsey are roommates. E file taxes free Kristin uses 300 square feet of their home for a qualified business use. E file taxes free Lindsey uses 200 square feet of their home for a separate qualified business use. E file taxes free The qualified business uses share 100 square feet. E file taxes free 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. E file taxes free If divided evenly, Kristin could claim 250 square feet using the simplified method and Lindsey could claim 150 square feet. E file taxes free More than one qualified business use. E file taxes free   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. E file taxes free Allocate the actual square footage used (up to the maximum of 300 square feet) among your qualified business uses in a reasonable manner. E file taxes free However, do not allocate more square feet to a qualified business use than you actually use for that business. E file taxes free Rental use. E file taxes free   The simplified method does not apply to rental use. E file taxes free A rental use that qualifies for the deduction must be figured using actual expenses. E file taxes free 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. E file taxes free 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. E file taxes free Part-year use or area changes. E file taxes free   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. E file taxes free 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. E file taxes free When determining the average monthly allowable square footage, you cannot take more than 300 square feet into account for any one month. E file taxes free Additionally, if your qualified business use was less than 15 days in a month, you must use -0- for that month. E file taxes free Example 1. E file taxes free Andy files his federal income tax return on a calendar year basis. E file taxes free On July 20, he began using 420 square feet of his home for a qualified business use. E file taxes free He continued to use the 420 square feet until the end of the year. E file taxes free 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). E file taxes free Example 2. E file taxes free Amy files her federal income tax return on a calendar year basis. E file taxes free On April 20, she began using 100 square feet of her home for a qualified business use. E file taxes free On August 5, she expanded the area of her qualified use to 330 square feet. E file taxes free Amy continued to use the 330 square feet until the end of the year. E file taxes free 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). E file taxes free Gross income limitation. E file taxes free   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. E file taxes free 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. E file taxes free Business expenses not related to use of the home. E file taxes free   These expenses relate to the business activity in the home, but not to the use of the home itself. E file taxes free You can still deduct business expenses that are unrelated to the use of the home. E file taxes free See Where To Deduct , later. E file taxes free Examples of business expenses that are unrelated to the use of the home are advertising, wages, supplies, dues, and depreciation for equipment. E file taxes free Space used regularly for daycare. E file taxes free   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. E file taxes free The reduced rate will equal the prescribed rate times a fraction. E file taxes free 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. E file taxes free You can use the Daycare Facility Worksheet (for simplified method), near the end of this publication, to help you figure the reduced rate. E file taxes free    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. E file taxes free 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. E file taxes free To qualify for this exception to the exclusive use rule, you must meet both of the following requirements. E file taxes free 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. E file taxes free 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. E file taxes free You do not meet this requirement if your application was rejected or your license or other authorization was revoked. E file taxes free Figuring the deduction. E file taxes free   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. E file taxes free    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. E file taxes free If you also use that part exclusively for daycare, deduct all the allocable expenses, subject to the deduction limit, as explained earlier. E file taxes free   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. E file taxes free 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. E file taxes free You do not have to keep records to show the specific hours the area was used for business. E file taxes free You can use the area occasionally for personal reasons. E file taxes free However, a room you use only occasionally for business does not qualify for the deduction. E file taxes free 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. E file taxes free You can compare the hours of business use in a week with the number of hours in a week (168). E file taxes free Or you can compare the hours of business use for the year with the number of hours in the year (8,760 in 2013). E file taxes free 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. E file taxes free Example 1. E file taxes free Mary Lake used her basement to operate a daycare business for children. E file taxes free She figures the business percentage of the basement as follows. E file taxes free 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. E file taxes free During the other 12 hours a day, the family could use the basement. E file taxes free She figures the percentage of time the basement was used for daycare as follows. E file taxes free 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. E file taxes free 25%           Mary can deduct 34. E file taxes free 25% of any direct expenses for the basement. E file taxes free However, because her indirect expenses are for the entire house, she can deduct only 17. E file taxes free 13% of the indirect expenses. E file taxes free She figures the percentage for her indirect expenses as follows. E file taxes free Business percentage of the basement 50% Multiplied by: Percentage of time used for daycare × 34. E file taxes free 25% Percentage for indirect expenses 17. E file taxes free 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. E file taxes free In Part II, Mary figures her deductible expenses. E file taxes free She uses the following information to complete Part II. E file taxes free 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. E file taxes free (This figure is the same as the amount on line 29 of her Schedule C (Form 1040). E file taxes free ) The expenses she paid for rent and utilities relate to her entire home. E file taxes free Therefore, she enters the amount paid for rent on line 18, column (b), and the amount paid for utilities on line 20, column (b). E file taxes free She shows the total of these expenses on line 22, column (b). E file taxes free For line 23, she multiplies the amount on line 22, column (b) by the percentage on line 7 and enters the result, $1,585. E file taxes free Mary paid $500 to have the basement painted. E file taxes free The painting is a direct expense. E file taxes free 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. E file taxes free 25% – line 6). E file taxes free She enters $171 (34. E file taxes free 25% × $500) on line 19, column (a). E file taxes free She adds line 22, column (a), and line 23 and enters $1,756 ($171 + $1,585) on line 25. E file taxes free This is less than her deduction limit (line 15), so she can deduct the entire amount. E file taxes free She follows the instructions to complete the rest of Part II and enters $1,756 on lines 33 and 35. E file taxes free She then carries the $1,756 to line 30 of her Schedule C (Form 1040). E file taxes free Example 2. E file taxes free 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. E file taxes free 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. E file taxes free 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. E file taxes free The basement and room are 60% of the total area of her home. E file taxes free In figuring her expenses, 34. E file taxes free 25% of any direct expenses for the basement and room are deductible. E file taxes free In addition, 20. E file taxes free 55% (34. E file taxes free 25% × 60%) of her indirect expenses are deductible. E file taxes free Example 3. E file taxes free Assume the same facts as in Example 1 except that Mary stopped using her home for a daycare facility on June 24, 2013. E file taxes free 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. E file taxes free During the other 12 hours a day, the family could still use the basement. E file taxes free She figures the percentage of time the basement was used for business as follows. E file taxes free 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. E file taxes free 71%           Mary can deduct 35. E file taxes free 71% of any direct expenses for the basement. E file taxes free However, because her indirect expenses are for the entire house, she can deduct only 17. E file taxes free 86% of the indirect expenses. E file taxes free She figures the percentage for her indirect expenses as follows. E file taxes free Business percentage of the basement 50% Multiplied by: Percentage of time used for daycare × 35. E file taxes free 71% Percentage for indirect expenses 17. E file taxes free 86% Meals. E file taxes free   If you provide food for your daycare recipients, do not include the expense as a cost of using your home for business. E file taxes free Claim it as a separate deduction on your Schedule C (Form 1040). E file taxes free You can never deduct the cost of food consumed by you or your family. E file taxes free 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. E file taxes free 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. E file taxes free 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. E file taxes free   If you deduct the actual cost of food for your daycare business, keep a separate record (with receipts) of your family's food costs. E file taxes free   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. E file taxes free If your reimbursements are more than your expenses for food, show the difference as income in Part I of Schedule C (Form 1040). E file taxes free If your food expenses are greater than the reimbursements, show the difference as an expense in Part V of Schedule C (Form 1040). E file taxes free Do not include payments or expenses for your own children if they are eligible for the program. E file taxes free Follow this procedure even if you receive a Form 1099-MISC, Miscellaneous Income, reporting a payment from the sponsor. E file taxes free Standard meal and snack rates. E file taxes free   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. E file taxes free For these purposes: A family daycare provider is a person engaged in the business of providing family daycare. E file taxes free Family daycare is childcare provided to eligible children in the home of the family daycare provider. E file taxes free The care must be non-medical, not involve a transfer of legal custody, and generally last less than 24 hours each day. E file taxes free Eligible children are minor children receiving family daycare in the home of the family daycare provider. E file taxes free 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. E file taxes free Eligible children do not include children who receive daycare services for personal reasons of the provider. E file taxes free For example, if a provider provides daycare services for a relative as a favor to that relative, that child is not an eligible child. E file taxes free   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. E file taxes free 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. E file taxes free 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. E file taxes free   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. E file taxes free 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. E file taxes free 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. E file taxes free   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. E file taxes free 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. E file taxes free This information can be recorded in a log similar to the one shown in Exhibit A, near the end of this publication. E file taxes free   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. E file taxes free These expenses can be claimed as a separate deduction on your Schedule C (Form 1040). E file taxes free     Table 3. E file taxes free Standard Meal and Snack Rates1 Location of Family Daycare Provider Breakfast Lunch Dinner Snack States other than Alaska an
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Letter 2357C Frequently Asked Questions (FAQs)

What is the letter telling me?

