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Taxslayer 7. Taxslayer   Filing Information Table of Contents Introduction Topics - This chapter discusses: Useful Items - You may want to see: What, When, and Where To FileResident Aliens Nonresident Aliens Amended Returns and Claims for Refund Other Forms You May Have To File PenaltiesCivil Penalties Criminal Penalties Introduction This chapter provides the basic filing information that you may need. Taxslayer Topics - This chapter discusses: Forms aliens must file, When and where to file, Penalties, and Amended returns and claims for refund. Taxslayer Useful Items - You may want to see: Forms (and Instructions) 1040 U. Taxslayer S. Taxslayer Individual Income Tax Return 1040A U. Taxslayer S. Taxslayer Individual Income Tax Return 1040EZ Income Tax Return for Single and Joint Filers With No Dependents 1040NR U. Taxslayer S. Taxslayer Nonresident Alien Income Tax Return 1040NR-EZ U. Taxslayer S. Taxslayer Income Tax Return for Certain Nonresident Aliens With No Dependents See chapter 12 for information about getting these forms. Taxslayer What, When, and Where To File What return you must file as well as when and where you file that return, depends on your status at the end of the tax year as a resident or a nonresident alien. Taxslayer Resident Aliens Resident aliens should file Form 1040EZ, 1040A, or 1040 at the address shown in the instructions for that form. Taxslayer The due date for filing the return and paying any tax due is April 15 of the year following the year for which you are filing a return (but see the Tip, later). Taxslayer Under U. Taxslayer S. Taxslayer immigration law, a lawful permanent resident who is required to file a tax return as a resident and fails to do so may be regarded as having abandoned status and may lose permanent resident status. Taxslayer Extensions of time to file. Taxslayer   You are allowed an automatic extension to June 15 to file if your main place of business and the home you live in are outside the United States and Puerto Rico on April 15. Taxslayer You can get an extension of time to October 15 to file your return if you get an extension by April 15 (June 15 if you qualify for the June 15 extension). Taxslayer Use Form 4868 to get the extension to October 15. Taxslayer In addition to this 6-month extension, taxpayers who are out of the country (as defined in the Form 4868 instructions) can request a discretionary 2-month additional extension of time to file their returns (to December 15 for calendar year taxpayers). Taxslayer To request this extension, you must send the IRS a letter explaining the reasons why you need the additional 2 months. Taxslayer Send the letter by the extended due date (October 15 for calendar year taxpayers) to the following address:  Department of the Treasury Internal Revenue Service Center Austin, TX 73301-0215   You will not receive any notification from the IRS unless your request is denied for being untimely. Taxslayer   The discretionary 2-month additional extension is not available to taxpayers who have an approved extension of time to file on Form 2350 (for U. Taxslayer S. Taxslayer citizens and resident aliens abroad who expect to qualify for special tax treatment). Taxslayer    If the due date for filing falls on a Saturday, Sunday, or legal holiday, the due date is the next day which is not a Saturday, Sunday, or legal holiday. Taxslayer You may be able to file your return electronically. Taxslayer See IRS e-file in your form instructions. Taxslayer Nonresident Aliens Nonresident aliens who are required to file an income tax return should use Form 1040NR or, if qualified, Form 1040NR-EZ. Taxslayer If you are any of the following, you must file a return. Taxslayer A nonresident alien individual engaged or considered to be engaged in a trade or business in the United States during 2013. Taxslayer (But see Exceptions , later. Taxslayer ) You must file even if: Your income did not come from a trade or business conducted in the United States, You have no income from U. Taxslayer S. Taxslayer sources, or Your income is exempt from income tax. Taxslayer A nonresident alien individual not engaged in a trade or business in the United States with U. Taxslayer S. Taxslayer income on which the tax liability was not satisfied by the withholding of tax at the source. Taxslayer A representative or agent responsible for filing the return of an individual described in (1) or (2). Taxslayer A fiduciary for a nonresident alien estate or trust. Taxslayer You must also file if you want to: Claim a refund of overwithheld or overpaid tax, or Claim the benefit of any deductions or credits. Taxslayer For example, if you have no U. Taxslayer S. Taxslayer business activities but have income from real property that you choose to treat as effectively connected income (discussed in chapter 4), you must timely file a true and accurate return to take any allowable deductions against that income. Taxslayer For information on what is timely, see When to file for deductions and credits under When To File, later. Taxslayer Exceptions. Taxslayer   You do not need to file Form 1040NR or Form 1040NR-EZ if you meet either of the following conditions. Taxslayer Your only U. Taxslayer S. Taxslayer trade or business was the performance of personal services, and Your wages were less than $3,900, and You have no other need to file a return to claim a refund of overwithheld taxes, to satisfy additional withholding at source, or to claim income exempt or partly exempt by treaty. Taxslayer You were a nonresident alien student, teacher, or trainee who was temporarily present in the United States under an “F,” “J,” “M,” or “Q” visa and you have no income that is subject to tax, such as wages, tips, scholarship and fellowship grants, dividends, etc. Taxslayer Even if you have left the United States and filed a Form 1040-C, U. Taxslayer S. Taxslayer Departing Alien Income Tax Return, on departure, you still must file an annual U. Taxslayer S. Taxslayer income tax return. Taxslayer If you are married and both you and your spouse are required to file, you must each file a separate return. Taxslayer Form 1040NR-EZ You can use Form 1040NR-EZ if all of the following conditions are met. Taxslayer You do not claim any dependents. Taxslayer You cannot be claimed as a dependent on someone else's U. Taxslayer S. Taxslayer tax return. Taxslayer If you were married, you do not claim an exemption for your spouse. Taxslayer Your taxable income is less than $100,000. Taxslayer The only itemized deduction you can claim is for state and local income taxes. Taxslayer Note. Taxslayer Residents of India who were students or business apprentices may be able to take the standard deduction instead of the itemized deduction for state and local income taxes. Taxslayer See chapter 5. Taxslayer Your only U. Taxslayer S. Taxslayer source income is from wages, salaries, tips, taxable refunds of state and local income taxes, scholarship or fellowship grants, and nontaxable interest or dividends. Taxslayer (If you had taxable interest or dividend income, you cannot use this form. Taxslayer ) You are not claiming any adjustments to income other than the student loan interest deduction or scholarship and fellowship grants excluded. Taxslayer You are not claiming any tax credits. Taxslayer This is not an “expatriation return. Taxslayer ” See Expatriation Tax in chapter 4. Taxslayer The only taxes you owe are: The income tax from the Tax Table. Taxslayer The social security and Medicare tax from Form 4137 or Form 8919. Taxslayer You are not claiming a credit for excess social security and tier 1 RRTA tax withheld. Taxslayer You are not filing Form 8959, to figure the amount of Additional Medicare Tax you owe and/or the amount of Additional Medicare Tax withheld by your employer, if any. Taxslayer If you do not meet all of the above conditions, you must file Form 1040NR. Taxslayer When To File If you are an employee and you receive wages subject to U. Taxslayer S. Taxslayer income tax withholding, you will generally file by the 15th day of the 4th month after your tax year ends. Taxslayer For the 2013 calendar year, file your return by April 15, 2014. Taxslayer If you are not an employee who receives wages subject to U. Taxslayer S. Taxslayer income tax withholding, you must file by the 15th day of the 6th month after your tax year ends. Taxslayer For the 2013 calendar year, file your return by June 16, 2014 (because June 15 is a Sunday. Taxslayer ) Extensions of time to file. Taxslayer   If you cannot file your return by the due date, file Form 4868 or use one of the electronic filing options explained in the Form 4868 instructions. Taxslayer For the 2013 calendar year, this will extend the due date to October 15, 2014 (December 15, 2014, if the regular due date of your return is June 16, 2014). Taxslayer You must file the extension by the regular due date of your return. Taxslayer   In addition to the 6-month extension to October 15, taxpayers whose main place of business is outside the United States and Puerto Rico and who live outside those jurisdictions can request a discretionary 2-month extension of time to file their returns (to December 15 for calendar year taxpayers). Taxslayer To request this extension, you must send the IRS a letter explaining the reasons why you need the additional 2 months. Taxslayer Send the letter by the extended due date (October 15 for calendar year taxpayers) to the following address: Department of the Treasury Internal Revenue Service Center Austin, TX 73301-0215   You will not receive any notification from the IRS unless your request is denied for being untimely. Taxslayer When to file for deductions and credits. Taxslayer   To get the benefit of any allowable deductions or credits, you must timely file a true and accurate return. Taxslayer For this purpose, a return is timely if it