The letter is informing you that we failed to send you the balance due notices we should have sent you.

What do I have to do?

Pay the balance due in the letter as soon as possible.

How much time do I have?

The letter provides you the full pay amount to a specified date.

What happens if I don't take any action?

If you do not make arrangements to pay the balance you owe, we can proceed with enforcement action and may file a levy on your wages or bank account or file a lien on your personal property.

Who should I contact?

If you have any questions about this letter, call us at the number printed in the letter. The person who answers the phone will assist you.

What if I don't agree or have already taken corrective action?

If you do not agree with this letter, call us immediately at the number included. We will do our best to help you. If you have called us about this matter before, but we did not correct the problem, you may want to contact the Office of the Taxpayer Advocate.

Page Last Reviewed or Updated: 30-Jan-2014

The E File Taxes Free

E file taxes free Publication 517 - Main Content Table of Contents Social Security CoverageCoverage of Members of the Clergy Coverage of Religious Workers (Church Employees) U. E file taxes free S. E file taxes free Citizens and Resident and Nonresident Aliens Ministerial ServicesMinisters Members of Religious Orders Christian Science Practitioners and Readers Exemption From Self-Employment (SE) TaxMembers of the Clergy Members of Recognized Religious Sects Self-Employment Tax: Figuring Net EarningsRegular Method Nonfarm Optional Method Income Tax: Income and ExpensesIncome Items Expense Items Income Tax Withholding and Estimated Tax Filing Your Return Retirement Savings ArrangementsDeducting contributions to tax-sheltered annuity plans. E file taxes free Full-time student. E file taxes free Adjusted gross income. E file taxes free More information. E file taxes free Earned Income Credit Comprehensive ExampleForm W-2 From Church Form W-2 From College Schedule C-EZ (Form 1040) Form 2106-EZ Schedule A (Form 1040) Schedule SE (Form 1040) Form 1040 Attachment 1 Attachment 2 How To Get Tax HelpLow Income Taxpayer Clinics Social Security Coverage This section gives information about which system (SECA or FICA) is used to collect social security and Medicare taxes from members of the clergy (ministers, members of a religious order, and Christian Science practitioners and readers) and religious workers (church employees). E file taxes free Coverage of Members of the Clergy The services you perform in the exercise of your ministry, of the duties required by your religious order, or of your profession as a Christian Science practitioner or reader are covered by social security and Medicare under SECA. E file taxes free Your earnings for these ministerial services (defined later) are subject to self-employment (SE) tax unless one of the following applies. E file taxes free You are a member of a religious order who has taken a vow of poverty. E file taxes free You ask the Internal Revenue Service (IRS) for an exemption from SE tax for your services and the IRS approves your request. E file taxes free See Exemption From Self-Employment (SE) Tax , later. E file taxes free You are subject only to the social security laws of a foreign country under the provisions of a social security agreement between the United States and that country. E file taxes free For more information, see Bilateral Social Security (Totalization) Agreements in Publication 54. E file taxes free Your earnings that are not from ministerial services may be subject to social security tax under FICA or SECA according to the rules that apply to taxpayers in general. E file taxes free See Ministerial Services , later. E file taxes free Ministers If you are a minister of a church, your earnings for the services you perform in your capacity as a minister are subject to SE tax, even if you perform these services as an employee of that church. E file taxes free However, you can request that the IRS grant you an exemption, as discussed under Exemption From Self-Employment (SE) Tax , later. E file taxes free For the specific services covered, see Ministerial Services , later. E file taxes free Ministers defined. E file taxes free   Ministers are individuals who are duly ordained, commissioned, or licensed by a religious body constituting a church or church denomination. E file taxes free Ministers have the authority to conduct religious worship, perform sacerdotal functions, and administer ordinances or sacraments according to the prescribed tenets and practices of that church or denomination. E file taxes free   If a church or denomination ordains some ministers and licenses or commissions others, anyone licensed or commissioned must be able to perform substantially all the religious functions of an ordained minister to be treated as a minister for social security purposes. E file taxes free Employment status for other tax purposes. E file taxes free   Even though all of your income from performing ministerial services is subject to self-employment tax for social security tax purposes, you may be an employee for income tax or retirement plan purposes in performing those same services. E file taxes free For income tax or retirement plan purposes, your income earned as an employee will be considered wages. E file taxes free Common-law employee. E file taxes free   Under common-law rules, you are considered either an employee or a self-employed person. E file taxes free Generally, you are an employee if you perform services for someone who has the legal right to control both what you do and how you do it, even if you have considerable discretion and freedom of action. E file taxes free For more information about the common-law rules, see Publication 15-A, Employer's Supplemental Tax Guide. E file taxes free   If a congregation employs you and pays you a salary, you are generally a common-law employee and income from the exercise of your ministry is wages for income tax purposes. E file taxes free However, amounts received directly from members of the congregation, such as fees for performing marriages, baptisms, or other personal services, are not wages; such amounts are self-employment income for both income tax purposes and social security tax purposes. E file taxes free Example. E file taxes free A church hires and pays you a salary to perform ministerial services subject to its control. E file taxes free Under the common-law rules, you are an employee of the church while performing those services. E file taxes free Form SS-8. E file taxes free   If you are not certain whether you are an employee or a self-employed person, you can get a determination from the IRS by filing Form SS-8. E file taxes free Members of Religious Orders If you are a member of a religious order who has not taken a vow of poverty, your earnings for ministerial services you perform as a member of the order are subject to SE tax. E file taxes free See Ministerial Services , later. E file taxes free However, you can request that the IRS grant you an exemption as discussed under Exemption From Self-Employment (SE) Tax , later. E file taxes free Vow of poverty. E file taxes free   If you are a member of a religious order and have taken a vow of poverty, you are already exempt from paying SE tax on your earnings for ministerial services you perform as an agent of your church or its agencies. E file taxes free You do not need to request a separate exemption. E file taxes free For income tax purposes, the earnings are tax free to you. E file taxes free Your earnings are considered the income of the religious order. E file taxes free Services covered under FICA at the election of the order. E file taxes free   However, even if you have taken a vow of poverty, the services you perform for your church or its agencies may be covered under social security. E file taxes free Your services are covered if your order, or an autonomous subdivision of the order, elects social security coverage for its current and future vow-of-poverty members. E file taxes free   The order or subdivision elects coverage by filing Form SS-16. E file taxes free The election may cover certain vow-of-poverty members for a retroactive period of up to 20 calendar quarters before the quarter in which it files the certificate. E file taxes free If the election is made, the order or subdivision pays both the employer's and employee's share of the tax. E file taxes free You do not pay any of the FICA tax. E file taxes free Services performed outside the order. E file taxes free   Even if you are a member of a religious order who has taken a vow of poverty and the order requires you to turn over amounts you earn, your earnings are subject to federal income tax and either SE tax or FICA tax (including estimated tax payments and/or withholding) if you: Are self-employed or an employee of an organization outside your religious community, and Perform work not required by, or done on behalf of, the order. E file taxes free   In these cases, your income from self-employment or as an employee of that outside organization is taxable to you directly. E file taxes free You may, however, be able to take a charitable deduction for the amount you turn over to the order. E file taxes free See Publication 526, Charitable Contributions. E file taxes free Rulings. E file taxes free   Organizations and individuals may request rulings from the IRS on whether they are religious orders, or members of a religious order, respectively, for FICA tax, SE tax, and federal income tax withholding purposes. E file taxes free To request a ruling, follow the procedures in Revenue Procedure 2014-1, 2014-1 I. E file taxes free R. E file taxes free B. E file taxes free 1, available at www. E file taxes free irs. E file taxes free gov/irb/2014-1_IRB/ar05. E file taxes free html. E file taxes free Christian Science Practitioners and Readers Generally, your earnings from services you perform in your profession as a Christian Science practitioner or reader are subject to SE tax. E file taxes free However, you can request an exemption as discussed under Exemption From Self-Employment (SE) Tax , later. E file taxes free Practitioners. E file taxes free   Christian Science practitioners are members in good standing of the Mother Church, The First Church of Christ, Scientist, in Boston, Massachusetts, who practice healing according to the teachings of Christian Science. E file taxes free State law specifically exempts Christian Science practitioners from licensing requirements. E file taxes free   Some Christian Science practitioners also are Christian Science teachers or lecturers. E file taxes free Income from teaching or lecturing is considered the same as income from their work as practitioners. E file taxes free Readers. E file taxes free   For tax purposes, Christian Science readers are considered the same as ordained, commissioned, or licensed ministers. E file taxes free Coverage of Religious Workers (Church Employees) If you are a religious worker (a church employee) and are not in one of the classes already discussed, your wages are generally subject to social security and Medicare tax under FICA, not SECA. E file taxes free Some exceptions are discussed next. E file taxes free Election by Church To Exclude Its Employees From FICA Coverage Churches and qualified church-controlled organizations (church organizations) that are opposed for religious reasons to the payment of social security and Medicare taxes can elect to exclude their employees from FICA coverage. E file taxes free If your employer makes this election, it does not pay the employer's portion of the FICA taxes or withhold from your pay your portion of the FICA taxes. E file taxes free Instead, your wages are subject to SECA and you must pay SE tax on your wages if they exceed $108. E file taxes free 28 during the tax year. E file taxes free However, you can request an exemption from SE tax if you are a member of a recognized religious sect, as discussed below. E file taxes free Churches and church organizations make this election by filing two copies of Form 8274. E file taxes free For more information about making this election, see Form 8274. E file taxes free Election by Certain Church Employees Who Are Opposed to Social Security and Medicare You may be able to choose to be exempt from social security and Medicare taxes, including the SE tax, if you are a member of a recognized religious sect or division and work for a church (or church-controlled nonprofit division) that does not pay the employer's part of the social security tax on wages. E file taxes free This exemption does not apply to your service, if any, as a minister of a church or as a member of a religious order. E file taxes free Make this choice by filing Form 4029. E file taxes free See Requesting Exemption—Form 4029 , later, under Members of Recognized Religious Sects. E file taxes free U. E file taxes free S. E file taxes free Citizens and Resident and Nonresident Aliens To be covered under the SE tax provisions (SECA), individuals generally must be citizens or resident aliens of the United States. E file taxes free Nonresident aliens are not covered under SECA unless a social security agreement in effect between the United States and the foreign country determines that you are covered under the U. E file taxes free S. E file taxes free social security system. E file taxes free To determine your alien status, see Publication 519, U. E file taxes free S. E file taxes free Tax Guide for Aliens. E file taxes free Residents of Puerto Rico, the U. E file taxes free S. E file taxes free Virgin Islands, Guam, the CNMI, and American Samoa. E file taxes free   If you are a resident of one of these U. E file taxes free S. E file taxes free possessions but not a U. E file taxes free S. E file taxes free citizen, for SE tax purposes you are treated the same as a citizen or resident alien of the United States. E file taxes free For information on figuring the tax, see Self-Employment Tax: Figuring Net Earnings , later. E file taxes free Ministerial Services Ministerial services, in general, are the services you perform in the exercise of your ministry, in the exercise of your duties as required by your religious order, or in the exercise of your profession as a Christian Science practitioner or reader. E file taxes free Income you receive for performing ministerial services is subject to SE tax unless you have an exemption as explained later. E file taxes free Even if you have an exemption, only the income you receive for performing ministerial services is exempt. E file taxes free The exemption does not apply to any other income. E file taxes free The following discussions provide more detailed information on ministerial services of ministers, members of a religious order, and Christian Science practitioners and readers. E file taxes free Ministers Most services you perform as a minister, priest, rabbi, etc. E file taxes free , are ministerial services. E file taxes free These services include: Performing sacerdotal functions, Conducting religious worship, and Controlling, conducting, and maintaining religious organizations (including the religious boards, societies, and other integral agencies of such organizations) that are under the authority of a religious body that is a church or denomination. E file taxes free You are considered to control, conduct, and maintain a religious organization if you direct, manage, or promote the organization's activities. E file taxes free A religious organization is under the authority of a religious body that is a church or denomination if it is organized for and dedicated to carrying out the principles of a faith according to the requirements governing the creation of institutions of the faith. E file taxes free Services for nonreligious organizations. E file taxes free   Your services for a nonreligious organization are ministerial services if the services are assigned or designated by your church. E file taxes free Assigned or designated services qualify even if they do not involve performing sacerdotal functions or conducting religious worship. E file taxes free   If your services are not assigned or designated by your church, they are ministerial services only if they involve performing sacerdotal functions or conducting religious worship. E file taxes free Services that are not part of your ministry. E file taxes free   Income from services you perform as an employee that are not ministerial services is subject to social security and Medicare tax withholding under FICA (not SECA) under the rules that apply to employees in general. E file taxes free The following are not ministerial services. E file taxes free Services you perform for nonreligious organizations other than the services stated above. E file taxes free Services you perform as a duly ordained, commissioned, or licensed minister of a church as an employee of the United States, the District of Columbia, a foreign government, or any of their political subdivisions. E file taxes free These services are not ministerial services even if you are performing sacerdotal functions or conducting religious worship. E file taxes free (For example, if you perform services as a chaplain in the Armed Forces of the United States, those services are not ministerial services. E file taxes free ) Services you perform in a government-owned and operated hospital. E file taxes free (These services are considered performed by a government employee, not by a minister as part of the ministry. E file taxes free ) However, services that you perform at a church-related hospital or health and welfare institution, or a private nonprofit hospital, are considered to be part of the ministry and are considered ministerial services. E file taxes free Books or articles. E file taxes free   Writing religious books or articles is considered to be in the exercise of your ministry and is considered a ministerial service. E file taxes free   This rule also applies to members of religious orders and to Christian Science practitioners and readers. E file taxes free Members of Religious Orders Services you perform as a member of a religious order in the exercise of duties required by the order are ministerial services. E file taxes free The services are considered ministerial because you perform them as an agent of the order. E file taxes free For example, if the order directs you to perform services for another agency of the supervising church or an associated institution, you are considered to perform the services as an agent of the order. E file taxes free However, if the order directs you to work outside the order, this employment will not be considered a duty required by the order unless: Your services are the kind that are ordinarily performed by members of the order, and Your services are part of the duties that must be exercised for, or on behalf of, the religious order as its agent. E file taxes free Effect of employee status. E file taxes free   Ordinarily, if your services are not considered directed or required of you by the order, you and the outside party for whom you work are considered employee and employer. E file taxes free In this case, your earnings from the services are taxed under the rules that apply to employees in general, not under the rules for services provided as agent for the order. E file taxes free This result is true even if you have taken a vow of poverty. E file taxes free Example. E file taxes free Pat Brown and Chris Green are members of a religious order and have taken vows of poverty. E file taxes free They renounce all claims to their earnings. E file taxes free The earnings belong to the order. E file taxes free Pat is a licensed attorney. E file taxes free The superiors of the order instructed her to get a job with a law firm. E file taxes free Pat joined a law firm as an employee and, as she requested, the firm made the salary payments directly to the order. E file taxes free Chris is a secretary. E file taxes free The superiors of the order instructed him to accept a job with the business office of the church that supervises the order. E file taxes free Chris took the job and gave all his earnings to the order. E file taxes free Pat's services are not duties required by the order. E file taxes free Her earnings are subject to social security and Medicare tax under FICA and to federal income tax. E file taxes free Chris' services are duties required by the order. E file taxes free He is acting as an agent of the order and not as an employee of a third party. E file taxes free He does not include the earnings in gross income, and they are not subject to income tax withholding or to social security and Medicare tax under FICA or SECA. E file taxes free Christian Science Practitioners and Readers Services you perform as a Christian Science practitioner or reader in the exercise of your profession are ministerial services. E file taxes free Amounts you receive for performing these services are generally subject to SE tax. E file taxes free You may request an exemption from SE tax, discussed next, which applies only to those services. E file taxes free Exemption From Self-Employment (SE) Tax You can request an exemption from SE tax if you are a member of the clergy (minister, member of a religious order, or Christian Science practitioner or reader) or a member of a recognized religious sect. E file taxes free Generally, members of religious orders who have taken a vow of poverty are already exempt from paying SE tax, as discussed earlier under Members of Religious Orders under Social Security Coverage. E file taxes free They do not have to request the exemption. E file taxes free Who cannot be exempt. E file taxes free   You cannot be