is filed within 16 months of the due date just discussed. Taxslayer However, if you did not file a 2012 tax return and 2013 is not the first year for which you are required to file one, your 2013 return is timely for this purpose if it is filed by the earlier of: The date that is 16 months after the due date for filing your 2013 return, or The date the IRS notifies you that your 2013 return has not been filed and that you cannot claim certain deductions and credits. Taxslayer The allowance of the following credits is not affected by this time requirement. Taxslayer Credit for withheld taxes. Taxslayer Credit for excise tax on certain uses of gasoline and special fuels. Taxslayer Credit for tax paid by a mutual fund (or other regulated investment company) or a real estate investment trust on undistributed long-term capital gains. Taxslayer Protective return. Taxslayer   If your activities in the United States were limited and you do not believe that you had any gross income effectively connected with a U. Taxslayer S. Taxslayer trade or business during the year, you can file a protective return (Form 1040NR) by the deadline explained above. Taxslayer By filing a protective return, you protect your right to receive the benefit of deductions and credits in the event it is later determined that some or all of your income is effectively connected. Taxslayer You are not required to report any effectively connected income or any deductions on the protective return, but you must give the reason the return is being filed. Taxslayer   If you believe some of your activities resulted in effectively connected income, file your return reporting that income and related deductions by the regular due date. Taxslayer To protect your right to claim deductions or credits resulting from other activities, attach a statement to that return explaining that you wish to protect your right to claim deductions and credits if it is later determined that the other activities produced effectively connected income. Taxslayer   You can follow the same procedure if you believe you have no U. Taxslayer S. Taxslayer tax liability because of a U. Taxslayer S. Taxslayer tax treaty. Taxslayer Be sure to also complete item L on page 5 of Form 1040NR. Taxslayer Waiver of filing deadline. Taxslayer   The IRS may waive the filing deadline if you establish that, based on the facts and circumstances, you acted reasonably and in good faith in failing to file a U. Taxslayer S. Taxslayer income tax return (including a protective return) and you cooperate with the IRS in determining your U. Taxslayer S. Taxslayer income tax liability for the tax year for which you did not file a return. Taxslayer Where To File If you are not enclosing a payment, file Form 1040NR-EZ and Form 1040NR at the following address. Taxslayer  Department of the Treasury Internal Revenue Service Center Austin, TX 73301-0215 If enclosing a payment, mail your return to:  Internal Revenue Service  P. Taxslayer O. Taxslayer Box 1303 Charlotte, NC 28201-1303 Aliens from the U. Taxslayer S. Taxslayer Virgin Islands. Taxslayer    If you are a bona fide resident of the U. Taxslayer S. Taxslayer Virgin Islands during your entire tax year and work temporarily in the United States, you must pay your income taxes to the U. Taxslayer S. Taxslayer Virgin Islands and file your income tax returns at the following address. Taxslayer Virgin Islands Bureau of Internal Revenue 6115 Estate Smith Bay Suite 225 St. Taxslayer Thomas, VI 00802   Report all income from U. Taxslayer S. Taxslayer sources, as well as income from other sources, on your return. Taxslayer For information on filing U. Taxslayer S. Taxslayer Virgin Islands returns, contact the U. Taxslayer S. Taxslayer Virgin Islands Bureau of Internal Revenue. Taxslayer   Chapter 8 discusses withholding from U. Taxslayer S. Taxslayer wages of U. Taxslayer S. Taxslayer Virgin Islanders. Taxslayer Aliens from Guam or the Commonwealth of the Northern Mariana Islands. Taxslayer   If you are a bona fide resident of Guam or the Commonwealth of the Northern Mariana Islands (CNMI) during your entire tax year, you must file your return with, and pay any tax due to, Guam or the CNMI. Taxslayer Report all income, including income from U. Taxslayer S. Taxslayer sources, on your return. Taxslayer It is not necessary to file a separate U. Taxslayer S. Taxslayer income tax return. Taxslayer    Bona fide residents of Guam should file their Guam returns at the following address. Taxslayer   Department of Revenue and Taxation Government of Guam P. Taxslayer O. Taxslayer Box 23607 GMF, GU 96921    Bona fide residents of the CNMI should file their CNMI income tax returns at the following address. Taxslayer   Department of Finance Division of Revenue and Taxation Commonwealth of the Northern Mariana Islands P. Taxslayer O. Taxslayer Box 5234 CHRB Saipan, MP 96950   If you are not a bona fide resident of Guam or the CNMI, see Pub. Taxslayer 570, Tax Guide for Individuals With Income From U. Taxslayer S. Taxslayer Possessions, for information on where to file your return. Taxslayer Amended Returns and Claims for Refund If you find changes in your income, deductions, or credits after you mail your return, file Form 1040X, Amended U. Taxslayer S. Taxslayer Individual Income Tax Return. Taxslayer Also use Form 1040X if you should have filed Form 1040, 1040A, or 1040EZ instead of Form 1040NR or 1040NR-EZ, or vice versa. Taxslayer If you amend Form 1040NR or Form 1040NR-EZ or file the correct return, attach the corrected return (Form 1040, Form 1040NR, etc. Taxslayer ) to Form 1040X. Taxslayer Print “Amended” across the top. Taxslayer Ordinarily, an amended return claiming a refund must be filed within 3 years from the date your return was filed or within 2 years from the time the tax was paid, whichever is later. Taxslayer A return filed before the final due date is considered to have been filed on the due date. Taxslayer Other Forms You May Have To File You may be required to file information returns to report certain foreign income or assets, or monetary transactions. Taxslayer FinCen Form 105 FinCEN Form 105 (formerly Customs Form 4790), Report of International Transportation of Currency or Monetary Instruments, must be filed by each person who physically transports, mails, or ships, or causes to be physically transported, mailed, or shipped, currency or other monetary instruments in a total amount of more than $10,000 at one time from the United States to any place outside the United States, or into the United States from any place outside the United States. Taxslayer The filing requirement also applies to each person who receives in the United States currency or monetary instruments totaling more than $10,000 at one time from any place outside of the United States. Taxslayer The term “monetary instruments” means the following: Coin and currency of the United States or of any other country, Travelers' checks in any form, Investment securities or stock in bearer form or otherwise in such form that title to them passes upon delivery, Negotiable instruments (including checks, promissory notes, and money orders) in bearer form, endorsed without restriction, made out to a fictitious payee, or otherwise in such form that title to them passes upon delivery, and Checks, promissory notes, and money orders which are signed but on which the name of the payee has been omitted. Taxslayer However, the term does not include: Checks or money orders made payable to the order of a named person which have not been endorsed or which contain restrictive endorsements, Warehouse receipts, or Bills of lading. Taxslayer A transfer of funds through normal banking procedures (wire transfer) that does not involve the physical transportation of currency or monetary instruments is not required to be reported on FinCEN Form 105. Taxslayer Filing requirements. Taxslayer   FinCEN Form 105 filing requirements follow. Taxslayer Recipients. Taxslayer   Each person who receives currency or other monetary instruments in the United States must file FinCEN Form 105 within 15 days after receipt, with the Customs officer in charge at any port of entry or departure, or by mail at the following address. Taxslayer Commissioner of Customs  Attention: Currency Transportation Reports Washington, DC 20229 Shippers or mailers. Taxslayer   If the currency or other monetary instrument does not accompany the person entering or departing the United States, FinCEN Form 105 can be filed by mail at the above address on or before the date of entry, departure, mailing, or shipping. Taxslayer Travelers. Taxslayer   Travelers must file FinCEN Form 105 with the Customs officer in charge at any Customs port of entry or departure, when entering or departing the United States. Taxslayer Penalties. Taxslayer   Civil and criminal penalties are provided for failing to file a report, filing a report containing material omissions or misstatements, or filing a false or fraudulent report. Taxslayer Also, the entire amount of the currency or monetary instrument may be subject to seizure and forfeiture. Taxslayer More information. Taxslayer   More information regarding the filing of FinCEN Form 105 can be found in the instructions on the back of the form. Taxslayer Form 8938 You may have to file Form 8938, Statement of Specified Foreign Financial Assets, to report the ownership of specified foreign financial asset(s) if you are one of the following individuals. Taxslayer A resident alien of the United States for any part of the tax year. Taxslayer A resident alien of the United States who elects to be treated as a resident of a foreign country under the provisions of a U. Taxslayer S. Taxslayer income tax treaty. Taxslayer See Effect of Tax Treaties in chapter 1. Taxslayer A nonresident alien who makes an election to be treated as a resident alien for purposes of filing a joint income tax return. Taxslayer