exempt from SE tax if you made one of the following elections to be covered under social security. E file taxes free These elections are irrevocable. E file taxes free You elected to be covered under social security by filing Form 2031, Revocation of Exemption From Self-Employment Tax for Use by Ministers, Members of Religious Orders, and Christian Science Practitioners, for your 1986, 1987, 2000, or 2001 tax year. E file taxes free You elected before 1968 to be covered under social security for your ministerial services. E file taxes free Requesting exemption. E file taxes free    Table 2, earlier, briefly summarizes the procedure for requesting exemption from the SE tax. E file taxes free More detailed explanations follow. E file taxes free If you are a minister, member of a religious order, or Christian Science practitioner, an approved exemption only applies to earnings you receive for ministerial services, discussed earlier. E file taxes free It does not apply to any other self-employment income. E file taxes free Table 2. E file taxes free The Self-Employment Tax Exemption Application and Approval Process   Who Can Apply Members of the Clergy Members of Recognized  Religious Sects How File Form 4361 File Form 4029 When File by the due date (including extensions) of your income tax return for the second tax year in which you had at least $400 of net earnings from self-employment (at least part from ministerial services) File anytime Approval If approved, you will receive an approved copy of Form 4361 If approved, you will receive an approved copy of Form 4029 Effective Date For all tax years after 1967 in which you have at least $400 of net earnings from self-employment For all tax years beginning with the first year you meet the eligibility requirements discussed later Members of the Clergy To claim the exemption from SE tax, you must meet all of the following conditions. E file taxes free You file Form 4361, described below under Requesting Exemption—Form 4361 . E file taxes free You are conscientiously opposed to public insurance because of your individual religious considerations (not because of your general conscience), or you are opposed because of the principles of your religious denomination. E file taxes free You file for other than economic reasons. E file taxes free You inform the ordaining, commissioning, or licensing body of your church or order that you are opposed to public insurance if you are a minister or a member of a religious order (other than a vow-of-poverty member). E file taxes free This requirement does not apply to Christian Science practitioners or readers. E file taxes free You establish that the organization that ordained, commissioned, or licensed you, or your religious order, is a tax-exempt religious organization. E file taxes free You establish that the organization is a church or a convention or association of churches. E file taxes free You did not make an election discussed earlier under Who cannot be exempt . E file taxes free You sign and return the statement the IRS mails to you to certify that you are requesting an exemption based on the grounds listed on the statement. E file taxes free Requesting Exemption—Form 4361 To request exemption from SE tax, file Form 4361 in triplicate (original and two copies) with the IRS. E file taxes free The IRS will return to you a copy of the Form 4361 that you filed indicating whether it has approved your exemption. E file taxes free If it is approved, keep the approved copy of Form 4361 in your permanent records. E file taxes free When to file. E file taxes free   File Form 4361 by the date your income tax return is due, including extensions, for the second tax year in which both of the following are true. E file taxes free You have net earnings from self-employment of at least $400. E file taxes free Any part of those net earnings was from ministerial services you performed as a: Minister, Member of a religious order, or Christian Science practitioner or reader. E file taxes free The 2 years do not have to be consecutive tax years. E file taxes free    The approval process can take some time, so you should file Form 4361 as soon as possible. E file taxes free Example 1. E file taxes free Rev. E file taxes free Lawrence Jaeger, a clergyman ordained in 2013, has net self-employment earnings as a minister of $450 in 2013 and $500 in 2014. E file taxes free He must file his application for exemption by the due date, including extensions, for his 2014 income tax return. E file taxes free However, if Rev. E file taxes free Jaeger does not receive IRS approval for an exemption by April 15, 2015, his SE tax for 2014 is due by that date. E file taxes free Example 2. E file taxes free Rev. E file taxes free Louise Wolfe has only $300 in net self-employment earnings as a minister in 2013, but earned more than $400 in 2012 and expects to earn more than $400 in 2014. E file taxes free She must file her application for exemption by the due date, including extensions, for her 2014 income tax return. E file taxes free However, if she does not receive IRS approval for an exemption by April 15, 2015, her SE tax for 2014 is due by that date. E file taxes free Example 3. E file taxes free In 2011, Rev. E file taxes free David Moss was ordained a minister and had $700 in net self-employment earnings as a minister. E file taxes free In 2012, he received $1,000 as a minister, but his related expenses were over $1,000. E file taxes free Therefore, he had no net self-employment earnings as a minister in 2012. E file taxes free Also in 2012, he opened a book store and had $8,000 in net self-employment earnings from the store. E file taxes free In 2013, he had net self-employment earnings of $1,500 as a minister and $10,000 net self-employment earnings from the store. E file taxes free Rev. E file taxes free Moss had net earnings from self-employment in 2011 and 2013 that were $400 or more each year, and part of the self-employment earnings in each of those years was for his services as a minister. E file taxes free Thus, he must file his application for exemption by the due date, including extensions, for his 2013 income tax return. E file taxes free Death of individual. E file taxes free   The right to file an application for exemption ends with an individual's death. E file taxes free A surviving spouse, executor, or administrator cannot file an exemption application for a deceased clergy member. E file taxes free Effective date of exemption. E file taxes free   An approved exemption is effective for all tax years after 1967 in which you have $400 or more of net earnings from self-employment and any part of those earnings is for services as a member of the clergy. E file taxes free Once the exemption is approved, it is irrevocable. E file taxes free Example. E file taxes free Rev. E file taxes free Trudy Austin, ordained in 2010, had $400 or more in net self-employment earnings as a minister in both 2010 and 2013. E file taxes free She files an application for exemption on February 20, 2014. E file taxes free If an exemption is granted, it is effective for 2010 and the following years. E file taxes free Refunds of SE tax. E file taxes free   If, after receiving an approved Form 4361, you find that you overpaid SE tax, you can file a claim for refund on Form 1040X. E file taxes free Generally, for a refund, you must file Form 1040X within 3 years from the date you filed the return or within 2 years from the date you paid the tax, whichever is later. E file taxes free A return you filed, or tax you paid, before the due date is considered to have been filed or paid on the due date. E file taxes free   If you file a claim after the 3-year period but within 2 years from the time you paid the tax, the credit or refund will not be more than the tax you paid within the 2 years immediately before you file the claim. E file taxes free Members of Recognized Religious Sects If you are a member of a recognized religious sect, or a division of a recognized religious sect, you can apply for an exemption from payment of social security and Medicare taxes on both your self-employment income and the wages you earn from an employer who also has an exemption. E file taxes free Exception. E file taxes free   If you received social security benefits or payments, or anyone else received these benefits or payments based on your wages or self-employment income, you cannot apply. E file taxes free However, if you pay your benefits back, you may be considered for exemption. E file taxes free Contact your local Social Security Administration office to find out the amount you must pay back. E file taxes free Eligibility requirements. E file taxes free   To claim this exemption from SE tax, all the following requirements must be met. E file taxes free You must file Form 4029, discussed later under Requesting Exemption—Form 4029 . E file taxes free As a follower of the established teachings of the sect or division, you must be conscientiously opposed to accepting benefits of any private or public insurance that makes payments for death, disability, old age, retirement, or medical care, or provides services for medical care. E file taxes free You must waive all rights to receive any social security payment or benefit and agree that no benefits or payments will be made to anyone else based on your wages and self-employment income. E file taxes free The Commissioner of Social Security must determine that: Your sect or division has the established teachings as described in (2) above, It is the practice, and has been for a substantial period of time, for members of the sect or division to provide for their dependent members in a manner that is reasonable in view of the members' general level of living, and The sect or division has existed at all times since December 31, 1950. E file taxes free Requesting Exemption—Form 4029 To request the exemption, file Form 4029 in triplicate (original and two copies) with the Social Security Administration at the address shown on the form. E file taxes free The sect or division must complete part of the form. E file taxes free The IRS will return to you a copy of the Form 4029 that you filed indicating whether it has approved your exemption. E file taxes free If it is approved, keep the approved copy of Form 4029 in your permanent records. E file taxes free When to file. E file taxes free   You can file Form 4029 at any time. E file taxes free   If you have an approved exemption from SE tax and for some reason that approved exemption ended, you must file a new Form 4029 if you subsequently meet the eligibility requirements, discussed earlier. E file taxes free See Effective date of exemption next for information on when the newly approved exemption would become effective. E file taxes free    If you have a previously approved exemption from SE tax and you change membership to another recognized religious sect, without