See chapter 1 for information about this election. Taxslayer A nonresident alien who is a bona fide resident of American Samoa or Puerto Rico. Taxslayer See Publication 570, Tax Guide for Individuals With Income From U. Taxslayer S. Taxslayer Possessions, for a definition of bona fide resident. Taxslayer You must file Form 8938 if the total value of those assets exceeds an applicable threshold (the “reporting threshold”). Taxslayer The reporting threshold varies depending on whether you live in the United States, are married, or file a joint income tax return with your spouse. Taxslayer Specified foreign financial assets include any financial account maintained by a foreign financial institution and, to the extent held for investment, any stock, securities, or any other interest in a foreign entity and any financial instrument or contract with an issuer or counterparty that is not a U. Taxslayer S. Taxslayer person. Taxslayer You may have to pay penalties if you are required to file Form 8938 and fail to do so, or if you have an understatement of tax due to any transaction involving an undisclosed foreign financial asset. Taxslayer More information about the filing of Form 8938 can be found in the separate instructions for Form 8938. Taxslayer Penalties The law provides penalties for failure to file returns or pay taxes as required. Taxslayer Civil Penalties If you do not file your return and pay your tax by the due date, you may have to pay a penalty. Taxslayer You may also have to pay a penalty if you substantially understate your tax, file a frivolous tax submission, or fail to supply your taxpayer identification number. Taxslayer If you provide fraudulent information on your return, you may have to pay a civil fraud penalty. Taxslayer Filing late. Taxslayer   If you do not file your return by the due date (including extensions), you may have to pay a failure-to-file penalty. Taxslayer The penalty is based on the tax not paid by the due date (without regard to extensions). Taxslayer The penalty is usually 5% for each month or part of a month that a return is late, but not more than 25%. Taxslayer Fraud. Taxslayer   If your failure to file is due to fraud, the penalty is 15% for each month or part of a month that your return is late, up to a maximum of 75%. Taxslayer Return over 60 days late. Taxslayer   If you file your return more than 60 days after the due date or extended due date, the minimum penalty is the smaller of $135 or 100% of the unpaid tax. Taxslayer Exception. Taxslayer   You will not have to pay the penalty if you show that you failed to file on time because of reasonable cause and not because of willful neglect. Taxslayer Paying tax late. Taxslayer   You will have to pay a failure-to-pay penalty of ½ of 1% (. Taxslayer 50%) of your unpaid taxes for each month, or part of a month, after the due date that the tax is not paid. Taxslayer This penalty does not apply during the automatic 6-month extension of time to file period, if you paid at least 90% of your actual tax liability on or before the due date of your return and pay the balance when you file the return. Taxslayer   The monthly rate of the failure-to-pay penalty is half the usual rate (. Taxslayer 25% instead of . Taxslayer 50%) if an installment agreement is in effect for that month. Taxslayer You must have filed your return by the due date (including extensions) to qualify for this reduced penalty. Taxslayer   If a notice of intent to levy is issued, the rate will increase to 1% at the start of the first month beginning at least 10 days after the day that the notice is issued. Taxslayer If a notice and demand for immediate payment is issued, the rate will increase to 1% at the start of the first month beginning after the day that the notice and demand is issued. Taxslayer   This penalty cannot be more than 25% of your unpaid tax. Taxslayer You will not have to pay the penalty if you can show that you had a good reason for not paying your tax on time. Taxslayer Combined penalties. Taxslayer   If both the failure-to-file penalty and the failure-to-pay penalty (discussed earlier) apply in any month, the 5% (or 15%) failure-to-file penalty is reduced by the failure-to-pay penalty. Taxslayer However, if you file your return more than 60 days after the due date or extended due date, the minimum penalty is the smaller of $135 or 100% of the unpaid tax. Taxslayer Accuracy-related penalty. Taxslayer   You may have to pay an accuracy-related penalty if you underpay your tax because: You show negligence or disregard of rules or regulations, You substantially understate your income tax, You claim tax benefits for a transaction that lacks economic substance, or You fail to disclose a foreign financial asset. Taxslayer The penalty is equal to 20% of the underpayment. Taxslayer The penalty is 40% of any portion of the underpayment that is attributable to an undisclosed noneconomic substance transaction or an undisclosed foreign financial asset transaction. Taxslayer The penalty will not be figured on any part of an underpayment on which the fraud penalty (discussed later) is charged. Taxslayer Negligence or disregard. Taxslayer   The term “negligence” includes a failure to make a reasonable attempt to comply with the tax law or to exercise ordinary and reasonable care in preparing a return. Taxslayer Negligence also includes failure to keep adequate books and records. Taxslayer You will not have to pay a negligence penalty if you have a reasonable basis for a position you took. Taxslayer   The term “disregard” includes any careless, reckless, or intentional disregard. Taxslayer Adequate disclosure. Taxslayer   You can avoid the penalty for disregard of rules or regulations if you adequately disclose on your return a position that has at least a reasonable basis. Taxslayer See Disclosure statement , later. Taxslayer   This exception will not apply to an item that is attributable to a tax shelter. Taxslayer In addition, it will not apply if you fail to keep adequate books and records, or substantiate items properly. Taxslayer Substantial understatement of income tax. Taxslayer   You understate your tax if the tax shown on your return is less than the correct tax. Taxslayer The understatement is substantial if it is more than the larger of 10% of the correct tax or $5,000. Taxslayer However, the amount of the understatement is reduced to the extent the understatement is due to: Substantial authority, or Adequate disclosure and a reasonable basis. Taxslayer   If an item on your return is attributable to a tax shelter, there is no reduction for an adequate disclosure. Taxslayer However, there is a reduction for a position with substantial authority, but only if you reasonably believed that your tax treatment was more likely than not the proper treatment. Taxslayer Substantial authority. Taxslayer   Whether there is or was substantial authority for the tax treatment of an item depends on the facts and circumstances. Taxslayer Consideration will be given to court opinions, Treasury regulations, revenue rulings, revenue procedures, and notices and announcements issued by the IRS and published in the Internal Revenue Bulletin that involve the same or similar circumstances as yours. Taxslayer Disclosure statement. Taxslayer   To adequately disclose the relevant facts about your tax treatment of an item, use Form 8275, Disclosure Statement. Taxslayer You must also have a reasonable basis for treating the item the way you did. Taxslayer   In cases of substantial understatement only, items that meet the requirements of Revenue Procedure 2012-51, 2012-51 IRB 719 (or later update) are considered adequately disclosed on your return without filing Form 8275. Taxslayer   Use Form 8275-R, Regulation Disclosure Statement, to disclose items or positions contrary to regulations. Taxslayer Transaction lacking economic substance. Taxslayer   For more information on economic substance, see section 7701(o). Taxslayer Foreign financial asset. Taxslayer   For more information on undisclosed foreign financial assets, see section 6662(j) or the Instructions for Form 8938. Taxslayer Reasonable cause. Taxslayer   You will not have to pay a penalty if you show a good reason (reasonable cause) for the way you treated an item. Taxslayer You must also show that you acted in good faith. Taxslayer This does not apply to a transaction that lacks economic substance. Taxslayer Filing erroneous claim for refund or credit. Taxslayer   You may have to pay a penalty if you file an erroneous claim for refund or credit. Taxslayer The penalty is equal to 20% of the disallowed amount of the claim, unless you can show a reasonable basis for the way you treated an item. Taxslayer However, any disallowed amount due to a transaction that lacks economic substance will not be treated as having a reasonable basis. Taxslayer The penalty will not be figured on any part of the disallowed amount of the claim that relates to the earned income credit or on which the accuracy-related or fraud penalties are charged. Taxslayer Frivolous tax submission. Taxslayer   You may have to pay a penalty of $5,000 if you file a frivolous tax return or other frivolous submissions. Taxslayer A frivolous tax return is one that does not include enough information to figure the correct tax or that contains information clearly showing that the tax you reported is substantially incorrect. Taxslayer For more information on frivolous returns, frivolous submissions, and a list of positions that are identified as frivolous, see Notice 2010-33, 2010-17 IRB 609 available at www. Taxslayer irs. Taxslayer gov/irb/2010-17_irb/ar13. Taxslayer html. Taxslayer   You will have to pay the penalty if you filed this kind of return or submission based on a frivolous position or a desire to delay or interfere with the administration of federal tax laws. Taxslayer This includes altering or striking out the preprinted language above the space provided for your signature. Taxslayer   This penalty is added to any other penalty provided by law. Taxslayer Fraud. Taxslayer   If there is any underpayment of tax on your return due to fraud, a penalty of 75% of the underpayment due to fraud will be added to your tax. Taxslayer Failure to supply taxpayer identification number. Taxslayer   If you do not include your social security number (SSN) or individual taxpayer identification number (ITIN) or the SSN or ITIN of another person where required on a return, statement, or other document, you will be subject to a penalty of $50 for each failure. Taxslayer You will also be subject to a penalty of $50 if you do not give your SSN or ITIN to another person when it is required on a return, statement, or other document. Taxslayer   For example, if you have a bank account that earns interest, you must give your SSN or ITIN to the bank. Taxslayer The number must be shown on the Form 1099-INT or other statement the bank sends you. Taxslayer If you do not give the bank your SSN or ITIN, you will be subject to the $50 penalty. Taxslayer (You also may be subject to “backup” withholding of income tax. Taxslayer )   You will not have to pay the penalty if you are able to show that the failure was due to reasonable cause and not willful neglect. Taxslayer Criminal Penalties You may be subject to criminal prosecution (brought to trial) for actions such as: Tax evasion, Willful failure to file a return, supply information, or pay any tax due, Fraud and false statements, or Preparing and filing a fraudulent return. 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Taxslayer 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. Taxslayer 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. Taxslayer However, you may be able to deduct expenses related to the business use of part of your home if you meet specific requirements. Taxslayer Even then, the deductible amount of these types of expenses may be limited. Taxslayer Use this section and Figure A, later, to decide if you can deduct expenses for the business use of your home. Taxslayer 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). Taxslayer Additional tests for employee use. Taxslayer   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. Taxslayer 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. Taxslayer If the use of the home office is merely appropriate and helpful, you cannot deduct expenses for the business use of your home. Taxslayer Exclusive Use To qualify under the exclusive use test, you must use a specific area of your home only for your trade or business. Taxslayer The area used for business can be a room or other separately identifiable space. Taxslayer The space does not need to be marked off by a permanent partition. Taxslayer 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. Taxslayer Example. Taxslayer You are an attorney and use a den in your home to write legal briefs and prepare clients' tax returns. Taxslayer Your family also uses the den for recreation. Taxslayer The den is not used exclusively in your trade or business, so you cannot claim a deduction for the business use of the den. Taxslayer Exceptions to Exclusive Use You do not have to meet the exclusive use test if either of the following applies. Taxslayer You use part of your home for the storage of inventory or product samples (discussed next). Taxslayer You use part of your home as a daycare facility, discussed later under Daycare Facility . Taxslayer Note. Taxslayer With the exception of these two uses, any portion of the home used for business purposes must meet the exclusive use test. Taxslayer Storage of inventory or product samples. Taxslayer    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. Taxslayer However, you must meet all the following tests. Taxslayer You sell products at wholesale or retail as your trade or business. Taxslayer You keep the inventory or product samples in your home for use in your trade or business. Taxslayer Your home is the only fixed location of your trade or business. Taxslayer You use the storage space on a regular basis. Taxslayer The space you use is a separately identifiable space suitable for storage. Taxslayer Example. Taxslayer Your home is the only fixed location of your business of selling mechanics' tools at retail. Taxslayer You regularly use half of your basement for storage of inventory and product samples. Taxslayer You sometimes use the area for personal purposes. Taxslayer The expenses for the storage space are deductible even though you do not use this part of your basement exclusively for business. Taxslayer Regular Use To qualify under the regular use test, you must use a specific area of your home for business on a regular basis. Taxslayer Incidental or occasional business use is not regular use. Taxslayer You must consider all facts and circumstances in determining whether your use is on a regular basis. Taxslayer 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. Taxslayer 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. Taxslayer Example. Taxslayer 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. Taxslayer You do not make investments as a broker or dealer. Taxslayer So, your activities are not part of a trade or business and you cannot take a deduction for the business use of your home. Taxslayer Principal Place of Business You can have more than one business location, including your home, for a single trade or business. Taxslayer 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. Taxslayer 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. Taxslayer Your home office will qualify as your principal place of business if you meet the following requirements. Taxslayer You use it exclusively and regularly for administrative or management activities of your trade or business. Taxslayer You have no other fixed location where you conduct substantial administrative or management activities of your trade or business. Taxslayer If, after considering your business locations, your home cannot be identified as your principal place of business, you cannot deduct home office expenses. Taxslayer 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. Taxslayer Administrative or management activities. Taxslayer   There are many activities that are administrative or managerial in nature. Taxslayer The following are a few examples. Taxslayer Billing customers, clients, or patients. Taxslayer Keeping books and records. Taxslayer Ordering supplies. Taxslayer Setting up appointments. Taxslayer Forwarding orders or writing reports. Taxslayer Administrative or management activities performed at other locations. Taxslayer   The following activities performed by you or others will not disqualify your home office from being your principal place of business. Taxslayer You have others conduct your administrative or management activities at locations other than your home. Taxslayer (For example, another company does your billing from its place of business. Taxslayer ) 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. Taxslayer You occasionally conduct minimal administrative or management activities at a fixed location outside your home. Taxslayer You conduct substantial nonadministrative or nonmanagement business activities at a fixed location outside your home. Taxslayer (For example, you meet with or provide services to customers, clients, or patients at a fixed location of the business outside your home. Taxslayer ) You have suitable space to conduct administrative or management activities outside your home, but choose to use your home office for those activities instead. Taxslayer Please click here for the text description of the image. Taxslayer Can you deduct business use of the home expenses? Example 1. Taxslayer John is a self-employed plumber. Taxslayer Most of John's time is spent at customers' homes and offices installing and repairing plumbing. Taxslayer 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. Taxslayer John writes up estimates and records of work completed at his customers' premises. Taxslayer He does not conduct any substantial administrative or management activities at any fixed location other than his home office. Taxslayer John does not do his own billing. Taxslayer He uses a local bookkeeping service to bill his customers. Taxslayer John's home office qualifies as his principal place of business for deducting expenses for its use. Taxslayer 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. Taxslayer His choice to have his billing done by another company does not disqualify his home office from being his principal place of business. Taxslayer 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. Taxslayer Example 2. Taxslayer Pamela is a self-employed sales representative for several different product lines. Taxslayer 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. Taxslayer She occasionally writes up orders and sets up appointments from her hotel room when she is away on business overnight. Taxslayer Pamela's business is selling products to customers at various locations throughout her territory. Taxslayer To make these sales, she regularly visits customers to explain the available products and take orders. Taxslayer Pamela's home office qualifies as her principal place of business for deducting expenses for its use. Taxslayer She conducts administrative or management activities there and she has no other fixed location where she conducts substantial administrative or management activities. Taxslayer 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. Taxslayer 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. Taxslayer Example 3. Taxslayer Paul is a self-employed anesthesiologist. Taxslayer He spends the majority of his time administering anesthesia and postoperative care in three local hospitals. Taxslayer One of the