any change to your eligibility requirements, then you do not need to file a new Form 4029. E file taxes free Effective date of exemption. E file taxes free   An approved exemption from SE tax generally is effective for all tax years beginning with the first year you meet the eligibility requirements discussed earlier. E file taxes free (For example, if you meet the eligibility requirements in 2011, you file Form 4029 in 2012, and the IRS approves your exemption in 2013, your exemption is effective for tax year 2011 and all later years. E file taxes free )   The exemption will end if you fail to meet the eligibility requirements or if the Commissioner of Social Security determines that the sect or division fails to meet them. E file taxes free You must notify the IRS within 60 days if you are no longer a member of the religious group, or if you no longer follow the established teachings of this group. E file taxes free The exemption will end for the tax year where you or your sect/division first fails to meet the eligibility requirements. E file taxes free Refunds of SE tax paid. E file taxes free    To get a refund of any SE tax you paid while the exemption was in effect, file Form 1040X. E file taxes free For information on filing this form, see Refunds of SE tax under Requesting Exemption—Form 4361, earlier. E file taxes free Exemption From FICA Taxes Generally, under FICA, the employer and the employee each pay half of the social security and Medicare tax. E file taxes free Both the employee and the employer, if they meet the eligibility requirements discussed earlier, can apply to be exempt from their share of FICA taxes on wages paid by the employer to the employee. E file taxes free A partnership in which each partner holds a religious exemption from social security and Medicare is an employer for this purpose. E file taxes free If the employer's application is approved, the exemption will apply only to FICA taxes on wages paid to employees who also received an approval of identical applications. E file taxes free Information for employers. E file taxes free   If you have an approved Form 4029 and you have an employee who has an approved Form 4029, do not report wages you paid to the employee as social security and Medicare wages. E file taxes free   If you have an employee who does not have an approved Form 4029, you must withhold the employee's share of social security and Medicare taxes and pay the employer's share. E file taxes free Form W-2. E file taxes free   When preparing a Form W-2 for an employee with an approved Form 4029, enter “Form 4029” in box 14, “Other. E file taxes free ” Do not make any entries in boxes 3, 4, 5, or 6. E file taxes free Forms 941, 943, and 944. E file taxes free   If both you and your employee have received approved Forms 4029, do not include these exempt wages on the following forms. E file taxes free Instead, follow the instructions given below. E file taxes free Form 941, Employer's QUARTERLY Federal Tax Return: check the box on line 4 and enter “Form 4029” in the empty space below the check box. E file taxes free Form 943, Employer's Annual Federal Tax Return for Agricultural Employees: enter “Form 4029” on the dotted line next to the lines 2 and 4 entry spaces. E file taxes free Form 944, Employer's ANNUAL Federal Tax Return: check the box on line 3 and enter “Form 4029” in the empty space below the check box. E file taxes free Effective date. E file taxes free   An approved exemption from FICA becomes effective on the first day of the first calendar quarter after the quarter in which you file Form 4029. E file taxes free The exemption will end on the last day of the calendar quarter before the quarter in which the employer, employee, sect, or division fails to meet the requirements. E file taxes free Self-Employment Tax: Figuring Net Earnings There are two methods for figuring your net earnings from self-employment as a member of the clergy or a religious worker. E file taxes free Regular method. E file taxes free Nonfarm optional method. E file taxes free You may find Worksheets 1 through 4 helpful in figuring your net earnings from self-employment. E file taxes free Blank worksheets are in the back of this publication, after the Comprehensive Example. E file taxes free Regular Method Most people use the regular method. E file taxes free Under this method, figure your net earnings from self-employment by totaling your gross income for services you performed as a minister, a member of a religious order who has not taken a vow of poverty, or a Christian Science practitioner or reader. E file taxes free Then, subtract your allowable business deductions and multiply the difference by 92. E file taxes free 35% (. E file taxes free 9235). E file taxes free Use Schedule SE (Form 1040) to figure your net earnings and SE tax. E file taxes free If you are an employee of a church that elected to exclude you from FICA coverage, figure net earnings by multiplying your church wages shown on Form W-2 by 92. E file taxes free 35% (. E file taxes free 9235). E file taxes free Do not reduce your wages by any business deductions when making this computation. E file taxes free Use Schedule SE (Form 1040), Section B, to figure your net earnings and SE tax. E file taxes free If you have an approved exemption, or you are automatically exempt, do not include the income or deductions from ministerial services in figuring your net earnings from self-employment. E file taxes free Amounts included in gross income. E file taxes free   To figure your net earnings from self-employment (on Schedule SE (Form 1040)), include in gross income: Salaries and fees for your ministerial services (discussed earlier), Offerings you receive for marriages, baptisms, funerals, masses, etc. E file taxes free , The value of meals and lodging provided to you, your spouse, and your dependents for your employer's convenience, The fair rental value of a parsonage provided to you (including the cost of utilities that are furnished) and the rental allowance (including an amount for payment of utilities) paid to you, and Any amount a church pays toward your income tax or SE tax, other than withholding the amount from your salary. E file taxes free This amount is also subject to income tax. E file taxes free   For the income tax treatment of items (2) and (4), see Income Tax: Income and Expenses , later. E file taxes free Example. E file taxes free Pastor Roger Adams receives an annual salary of $39,000 as a full-time minister. E file taxes free The $39,000 includes $5,000 that is designated as a rental allowance to pay utilities. E file taxes free His church owns a parsonage that has a fair rental value of $12,000 per year. E file taxes free The church gives Pastor Adams the use of the parsonage. E file taxes free He is not exempt from SE tax. E file taxes free He must include $51,000 ($39,000 plus $12,000) when figuring his net earnings for SE tax purposes. E file taxes free The results would be the same if, instead of the use of the parsonage and receipt of the rental allowance for utilities, Pastor Adams had received an annual salary of $51,000 of which $17,000 ($5,000 plus $12,000) per year was designated as a rental allowance. E file taxes free Overseas duty. E file taxes free   Your net earnings from self-employment are determined without any foreign earned income exclusion or the foreign housing exclusion or deduction if you are a U. E file taxes free S. E file taxes free citizen or resident alien serving abroad and living in a foreign country. E file taxes free   For information on excluding foreign earned income or the foreign housing amount, see Publication 54. E file taxes free Example. E file taxes free Diane Jones was the minister of a U. E file taxes free S. E file taxes free church in Mexico. E file taxes free She earned $35,000 in that position and was able to exclude it all for income tax purposes under the foreign earned income exclusion. E file taxes free The United States does not have a social security agreement with Mexico, so Mrs. E file taxes free Jones is subject to U. E file taxes free S. E file taxes free SE tax and must include $35,000 when figuring net earnings from self-employment. E file taxes free Specified U. E file taxes free S. E file taxes free possessions. E file taxes free    The exclusion from gross income for amounts derived from American Samoa or Puerto Rico does not apply in computing net earnings from self-employment. E file taxes free Also see Residents of Puerto Rico, the U. E file taxes free S. E file taxes free Virgin Islands, Guam, the CNMI, and American Samoa , earlier, under U. E file taxes free S. E file taxes free Citizens and Resident and Nonresident Aliens. E file taxes free Amounts not included in gross income. E file taxes free   Do not include the following amounts in gross income when figuring your net earnings from self-employment. E file taxes free Offerings that others made to the church. E file taxes free Contributions by your church to a tax-sheltered annuity plan set up for you, including any salary reduction contributions (elective deferrals) that are not included in your gross income. E file taxes free Pension payments or retirement allowances you receive for your past ministerial services. E file taxes free The rental value of a parsonage or a parsonage allowance provided to you after you retire. E file taxes free Allowable deductions. E file taxes free   When figuring your net earnings from self-employment, deduct all your expenses related to your ministerial services performed as a self-employed person. E file taxes free These are ministerial expenses you incurred while working other than as a common-law employee of the church. E file taxes free They include expenses incurred in performing marriages and baptisms, and in delivering speeches. E file taxes free Deduct these expenses on Schedule C or C-EZ (Form 1040), and carry the net amount to line 2 of Schedule SE (Form 1040), Section A or B. E file taxes free   Wages earned as a common-law employee (explained earlier) of a church are generally subject to self-employment tax unless an exemption is requested, as discussed earlier under Exemption From Self-Employment (SE) Tax . E file taxes free Subtract any allowable expenses (including unreimbursed employee business expenses) from those wages, include the net amount on line 2 of Schedule SE (Form 1040), Section A or B, and attach an explanation. E file taxes free Do not complete Schedule C or C-EZ (Form 1040). E file taxes free However, for income tax purposes, the expenses are allowed only as an itemized deduction on Schedule A (Form 1040) to the extent they exceed 2% of adjusted gross income. E file taxes free Employee reimbursement arrangements. E file taxes free   If you received an advance, allowance, or reimbursement for your employee expenses, how you report this amount and your employee expenses