hospitals provides him with a small shared office where he could conduct administrative or management activities. Taxslayer Paul very rarely uses the office the hospital provides. Taxslayer He uses a room in his home that he has converted to an office. Taxslayer He uses this room exclusively and regularly to conduct all the following activities. Taxslayer Contacting patients, surgeons, and hospitals regarding scheduling. Taxslayer Preparing for treatments and presentations. Taxslayer Maintaining billing records and patient logs. Taxslayer Satisfying continuing medical education requirements. Taxslayer Reading medical journals and books. Taxslayer Paul's home office qualifies as his principal place of business for deducting expenses for its use. Taxslayer 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. Taxslayer 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. Taxslayer 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. Taxslayer 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. Taxslayer Example 4. Taxslayer Kathleen is employed as a teacher. Taxslayer She is required to teach and meet with students at the school and to grade papers and tests. Taxslayer 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. Taxslayer The school does not require her to work at home. Taxslayer Kathleen prefers to use the office she has set up in her home and does not use the one provided by the school. Taxslayer She uses this home office exclusively and regularly for the administrative duties of her teaching job. Taxslayer 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. Taxslayer 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. Taxslayer More Than One Trade or Business The same home office can be the principal place of business for two or more separate business activities. Taxslayer 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. Taxslayer You must use the home office exclusively and regularly for one or more of the following purposes. Taxslayer As the principal place of business for one or more of your trades or businesses. Taxslayer 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. Taxslayer If your home office is a separate structure, in connection with one or more of your trades or businesses. Taxslayer You can use your home office for more than one business activity, but you cannot use it for any nonbusiness (i. Taxslayer e. Taxslayer , personal) activities. Taxslayer If you are an employee, any use of the home office in connection with your employment must be for the convenience of your employer. Taxslayer See Rental to employer , later, if you rent part of your home to your employer. Taxslayer Example. Taxslayer Tracy White is employed as a teacher. Taxslayer Her principal place of work is the school, which provides her office space to do her school work. Taxslayer She also has a mail order jewelry business. Taxslayer All her work in the jewelry business is done in her home office and the office is used exclusively for that business. Taxslayer If she meets all the other tests, she can deduct expenses for the business use of her home for the jewelry business. Taxslayer 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. Taxslayer As an employee, Tracy must also meet the convenience-of-the-employer test to qualify for the deduction. Taxslayer 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. Taxslayer 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. Taxslayer You physically meet with patients, clients, or customers on your premises. Taxslayer Their use of your home is substantial and integral to the conduct of your business. Taxslayer Doctors, dentists, attorneys, and other professionals who maintain offices in their homes generally will meet this requirement. Taxslayer Using your home for occasional meetings and telephone calls will not qualify you to deduct expenses for the business use of your home. Taxslayer 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. Taxslayer Example. Taxslayer June Quill, a self-employed attorney, works 3 days a week in her city office. Taxslayer She works 2 days a week in her home office used only for business. Taxslayer She regularly meets clients there. Taxslayer Her home office qualifies for a business deduction because she meets clients there in the normal course of her business. Taxslayer 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. Taxslayer The structure does not have to be your principal place of business or a place where you meet patients, clients, or customers. Taxslayer Example. Taxslayer John Berry operates a floral shop in town. Taxslayer He grows the plants for his shop in a greenhouse behind his home. Taxslayer 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. Taxslayer 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. Taxslayer 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. Taxslayer Electing to use the simplified method. Taxslayer   The simplified method is an alternative to the calculation, allocation, and substantiation of actual expenses. Taxslayer You choose whether or not to figure your deduction using the simplified method each taxable year. Taxslayer See Using the Simplified Method , later. Taxslayer Rental to employer. Taxslayer   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. Taxslayer You can deduct mortgage interest, qualified mortgage insurance premiums, real estate taxes, and personal casualty losses for the rented part, subject to any limitations. Taxslayer 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. Taxslayer 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. Taxslayer You will also need to figure the percentage of your home used for business and the limit on the deduction. Taxslayer 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. Taxslayer 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. Taxslayer Part-year use. Taxslayer   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. Taxslayer 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. Taxslayer Expenses related to tax-exempt income. Taxslayer   Generally, you cannot deduct expenses that are related to tax-exempt allowances. Taxslayer 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. Taxslayer No deduction is allowed for other expenses related to the tax-exempt allowance. Taxslayer   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. Taxslayer Actual Expenses You must divide the expenses of operating your home between personal and business use. Taxslayer The part of a home operating expense you can use to figure your deduction depends on both of the following. Taxslayer Whether the expense is direct, indirect, or unrelated. Taxslayer The percentage of your home used for business. Taxslayer Table 1, next, describes the types of expenses you may have and the extent to which they are deductible. Taxslayer Table 1. Taxslayer Types of Expenses  Expense  Description  Deductibility Direct Expenses only for  the business part  of your home. Taxslayer Deductible in full. Taxslayer *   Examples:  Painting or repairs  only in the area  used for business. Taxslayer Exception: May be only partially  deductible in a daycare facility. Taxslayer See Daycare Facility , later. Taxslayer Indirect Expenses for  keeping up and running your  entire home. Taxslayer Deductible based on the percentage of your home used for business. Taxslayer *   Examples:  Insurance, utilities, and  general repairs. Taxslayer   Unrelated Expenses only for  the parts of your  home not used  for business. Taxslayer Not deductible. Taxslayer   Examples:  Lawn care or painting  a room not used  for business. Taxslayer   *Subject to the deduction limit, discussed later. Taxslayer Form 8829 and the Worksheet To Figure the Deduction for Business Use of Your Home have separate columns for direct and indirect expenses. Taxslayer Certain expenses are deductible whether or not you use your home for business. Taxslayer 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. Taxslayer These expenses include the following. Taxslayer Real estate taxes. Taxslayer Qualified mortgage insurance premiums. Taxslayer Deductible mortgage interest. Taxslayer Casualty losses. Taxslayer Other expenses are deductible only if you use your home for business. Taxslayer You can use the business percentage of these expenses to figure your total business use of the home deduction. Taxslayer These expenses generally include (but are not limited to) the following. Taxslayer Depreciation (covered under Depreciating Your Home , later). Taxslayer Insurance. Taxslayer Rent paid for the use of property you do not own but use in your trade or business. Taxslayer Repairs. Taxslayer Security system. Taxslayer Utilities and services. Taxslayer Real estate taxes. Taxslayer   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. Taxslayer   For more information on the deduction for real estate taxes, see Publication 530, Tax Information for Homeowners. Taxslayer Deductible mortgage interest. Taxslayer   To figure the business part of your deductible mortgage interest, multiply this interest by the percentage of your home used for business. Taxslayer You can include interest on a second mortgage in this computation. Taxslayer 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. Taxslayer For more information on what interest is deductible, see Publication 936, Home Mortgage Interest Deduction. Taxslayer Qualified mortgage insurance premiums. Taxslayer   To figure the business part of your qualified mortgage insurance premiums, multiply the premiums by the percentage of your home used for business. Taxslayer You can include premiums for insurance on a second mortgage in this computation. Taxslayer 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. Taxslayer For more information, see Publication 936, and Line 13 in the Instructions for Schedule A (Form 1040). Taxslayer Casualty losses. Taxslayer    