depends on whether your employer reimbursed you under an accountable plan or a nonaccountable plan. E file taxes free Ask your employer if you are not sure if it reimburses you using an accountable or a nonaccountable plan. E file taxes free Accountable plans. E file taxes free   To be an accountable plan, your employer's reimbursement arrangement must include all three of the following rules. E file taxes free Your expenses must have a business connection—that is, you must have paid or incurred deductible expenses while performing services as an employee of your employer. E file taxes free You must adequately account to your employer for these expenses within a reasonable period of time. E file taxes free You must return any excess reimbursement or allowance within a reasonable period of time. E file taxes free   The reimbursement is not reported on your Form W-2. E file taxes free Generally, if your expenses equal your reimbursement, you have no deduction. E file taxes free If your expenses are more than your reimbursement, you can deduct your excess expenses for SE tax and income tax purposes. E file taxes free Nonaccountable plan. E file taxes free   A nonaccountable plan is a reimbursement arrangement that does not meet all three of the rules listed under Accountable plans above. E file taxes free In addition, even if your employer has an accountable plan, the following payments will be treated as being paid under a nonaccountable plan. E file taxes free Excess reimbursements you fail to return to your employer. E file taxes free Reimbursement of nondeductible expenses related to your employer's business. E file taxes free   Your employer will combine any reimbursement paid to you under a nonaccountable plan with your wages, salary, or other compensation and report the combined total in box 1 of your Form W-2. E file taxes free Since reimbursements under a nonaccountable plan are included in your gross income, you can deduct your related expenses (for SE tax and income tax purposes) regardless of whether they are more than, less than, or equal to your reimbursement. E file taxes free   For more information on accountable and nonaccountable plans, see Publication 463, Travel, Entertainment, Gift, and Car Expenses. E file taxes free Married Couple Missionary Team If both spouses are duly ordained, commissioned, or licensed ministers of a church and have an agreement that each will perform specific services for which they are paid jointly or separately, they must divide the self-employment income according to the agreement. E file taxes free If the agreement is with one spouse only and the other spouse is not paid for any specific duties, amounts received for their services are included only in the self-employment income of the spouse having the agreement. E file taxes free Earnings Subject to SE Tax For 2013, the maximum net earnings from self-employment subject to social security (old age, survivors, and disability insurance) tax is $113,700 minus any wages and tips you earned that were subject to social security tax. E file taxes free The tax rate for the social security part is 12. E file taxes free 4%. E file taxes free In addition, all of your net earnings are subject to the Medicare (hospital insurance) part of the SE tax. E file taxes free This tax rate is 2. E file taxes free 9%. E file taxes free The combined self-employment tax rate is 15. E file taxes free 3%. E file taxes free Additional Medicare Tax. E file taxes free   Beginning in 2013, a 0. E file taxes free 9% Additional Medicare Tax applies to Medicare wages, railroad retirement (RRTA) compensation, and self-employment income that are more than: $125,000 if married filing separately, $250,000 if married filing jointly, or $200,000 for any other filing status. E file taxes free Medicare wages and self-employment income are combined to determine if income exceeds the threshold. E file taxes free A self-employment loss is not considered for purposes of this tax. E file taxes free RRTA compensation is separately compared to the threshold. E file taxes free For more information, see Form 8959, Additional Medicare Tax, and its separate instructions. E file taxes free Nonfarm Optional Method You may be able to use the nonfarm optional method for figuring your net earnings from self-employment. E file taxes free In general, the nonfarm optional method is intended to permit continued coverage for social security and Medicare purposes when your income for the tax year is low. E file taxes free You may use the nonfarm optional method if you meet all the following tests. E file taxes free You are self-employed on a regular basis. E file taxes free You meet this test if your actual net earnings from self-employment were $400 or more in at least 2 of the 3 tax years before the one for which you use this method. E file taxes free The net earnings can be from either farm or nonfarm earnings or both. E file taxes free You have used this method less than 5 prior years. E file taxes free (There is a 5-year lifetime limit. E file taxes free ) The years do not have to be consecutive. E file taxes free Your net nonfarm profits were: Less than $5,024, and Less than 72. E file taxes free 189% of your gross nonfarm income. E file taxes free If you meet all three tests, use Table 3 to figure your net earnings from self-employment under the nonfarm optional method. E file taxes free Table 3. E file taxes free Figuring Nonfarm Net Earnings IF your gross nonfarm income is . E file taxes free . E file taxes free . E file taxes free THEN your net earnings are equal to . E file taxes free . E file taxes free . E file taxes free $6,960 or less Two-thirds of your gross nonfarm income. E file taxes free More than $6,960 $4,640. E file taxes free Actual net earnings. E file taxes free   Multiply your total earnings subject to SE tax by 92. E file taxes free 35% (. E file taxes free 9235) to get actual net earnings. E file taxes free Actual net earnings are equivalent to net earnings under the “Regular Method. E file taxes free ” More information. E file taxes free   For more information on the nonfarm optional method, see Publication 334, Tax Guide for Small Business, and the Schedule SE (Form 1040) instructions. E file taxes free Income Tax: Income and Expenses Some income and expense items are treated the same for both income tax and SE tax purposes and some are treated differently. E file taxes free Note. E file taxes free For purposes of this section, references to members of the clergy are only to ministers or members of a religious order. E file taxes free Income Items The tax treatment of offerings and fees, outside earnings, rental allowances, rental value of a parsonage, earnings of members of religious orders, and foreign earned income is discussed here. E file taxes free Offerings and Fees If you are a member of the clergy, you must include in your income offerings and fees you receive for marriages, baptisms, funerals, masses, etc. E file taxes free , in addition to your salary. E file taxes free If the offering is made to the religious institution, it is not taxable to you. E file taxes free Outside Earnings If you are a member of a religious organization and you give your outside earnings to the organization, you still must include the earnings in your income. E file taxes free However, you may be entitled to a charitable contribution deduction for the amount paid to the organization. E file taxes free For more information, see Publication 526. E file taxes free Exclusion of Rental Allowance and Fair Rental Value of a Parsonage Ordained, commissioned, or licensed ministers of the gospel may be able to exclude from income tax the rental allowance or fair rental value of a parsonage that is provided to them as pay for their services. E file taxes free Services include: Ministerial services, discussed earlier, Administrative duties and teaching at theological seminaries, and The ordinary duties of a minister performed as an employee of the United States (other than as a chaplain in the Armed Forces), a state, possession, political subdivision, or the District of Columbia. E file taxes free This exclusion applies only for income tax purposes. E file taxes free It does not apply for SE tax purposes, as discussed earlier under Amounts included in gross income under Self-Employment Tax: Figuring Net Earnings. E file taxes free Designation requirement. E file taxes free   The church or organization that employs you must officially designate the payment as a housing allowance before it makes the payment. E file taxes free It must designate a definite amount. E file taxes free It cannot determine the amount of the housing allowance at a later date. E file taxes free If the church or organization does not officially designate a definite amount as a housing allowance, you must include your total salary in your income. E file taxes free   If you are employed and paid by a local congregation, a resolution by a national church agency of your denomination does not effectively designate a housing allowance for you. E file taxes free The local congregation must officially designate the part of your salary that is a housing allowance. E file taxes free However, a resolution of a national church agency can designate your housing allowance if you are directly employed by the national agency. E file taxes free Rental allowances. E file taxes free   If you receive in your salary an amount officially designated as a rental allowance (including an amount to pay utility costs), you can exclude the allowance from your gross income if: You use the amount to provide or rent a home, and The amount is not more than reasonable pay for your services. E file taxes free   The amount you exclude cannot be more than the fair rental value of the home, including furnishings, plus the cost of utilities. E file taxes free Fair rental value of parsonage. E file taxes free   You can exclude from gross income the fair rental value of a house or parsonage, including utilities, furnished to you as part of your earnings. E file taxes free However, the exclusion cannot be more than the reasonable pay for your services. E file taxes free If you pay for the utilities, you can exclude any allowance designated for utility costs, up to your actual cost. E file taxes free Example. E file taxes free Rev. E file taxes free Joanna Baker is a full-time minister. E file taxes free The church allows her to use a parsonage that has an annual fair rental value of $24,000. E file taxes free The church pays her an annual salary of $67,000, of which $7,500 is designated for utility costs. E file taxes free Her actual utility costs during the year were $7,000. E file taxes free For income tax purposes, Rev. E file taxes free Baker excludes $31,000 from gross income ($24,000 fair rental value of the parsonage plus $7,000 from the allowance for utility costs). E file taxes free She will