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. Taxslayer A direct expense is the loss on the portion of the property you use only in your business. Taxslayer Use the entire loss to figure the business use of the home deduction. Taxslayer An indirect expense is the loss on property you use for both business and personal purposes. Taxslayer Use only the business portion to figure the deduction. Taxslayer An unrelated expense is the loss on property you do not use in your business. Taxslayer Do not use any of the loss to figure the deduction. Taxslayer Example. Taxslayer You meet the rules to take a deduction for an office in your home that is 10% of the total area of your house. Taxslayer A storm damages your roof. Taxslayer 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. Taxslayer You would complete Form 4684, Casualties and Thefts, to report your loss. Taxslayer 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. Taxslayer 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. Taxslayer 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. Taxslayer Forms and worksheets to use. Taxslayer   If you are filing Schedule C (Form 1040), get Form 8829 and follow the instructions for casualty losses. Taxslayer 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. Taxslayer You will also need to get Form 4684. Taxslayer More information. Taxslayer   For more information on casualty losses, see Publication 547, Casualties, Disasters, and Thefts. Taxslayer Insurance. Taxslayer   You can deduct the cost of insurance that covers the business part of your home. Taxslayer 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. Taxslayer You can deduct the business percentage of the part that applies to the following year in that year. Taxslayer Rent. Taxslayer   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. Taxslayer To figure your deduction, multiply your rent payments by the percentage of your home used for business. Taxslayer   If you own your home, you cannot deduct the fair rental value of your home. Taxslayer However, see Depreciating Your Home , later. Taxslayer Repairs. Taxslayer   The cost of repairs that relate to your business, including labor (other than your own labor), is a deductible expense. Taxslayer For example, a furnace repair benefits the entire home. Taxslayer If you use 10% of your home for business, you can deduct 10% of the cost of the furnace repair. Taxslayer   Repairs keep your home in good working order over its useful life. Taxslayer Examples of common repairs are patching walls and floors, painting, wallpapering, repairing roofs and gutters, and mending leaks. Taxslayer However, repairs are sometimes treated as a permanent improvement and are not deductible. Taxslayer See Permanent improvements , later, under Depreciating Your Home. Taxslayer Security system. Taxslayer   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. Taxslayer 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. Taxslayer Utilities and services. Taxslayer   Expenses for utilities and services, such as electricity, gas, trash removal, and cleaning services, are primarily personal expenses. Taxslayer However, if you use part of your home for business, you can deduct the business part of these expenses. Taxslayer Generally, the business percentage for utilities is the same as the percentage of your home used for business. Taxslayer Telephone. Taxslayer   The basic local telephone service charge, including taxes, for the first telephone line into your home (i. Taxslayer e. Taxslayer , landline) is a nondeductible personal expense. Taxslayer 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. Taxslayer Do not include these expenses as a cost of using your home for business. Taxslayer Deduct these charges separately on the appropriate form or schedule. Taxslayer 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). Taxslayer Depreciating Your Home If you own your home and qualify to deduct expenses for its business use, you can claim a deduction for depreciation. Taxslayer Depreciation is an allowance for the wear and tear on the part of your home used for business. Taxslayer You cannot depreciate the cost or value of the land. Taxslayer You recover its cost when you sell or otherwise dispose of the property. Taxslayer Before you figure your depreciation deduction, you need to know the following information. Taxslayer The month and year you started using your home for business. Taxslayer The adjusted basis and fair market value of your home (excluding land) at the time you began using it for business. Taxslayer The cost of any improvements before and after you began using the property for business. Taxslayer The percentage of your home used for business. Taxslayer See Business Percentage , later. Taxslayer Adjusted basis defined. Taxslayer   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. Taxslayer For a discussion of adjusted basis, see Publication 551. Taxslayer Permanent improvements. Taxslayer   A permanent improvement increases the value of property, adds to its life, or gives it a new or different use. Taxslayer Examples of improvements are replacing electric wiring or plumbing, adding a new roof or addition, paneling, or remodeling. Taxslayer    You must carefully distinguish between repairs and improvements. Taxslayer See Repairs , earlier, under Actual Expenses. Taxslayer You also must keep accurate records of these expenses. Taxslayer These records will help you decide whether an expense is a deductible or a capital (added to the basis) expense. Taxslayer However, if you make repairs as part of an extensive remodeling or restoration of your home, the entire job is an improvement. Taxslayer Example. Taxslayer You buy an older home and fix up two rooms as a beauty salon. Taxslayer 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. Taxslayer Normally, the patching, painting, and floor work are repairs and the other expenses are permanent improvements. Taxslayer 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. Taxslayer You cannot deduct any portion of it as a repair expense. Taxslayer Adjusting for depreciation deducted in earlier years. Taxslayer   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. Taxslayer 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. Taxslayer If you did not deduct any depreciation, decrease the basis by the amount you could have deducted. Taxslayer   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. Taxslayer   If you deducted the incorrect amount of depreciation, see Publication 946. Taxslayer Fair market value defined. Taxslayer   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. Taxslayer 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. Taxslayer Figuring the depreciation deduction for the current year. Taxslayer   If you began using your home for business before 2013, continue to use the same depreciation method you used in past tax years. Taxslayer   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). Taxslayer Under MACRS, nonresidential real property is depreciated using the straight line method over 39 years. Taxslayer For more information on MACRS and other methods of depreciation, see Publication 946. Taxslayer   To figure the depreciation deduction, you must first figure the part of the cost of your home that can be depreciated (depreciable basis). Taxslayer The depreciable basis is figured by multiplying the percentage of your home used for business by the smaller of the following. Taxslayer The adjusted basis of your home (excluding land) on the date you began using your home for business. Taxslayer The fair market value of your home (excluding land) on the date you began using your home for business. Taxslayer Depreciation table. Taxslayer   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. Taxslayer Table 2. Taxslayer MACRS Percentage Table for 39-Year Nonresidential Real Property Month First Used for Business Percentage To Use 1 2. Taxslayer 461% 2 2. Taxslayer 247% 3 2. Taxslayer 033% 4 1. Taxslayer 819% 5 1. Taxslayer 605% 6 1. Taxslayer 391% 7 1. Taxslayer 177% 8 0. Taxslayer 963% 9 0. Taxslayer 749% 10 0. Taxslayer 535% 11 0. Taxslayer 321% 12 0. Taxslayer 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. Taxslayer See Publication 946 for the percentages for the remaining tax years of the recovery period. Taxslayer Example. Taxslayer In May, George Miller began to use one room in his home exclusively and regularly to meet clients. Taxslayer This room is 8% of the square footage of his home. Taxslayer He bought the home in 2003 for $125,000. Taxslayer He determined from his property tax records that his adjusted basis in the house (exclusive of land) is $115,000. Taxslayer In May, the house had a fair market value of $165,000. Taxslayer He multiplies his adjusted basis of $115,000 (which is less than the fair market value) by 8%. Taxslayer The result is $9,200, his depreciable basis for the business part of the house. Taxslayer George files his return based on the calendar year. Taxslayer May is the 5th month of his tax year. Taxslayer He multiplies his depreciable basis of $9,200 by 1. Taxslayer 605% (. Taxslayer 01605), the percentage from the table for the 5th month. Taxslayer His depreciation deduction is $147. Taxslayer 66. Taxslayer Depreciating permanent improvements. Taxslayer   Add the costs of permanent improvements made before you began using your home for business to the basis of your property. Taxslayer Depreciate these costs as part of the cost of your home as explained earlier. Taxslayer 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. Taxslayer 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. Taxslayer For improvements made this year, the recovery period is 39 years. Taxslayer For the percentage to use for the first year, see Table 2, earlier. Taxslayer For more information on recovery periods, see Publication 946. Taxslayer 