report $60,000 ($59,500 salary plus $500 of unused utility allowance). E file taxes free Her income for SE tax purposes, however, is $91,000 ($67,000 salary + $24,000 fair rental value of the parsonage). E file taxes free Home ownership. E file taxes free   If you own your home and you receive as part of your salary a housing or rental allowance, you may exclude from gross income the smallest of: The amount actually used to provide a home, The amount officially designated as a rental allowance, or The fair rental value of the home, including furnishings, utilities, garage, etc. E file taxes free Excess rental allowance. E file taxes free   You must include in gross income the amount of any rental allowance that is more than the smallest of: Your reasonable salary, The fair rental value of the home plus utilities, or The amount actually used to provide a home. E file taxes free   Include in the total on Form 1040, line 7. E file taxes free On the dotted line next to line 7, enter “Excess allowance” and the amount. E file taxes free You may deduct the home mortgage interest and real estate taxes paid on your home even though you pay all or part of those expenses with funds you get through a tax-free rental or parsonage allowance. E file taxes free However, you can only deduct these expenses as itemized deductions on Schedule A (Form 1040). E file taxes free Retired ministers. E file taxes free   If you are a retired minister, you can exclude from your gross income the rental value of a home (plus utilities) furnished to you by your church as a part of your pay for past services, or the part of your pension that was designated as a rental allowance. E file taxes free However, a minister's surviving spouse cannot exclude the rental value unless the rental value is for ministerial services he or she performs or performed. E file taxes free Teachers or administrators. E file taxes free   If you are a minister employed as a teacher or administrator by a church school, college, or university, you are performing ministerial services for purposes of the housing exclusion. E file taxes free However, if you perform services as a teacher or administrator on the faculty of a nonchurch college, you cannot exclude from your income a housing allowance or the value of a home that the college provides to you. E file taxes free    If you live in faculty lodging as an employee of an educational institution or academic health center, all or part of the value of that lodging may be nontaxable under a different rule. E file taxes free In Publication 525, see Faculty lodging in the discussion on meals and lodging under Fringe Benefits. E file taxes free   If you serve as a minister of music or minister of education, or serve in an administrative or other function of your religious organization, but are not authorized to perform substantially all of the religious duties of an ordained minister in your church (even if you are commissioned as a minister of the gospel), the housing exclusion does not apply to you. E file taxes free Theological students. E file taxes free   If you are a theological student serving a required internship as a part-time or assistant pastor, you cannot exclude a parsonage or rental allowance from your income unless you are ordained, commissioned, or licensed as a minister. E file taxes free Traveling evangelists. E file taxes free   You can exclude a designated rental allowance from out-of-town churches if you meet all of the following requirements. E file taxes free You are an ordained minister. E file taxes free You perform ministerial services at churches located away from your community. E file taxes free You actually use the rental allowance to maintain your permanent home. E file taxes free Cantors. E file taxes free   If you have a bona fide commission and your congregation employs you on a full-time basis to perform substantially all the religious functions of the Jewish faith, you can exclude a rental allowance from your gross income. E file taxes free Earnings—Members of Religious Orders Your earnings may be exempt from both income tax and SE tax if you are a member of a religious order who: Has taken a vow of poverty, Receives earnings for services performed as an agent of the order and in the exercise of duties required by the order, and Renounces the earnings and gives them to the order. E file taxes free See Members of Religious Orders , earlier, under Social Security Coverage. E file taxes free Foreign Earned Income Certain income may be exempt from income tax if you work in a foreign country or in a specified U. E file taxes free S. E file taxes free possession. E file taxes free Publication 54 discusses the foreign earned income exclusion. E file taxes free Publication 570, Tax Guide for Individuals With Income From U. E file taxes free S. E file taxes free Possessions, covers the rules for taxpayers with income from U. E file taxes free S. E file taxes free possessions. E file taxes free You can get these free publications from the Internal Revenue Service at IRS. E file taxes free gov or from most U. E file taxes free S. E file taxes free Embassies or consulates. E file taxes free Expense Items The tax treatment of ministerial trade or business expenses, expenses allocable to tax-free income, and health insurance costs is discussed here. E file taxes free Ministerial Trade or Business Expenses as an Employee When you figure your income tax, you must itemize your deductions on Schedule A (Form 1040) to claim allowable deductions for ministerial trade or business expenses incurred while working as an employee. E file taxes free You also may have to file Form 2106, Employee Business Expenses (or Form 2106-EZ, Unreimbursed Employee Business Expenses). E file taxes free You claim these expenses as miscellaneous itemized deductions that are subject to the 2%-of-adjusted-gross-income (AGI) limit. E file taxes free See Publication 529 for more information on this limit. E file taxes free However, you cannot deduct any of your employee business expenses that are allocable to tax-free income (discussed next). E file taxes free Expenses Allocable to Tax-Free Income If you receive a rental or parsonage allowance that is exempt from income tax (tax free), you must allocate a portion of the expenses of operating your ministry to that tax-free income. E file taxes free You cannot deduct the portion of your expenses that you allocate to your tax-free rental or parsonage allowance. E file taxes free Exception. E file taxes free   This rule does not apply to your deductions for home mortgage interest or real estate taxes on your home. E file taxes free Figuring the allocation. E file taxes free   Figure the portion of your otherwise deductible expenses that you cannot deduct (because you must allocate that portion to tax-free income) by multiplying the expenses by the following fraction:      Tax-free rental or parsonage allowance     All income (taxable and tax free) earned from your ministry           When figuring the allocation, include the income and expenses related to the ministerial duties you perform both as an employee and as a self-employed person. E file taxes free    Reduce your otherwise deductible expenses only in figuring your income tax, not your SE tax. E file taxes free Example. E file taxes free Rev. E file taxes free Charles Ashford received $40,000 in earnings for ministerial services consisting of a $28,000 salary for ministerial services performed as an employee, $2,000 for weddings and baptisms performed as a self-employed person, and a $10,000 tax-free parsonage allowance. E file taxes free He incurred $4,000 of unreimbursed expenses connected with his earnings for ministerial services. E file taxes free $3,500 of the $4,000 is for employee expenses related to his ministerial salary, and $500 is related to the weddings and baptisms he performed as a self-employed person. E file taxes free Rev. E file taxes free Ashford figures the nondeductible (tax-free) portion of expenses related to his ministerial salary as follows: ($10,000 ÷ $40,000) x $3,500 = $875   Rev. E file taxes free Ashford figures the nondeductible (tax-free) portion of expenses related to his wedding and baptism income as follows: ($10,000 ÷ $40,000) x $500 = $125 Required statement. E file taxes free   If you receive a tax-free rental or parsonage allowance and have ministerial expenses, attach a statement to your tax return. E file taxes free The statement must contain all of the following information. E file taxes free A list of each item of taxable ministerial income by source (such as wages, salary, weddings, baptisms, etc. E file taxes free ) plus the amount. E file taxes free A list of each item of tax-free ministerial income by source (parsonage allowance) plus the amount. E file taxes free A list of each item of otherwise deductible ministerial expenses plus the amount. E file taxes free How you figured the nondeductible part of your otherwise deductible expenses. E file taxes free A statement that the other deductions claimed on your tax return are not allocable to your tax-free income. E file taxes free   See the attachments prepared for the Comprehensive Example , later. E file taxes free Following the example, you will find blank worksheets for your own use. E file taxes free Health Insurance Costs of Self-Employed Ministers If you are self-employed, you may be able to deduct the amount you paid in 2013 for medical and dental insurance and qualified long-term care insurance for you, your spouse, and your dependents. E file taxes free If you qualify, you can take this deduction as an adjustment to income on Form 1040, line 29. E file taxes free See the Instructions for Form 1040 to figure your deduction. E file taxes free The following special rules apply to the self-employed health insurance deduction. E file taxes free You cannot take a medical expense deduction on Schedule A (Form 1040) for any expenses you claim for purposes of the self-employed health insurance deduction. E file taxes free You cannot take the deduction for any month you are eligible to participate in a subsidized plan of your (or your spouse's) employer. E file taxes free The deduction cannot exceed your net earnings from the business under which the insurance plan is established. E file taxes free Your net earnings under this rule do not include the income you earned as a common-law employee (discussed earlier) of a church. E file taxes free More information. E file taxes free   For more information about the self-employed health insurance deduction, see chapter 6 in Publication 535. E file taxes free Deduction for SE Tax You can deduct one-half of your SE tax in figuring adjusted gross income. E file taxes free This is an income tax deduction only, on Form 1040, line 27. E file taxes free Do not claim this deduction in figuring net earnings from self-employment subject to SE tax. E file taxes