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. Taxslayer Use the resulting percentage to figure the business part of the expenses for operating your entire home. Taxslayer You can use any reasonable method to determine the business percentage. Taxslayer The following are two commonly used methods for figuring the percentage. Taxslayer Divide the area (length multiplied by the width) used for business by the total area of your home. Taxslayer 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. Taxslayer Example 1. Taxslayer Your office is 240 square feet (12 feet × 20 feet). Taxslayer Your home is 1,200 square feet. Taxslayer Your office is 20% (240 ÷ 1,200) of the total area of your home. Taxslayer Your business percentage is 20%. Taxslayer Example 2. Taxslayer You use one room in your home for business. Taxslayer Your home has 10 rooms, all about equal size. Taxslayer Your office is 10% (1 ÷ 10) of the total area of your home. Taxslayer Your business percentage is 10%. Taxslayer 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. Taxslayer 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. Taxslayer 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. Taxslayer 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. Taxslayer 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)). Taxslayer These expenses are discussed in detail under Actual Expenses , earlier. Taxslayer 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. Taxslayer If you are self-employed, do not include in (2) above your deduction for one-half of your self-employment tax. Taxslayer Carryover of unallowed expenses. Taxslayer   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. Taxslayer They are subject to the deduction limit for that year, whether or not you live in the same home during that year. Taxslayer Figuring the deduction limit and carryover. Taxslayer   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. Taxslayer If you file Schedule C (Form 1040), figure your deduction limit and carryover on Form 8829. Taxslayer Example. Taxslayer You meet the requirements for deducting expenses for the business use of your home. Taxslayer You use 20% of your home for business. Taxslayer 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. Taxslayer    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). Taxslayer You also can deduct all of your business expenses not related to the use of your home ($2,000). Taxslayer 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. Taxslayer Your deduction for depreciation for the business use of your home is limited to $200 ($1,000 minus $800) because of the deduction limit. Taxslayer You can carry over the $1,400 balance and add it to your depreciation for 2014, subject to your deduction limit in 2014. Taxslayer More than one place of business. Taxslayer   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. Taxslayer 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. Taxslayer 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. Taxslayer For more information on transportation costs, see Publication 463, Travel, Entertainment, Gift, and Car Expenses. Taxslayer Using the Simplified Method The simplified method is an alternative to the calculation, allocation, and substantiation of actual expenses. Taxslayer 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. Taxslayer The area you use to figure your deduction is limited to 300 square feet. Taxslayer See Simplified Amount , later, for information about figuring the amount of the deduction. Taxslayer For more information about the simplified method, see Revenue Procedure 2013-13, 2013-06 I. Taxslayer R. Taxslayer B. Taxslayer 478, available at www. Taxslayer irs. Taxslayer gov/irb/2013-06_IRB/ar09. Taxslayer html. Taxslayer Actual expenses and depreciation of your home. Taxslayer   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. Taxslayer 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. Taxslayer The depreciation deduction allowable for that portion of the home is deemed to be zero for a year you use the simplified method. Taxslayer 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. Taxslayer More information. Taxslayer   For more information about claiming depreciation in a subsequent year, see Revenue Procedure 2013-13, 2013-06 I. Taxslayer R. Taxslayer B. Taxslayer 478, available at www. Taxslayer irs. Taxslayer gov/irb/2013-06_IRB/ar09. Taxslayer html. Taxslayer 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). Taxslayer Expenses deductible without regard to business use. Taxslayer   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. Taxslayer These expenses include mortgage interest, real estate taxes, and casualty losses, subject to any limitations. Taxslayer See Where To Deduct , later. Taxslayer 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). Taxslayer No deduction of carryover of actual expenses. Taxslayer   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. Taxslayer Instead, you will continue to carry over the disallowed amount to the next year that you use actual expenses to figure your deduction. Taxslayer Electing the Simplified Method You choose whether or not to figure your deduction using the simplified method each taxable year. Taxslayer 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. Taxslayer An election for a taxable year, once made, is irrevocable. Taxslayer 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. Taxslayer Shared use. Taxslayer   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. Taxslayer More than one qualified business use. Taxslayer   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. Taxslayer More than one home. Taxslayer   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. Taxslayer You must figure the deduction for any other home using actual expenses. Taxslayer 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. Taxslayer 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. Taxslayer The allowable area of your home used in conducting the business. Taxslayer 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. Taxslayer The gross income from the business use of your home. Taxslayer The amount of the business expenses that are not related to the use of your home. Taxslayer 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. Taxslayer To figure the amount you can deduct for qualified business use of your home using the simplified method, follow these 3 steps. Taxslayer 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). Taxslayer See Allowable area and Space used regularly for daycare , later. Taxslayer 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. Taxslayer 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. Taxslayer See Gross income limitation , later. Taxslayer Take the smaller of the amounts from (1) and (2). Taxslayer This is the amount you can deduct for this qualified business use of your home using the simplified method. Taxslayer 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. Taxslayer 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. Taxslayer Allowable area. Taxslayer   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. Taxslayer 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. Taxslayer 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. Taxslayer Area used by a qualified joint venture. Taxslayer   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. Taxslayer Split the actual area used in conducting business between you and your spouse in the same manner you split your other tax attributes. Taxslayer Then, each spouse will figure the allowable area separately. Taxslayer For more information about qualified joint ventures, see Qualified Joint Venture in the Instructions for Schedule C. Taxslayer Shared use. Taxslayer   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. Taxslayer You must allocate the shared space between you and the other person in a reasonable manner. Taxslayer Example. Taxslayer Kristin and Lindsey are roommates. Taxslayer Kristin uses 300 square feet of their home for a qualified business use. Taxslayer Lindsey uses 200 square feet of their home for a separate qualified business use. Taxslayer The qualified business uses share 100 square feet. Taxslayer 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. Taxslayer If divided evenly, Kristin could claim 250 square feet using the simplified method and Lindsey could claim 150 square feet. Taxslayer More than one qualified business use. Taxslayer   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. Taxslayer Allocate the actual square footage used (up to the maximum of 300 square feet) among your qualified business uses in a reasonable manner. Taxslayer However, do not allocate more square feet to a qualified business use than you actually use for that business. Taxslayer Rental use. Taxslayer   The simplified method does not apply to rental use. Taxslayer A rental use that qualifies for the deduction must be figured using actual expenses. Taxslayer 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. Taxslayer 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. Taxslayer Part-year use or area changes. Taxslayer   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. Taxslayer 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. Taxslayer When determining the average monthly allowable square footage, you cannot take more than 300 square feet into account for any one month. Taxslayer Additionally, if your qualified business use was less than 15 days in a month, you must use -0- for that month. Taxslayer Example 1. Taxslayer Andy files his federal income tax return on a calendar year basis. Taxslayer On July 20, he began using 420 square feet of his home for a qualified business use. Taxslayer He continued to use the 420 square feet until the end of the year. Taxslayer 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). Taxslayer