free Income Tax Withholding and Estimated Tax The federal income tax is a pay-as-you-go tax. E file taxes free You must pay the tax as you earn or receive income during the year. E file taxes free An employee usually has income tax withheld from his or her wages or salary. E file taxes free However, your salary is not subject to federal income tax withholding if both of the following conditions apply. E file taxes free You are a duly ordained, commissioned, or licensed minister, a member of a religious order (who has not taken a vow of poverty), or a Christian Science practitioner or reader. E file taxes free Your salary is for ministerial services (see Ministerial Services , earlier). E file taxes free If your salary is not subject to withholding, or if you do not pay enough tax through withholding, you may need to make estimated tax payments to avoid penalties for not paying enough tax as you earn your income. E file taxes free You generally must make estimated tax payments if you expect to owe taxes, including SE tax, of $1,000 or more, when you file your return. E file taxes free Determine your estimated tax by using the worksheets in Publication 505, Tax Withholding and Estimated Tax. E file taxes free Pay the entire estimated tax for 2014 or the first installment by April 15, 2014. E file taxes free See Form 1040-ES for the different payment methods. E file taxes free The April 15 date applies whether or not your tax home and your abode are outside the United States and Puerto Rico. E file taxes free For more information, see chapter 2 of Publication 505. E file taxes free If you perform your services as a common-law employee of the church and your salary is not subject to income tax withholding, you can enter into a voluntary withholding agreement with the church to cover any income and SE tax that may be due. E file taxes free Filing Your Return You must file an income tax return for 2013 if your gross income was at least the amount shown in the third column of Table 4 above. E file taxes free Table 4. E file taxes free 2013 Filing Requirements for Most Taxpayers IF your filing status is . E file taxes free . E file taxes free . E file taxes free AND at the end of 2013 you were* . E file taxes free . E file taxes free . E file taxes free THEN file a return if your gross income** was at least . E file taxes free . E file taxes free . E file taxes free single under age 65 65 or older   $10,000 $11,500   married filing jointly*** under 65 (both spouses) 65 or older (one spouse) 65 or older (both spouses)   $20,000  $21,200  $22,400   married filing separately any age   $3,900   head of household under 65 65 or older   $12,850 $14,350   qualifying widow(er) with dependent child under 65 65 or older   $16,100  $17,300   * If you were born on January 1, 1949, you are considered to be age 65 at the end of 2013. E file taxes free ** Gross income means all income you received in the form of money, goods, property, and services that is not exempt from tax, including any income from sources outside the United States or from the sale of your main home (even if you can exclude part or all of it). E file taxes free Do not include any social security benefits unless (a) you are married filing a separate return and you lived with your spouse at any time in 2013, or (b) one-half of your social security benefits plus your other gross income and any tax-exempt interest is more than $25,000 ($32,000 if married filing jointly). E file taxes free If (a) or (b) applies, see the instructions for Form 1040, lines 20a and 20b, to figure the taxable part of social security benefits you must include in gross income. E file taxes free Gross income includes gains, but not losses, reported on Form 8949 or Schedule D (Form 1040). E file taxes free Gross income from a business means, for example, the amount on Schedule C (Form 1040), line 7, or Schedule F (Form 1040), line 9. E file taxes free But, in figuring gross income, do not reduce your income by any losses, including any loss on Schedule C (Form 1040), line 7, or Schedule F (Form 1040), line 9. E file taxes free *** If you did not live with your spouse at the end of 2013 (or on the date your spouse died) and your gross income was at least $3,900, you must file a return regardless of your age. E file taxes free Additional requirements. E file taxes free   Even if your income was less than the amount shown in Table 4, you must file an income tax return on Form 1040, and attach a completed Schedule SE (Form 1040), if:    You are not exempt from SE tax, and you have net earnings from self-employment (discussed earlier under Self-Employment Tax: Figuring Net Earnings ) of $400 or more in the tax year, You are exempt from SE tax on earnings from ministerial services and you have $400 or more of other net earnings subject to SE tax, or You had wages of $108. E file taxes free 28 or more from an electing church or church-controlled organization (see Coverage of Religious Workers (Church Employees) , earlier, under Social Security Coverage). E file taxes free Self-employment tax. E file taxes free   If you are liable for SE tax, you must file Schedule SE (Form 1040) with your return. E file taxes free   If you filed Form 4361 and did not receive approval from the IRS, you must pay SE tax on your ministerial earnings, as explained earlier. E file taxes free You should report ministerial earnings and expenses from nonemployee ministerial services on Schedule C or C-EZ (Form 1040). E file taxes free You should then carry the net amount over to line 2 of Schedule SE (Form 1040), Section A or B. E file taxes free However, if you were a duly ordained minister who was an employee of a church and you must pay SE tax on the wages you earned for those services, do not report those wages on Schedule C or C-EZ (Form 1040). E file taxes free Instead, report those wages less any allowable expenses (including any unreimbursed employee business expenses), on line 2 of Schedule SE (Form 1040), Section A or B, and attach an explanation. E file taxes free Note. E file taxes free For income tax purposes, the unreimbursed employee business expenses that you incurred as an employee of the church and subtracted from your wages on line 2 of Schedule SE (Form 1040) are allowed only as an itemized deduction on Schedule A (Form 1040) if they exceed 2% of your adjusted gross income. E file taxes free You cannot deduct these expenses on Schedule C or C-EZ (Form 1040) as a trade or business expense. E file taxes free Exemption from SE tax. E file taxes free   If you filed Form 4361 and received IRS approval not to be taxed on your ministerial earnings, and you do not have any other income subject to SE tax, do not file Schedule SE (Form 1040). E file taxes free Instead, enter “Exempt—Form 4361” on the dotted line next to Form 1040, line 56. E file taxes free However, if you had net earnings from another trade or business of $400 or more subject to SE tax, see line A at the top of Schedule SE (Form 1040), Section B. E file taxes free    If you filed Form 4029 and received IRS approval not to be taxed on those earnings, and you do not have any other income subject to SE tax, do not file Schedule SE (Form 1040). E file taxes free Instead, enter “Exempt—Form 4029” on the dotted line next to Form 1040, line 56. E file taxes free More information. E file taxes free   For more information on filing your return, including when and where to file it, see the Instructions for Form 1040. E file taxes free Retirement Savings Arrangements Retirement savings arrangements are plans that offer you a tax-favored way to save for your retirement. E file taxes free You generally can deduct your contributions to the plan. E file taxes free Your contributions and the earnings on them are not taxed until they are distributed. E file taxes free Retirement plans for the self-employed. E file taxes free   To set up one of the following plans you must be self-employed. E file taxes free SEP (simplified employee pension) plan. E file taxes free SIMPLE (savings incentive match plan for employees) plan. E file taxes free Qualified retirement plan (also called a Keogh or H. E file taxes free R. E file taxes free 10 plan). E file taxes free   The common-law rules determine whether you are an employee or a self-employed person for purposes of setting up a retirement plan. E file taxes free See Employment status for other tax purposes under Coverage of Members of the Clergy, earlier. E file taxes free This result is true even if your compensation for ministerial services (defined earlier) is subject to SE tax. E file taxes free   For example, if a congregation pays you a salary for performing ministerial services and you are subject to the congregation's control, you generally are a common-law employee. E file taxes free You are not a self-employed person for purposes of setting up a retirement plan. E file taxes free This result is true even if your salary is subject to SE tax. E file taxes free   On the other hand, amounts received directly from members of the congregation, such as fees for performing marriages, baptisms, or other personal services that you report on Schedule C or C-EZ (Form 1040), are earnings from self-employment for all tax purposes. E file taxes free   For more information on establishing a SEP, SIMPLE, or qualified retirement plan, see Publication 560, Retirement Plans for Small Business (SEP, SIMPLE, and Qualified Plans). E file taxes free Individual retirement arrangements (IRAs). E file taxes free   The traditional IRA and the Roth IRA are two individual retirement arrangements you can use to save money for your retirement. E file taxes free Generally, your maximum contribution for 2013 to either of these plans (or to a combination of the two) is the smaller of your taxable compensation or $5,500 ($6,500 if you are age 50 or older). E file taxes free   However, your maximum contribution to a Roth IRA will be further reduced or eliminated if your adjusted gross income is above a certain amount. E file taxes free You cannot deduct Roth IRA contributions, but if you satisfy certain requirements, all earnings in the Roth IRA are tax free and neither your nondeductible contributions nor any earnings on them are taxable when distributed. E file taxes free   If you contribute to a traditional IRA, your contribution may be deductible. E file taxes free However, your deduction may be reduced or eliminated if you or your spouse is covered by an employer retirement plan (including, but not limited to, a SEP, SIMPLE, or qualified retirement plan). E file taxes free   For more information on IRAs, see Publication 590. E file taxes free Tax-sheltered annuity plans. E file taxes free   Church employees, members of religious orders, and duly ordained, commissioned, or licensed ministers working as ministers or chaplains can participate in tax-sheltered annuity (403(b)) plans. E file taxes free For more