Example 2. Taxslayer Amy files her federal income tax return on a calendar year basis. Taxslayer On April 20, she began using 100 square feet of her home for a qualified business use. Taxslayer On August 5, she expanded the area of her qualified use to 330 square feet. Taxslayer Amy continued to use the 330 square feet until the end of the year. Taxslayer 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). Taxslayer Gross income limitation. Taxslayer   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. Taxslayer 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. Taxslayer Business expenses not related to use of the home. Taxslayer   These expenses relate to the business activity in the home, but not to the use of the home itself. Taxslayer You can still deduct business expenses that are unrelated to the use of the home. Taxslayer See Where To Deduct , later. Taxslayer Examples of business expenses that are unrelated to the use of the home are advertising, wages, supplies, dues, and depreciation for equipment. Taxslayer Space used regularly for daycare. Taxslayer   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. Taxslayer The reduced rate will equal the prescribed rate times a fraction. Taxslayer 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. Taxslayer You can use the Daycare Facility Worksheet (for simplified method), near the end of this publication, to help you figure the reduced rate. Taxslayer    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. Taxslayer 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. Taxslayer To qualify for this exception to the exclusive use rule, you must meet both of the following requirements. Taxslayer 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. Taxslayer 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. Taxslayer You do not meet this requirement if your application was rejected or your license or other authorization was revoked. Taxslayer Figuring the deduction. Taxslayer   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. Taxslayer    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. Taxslayer If you also use that part exclusively for daycare, deduct all the allocable expenses, subject to the deduction limit, as explained earlier. Taxslayer   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. Taxslayer 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. Taxslayer You do not have to keep records to show the specific hours the area was used for business. Taxslayer You can use the area occasionally for personal reasons. Taxslayer However, a room you use only occasionally for business does not qualify for the deduction. Taxslayer 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. Taxslayer You can compare the hours of business use in a week with the number of hours in a week (168). Taxslayer Or you can compare the hours of business use for the year with the number of hours in the year (8,760 in 2013). Taxslayer 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. Taxslayer Example 1. Taxslayer Mary Lake used her basement to operate a daycare business for children. Taxslayer She figures the business percentage of the basement as follows. Taxslayer 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. Taxslayer During the other 12 hours a day, the family could use the basement. Taxslayer She figures the percentage of time the basement was used for daycare as follows. Taxslayer 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. Taxslayer 25%           Mary can deduct 34. Taxslayer 25% of any direct expenses for the basement. Taxslayer However, because her indirect expenses are for the entire house, she can deduct only 17. Taxslayer 13% of the indirect expenses. Taxslayer She figures the percentage for her indirect expenses as follows. Taxslayer Business percentage of the basement 50% Multiplied by: Percentage of time used for daycare × 34. Taxslayer 25% Percentage for indirect expenses 17. Taxslayer 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. Taxslayer In Part II, Mary figures her deductible expenses. Taxslayer She uses the following information to complete Part II. Taxslayer 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. Taxslayer (This figure is the same as the amount on line 29 of her Schedule C (Form 1040). Taxslayer ) The expenses she paid for rent and utilities relate to her entire home. Taxslayer Therefore, she enters the amount paid for rent on line 18, column (b), and the amount paid for utilities on line 20, column (b). Taxslayer She shows the total of these expenses on line 22, column (b). Taxslayer For line 23, she multiplies the amount on line 22, column (b) by the percentage on line 7 and enters the result, $1,585. Taxslayer Mary paid $500 to have the basement painted. Taxslayer The painting is a direct expense. Taxslayer 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. Taxslayer 25% – line 6). Taxslayer She enters $171 (34. Taxslayer 25% × $500) on line 19, column (a). Taxslayer She adds line 22, column (a), and line 23 and enters $1,756 ($171 + $1,585) on line 25. Taxslayer This is less than her deduction limit (line 15), so she can deduct the entire amount. Taxslayer She follows the instructions to complete the rest of Part II and enters $1,756 on lines 33 and 35. Taxslayer She then carries the $1,756 to line 30 of her Schedule C (Form 1040). Taxslayer Example 2. Taxslayer 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. Taxslayer 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. Taxslayer 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. Taxslayer The basement and room are 60% of the total area of her home. Taxslayer In figuring her expenses, 34. Taxslayer 25% of any direct expenses for the basement and room are deductible. Taxslayer In addition, 20. Taxslayer 55% (34. Taxslayer 25% × 60%) of her indirect expenses are deductible. Taxslayer Example 3. Taxslayer Assume the same facts as in Example 1 except that Mary stopped using her home for a daycare facility on June 24, 2013. Taxslayer 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. Taxslayer During the other 12 hours a day, the family could still use the basement. Taxslayer She figures the percentage of time the basement was used for business as follows. Taxslayer 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. Taxslayer 71%           Mary can deduct 35. Taxslayer 71% of any direct expenses for the basement. Taxslayer However, because her indirect expenses are for the entire house, she can deduct only 17. Taxslayer 86% of the indirect expenses. Taxslayer She figures the percentage for her indirect expenses as follows. Taxslayer Business percentage of the basement 50% Multiplied by: Percentage of time used for daycare × 35. Taxslayer 71% Percentage for indirect expenses 17. Taxslayer 86% Meals. Taxslayer   If you provide food for your daycare recipients, do not include the expense as a cost of using your home for business. Taxslayer Claim it as a separate deduction on your Schedule C (Form 1040). Taxslayer You can never deduct the cost of food consumed by you or your family. Taxslayer 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. Taxslayer 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. Taxslayer 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. Taxslayer   If you deduct the actual cost of food for your daycare business, keep a separate record (with receipts) of your family's food costs. Taxslayer   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. Taxslayer If your reimbursements are more than your expenses for food, show the difference as income in Part I of Schedule C (Form 1040). Taxslayer If your food expenses are greater than the reimbursements, show the difference as an expense in Part V of Schedule C (Form 1040). Taxslayer Do not include payments or expenses for your own children if they are eligible for the program. Taxslayer Follow this procedure even if you receive a Form 1099-MISC, Miscellaneous Income, reporting a payment from the sponsor. Taxslayer Standard meal and snack rates. Taxslayer   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. Taxslayer For these purposes: A family daycare provider is a person engaged in the business of providing family daycare. Taxslayer Family daycare is childcare provided to eligible children in the home of the family daycare provider. Taxslayer The care must be non-medical, not involve a transfer of legal custody, and generally last less than 24 hours each day. Taxslayer Eligible children are minor children receiving family daycare in the home of the family daycare provider. Taxslayer 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. Taxslayer Eligible children do not include children who receive daycare services for personal reasons of the provider. Taxslayer For example, if a provider provides daycare services for a relative as a favor to that relative, that child is not an eligible child. Taxslayer   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. Taxslayer 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. Taxslayer 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. Taxslayer   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. Taxslayer 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. Taxslayer 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. Taxslayer   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. Taxslayer 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. Taxslayer This information can be recorded in a log similar to the one shown in Exhibit A, near the end of this publication. Taxslayer   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. Taxslayer These expenses can be claimed as a separate deduction on your Schedule C (Form 1040). Taxslayer     Table 3. Taxslayer Standard Meal and Snack Rates1 Location of Family Daycare Provider Breakfast Lunch Dinner Snack States other than Alaska an