Business Furniture and Equipment
This section discusses the depreciation and section 179 deductions you may be entitled to take for furniture and equipment you use in your home for business or work as an employee. These deductions are available whether or not you qualify to deduct expenses for the business use of your home.
This section explains the different rules for each of the following.
- Listed property.
- Property bought for business use.
- Personal property converted to business use.
For 2002, you may be entitled to additional depreciation and an increased 179 deduction. For more information, see Section 179 Deduction and Depreciation under Property Bought for Business Use, later.
Listed Property
If you use certain types of property, called listed property, in your home, special rules apply. Listed property includes computers and related equipment and any property of a type generally used for entertainment, recreation, and amusement (including photographic, phonographic, communication, and video recording equipment).
Exception for computers. Computers and related equipment used exclusively in a qualifying office in your home are not listed property. If you qualify to deduct expenses for the business use of your home (see Qualifying for a Deduction, earlier) and you use your computer exclusively in your qualifying office in the home, do not use the listed property rules discussed below. Instead, follow the rules discussed under Property Bought for Business Use, later.
More-than-50%-use test. If you bought listed property and placed it in service during the year, you must use it more than 50% for business (including work as an employee) to claim a section 179 deduction or an accelerated depreciation deduction.
If your business use of listed property is 50% or less, you cannot take a section 179 deduction and you must depreciate the property using the Alternate Depreciation System (ADS) (straight line method). For more information on ADS, see chapter 3 in Publication 946.
Listed property meets the more-than-50%-use test for any year if its qualified business use is more than 50% of its total use. You must allocate the use of any item of listed property used for more than one purpose during the year among its various uses. You cannot use the percentage of investment use as part of the percentage of qualified business use to meet the more-than-50%-use test. However, you do use the combined total of business and investment use to figure your depreciation deduction for the property.
Example 1. Sarah does not qualify to claim a deduction for the business use of her home, but she uses her home computer 40% of the time for a business she operates out of her home. She also uses the computer 50% of the time to manage her investments. Sarah's home computer is listed property because it is not used in a qualified office in her home. She does not use the computer more than 50% for business, so she cannot elect a section 179 deduction. She can use her combined business/investment use (90%) to figure her depreciation deduction using ADS.
Example 2. If Sarah uses her computer 60% of the time for her business and 30% for managing her investments, her computer meets the more-than-50%-use test. She can elect a section 179 deduction. She can use her combined business/investment use (90%) to figure her depreciation deduction using the General Depreciation System (GDS).
Employee. If you use your own listed property (or listed property you rent) in your work as an employee, the property is business-use property only if you meet the following requirements.
- The use is for your employer's convenience.
- The use is required as a condition of your employment.
The use of property as a condition of your employment means that it is necessary for you to properly perform your work. Whether the use of the property is required for this purpose depends on all the facts and circumstances. Your employer does not have to tell you specifically to use the property. Nor is a statement by your employer to that effect sufficient.
Years following the year placed in service. If, in a year after you place an item of listed property in service, you fail to meet the more-than-50%-use test for that item of property, you may be required to do the following.
- Figure depreciation, beginning with the year you no longer use the property more than 50% for business, using the straight line method.
- Figure any excess depreciation (include any section 179 deduction on the property in figuring excess depreciation) and add it to:
- Your gross income, and
- The adjusted basis of your property.
For more information, see Recapture of Excess Depreciation under What Is the Business-Use Requirement? in Publication 946.
Reporting and recordkeeping requirements. If you use listed property in your business, you must file Form 4562 to claim a depreciation or section 179 deduction. Begin with Part V, Section A, of that form.
You cannot take any depreciation or section 179 deduction for the use of listed property unless you can prove your business/investment use with adequate records or sufficient evidence to support your own statements.
To meet the adequate records requirement, you must maintain an account book, diary, log, statement of expense, trip sheet, or similar record or other documentary evidence that is sufficient to establish business/investment use. For more information on what records to keep, see What Records Must Be Kept? in chapter 5 of Publication 946.
Property Bought for Business Use
If you bought certain property to use in your business, you can do any one of the following (subject to the limits discussed later).
- Elect a section 179 deduction for the full cost of the property.
- Take part of the cost as a section 179 deduction and depreciate the balance.
- Depreciate the full cost of the property.
Section 179 Deduction
You may be able to claim an increased section 179 deduction if your business qualifies as an enterprise zone business or you place property in service in the New York Liberty Zone. The increase can be as much as $35,000, but it cannot be more than the cost of qualified property which is section 179 property placed in service during the year.
For more information on the increased section 179 deduction, see Liberty Zone Property and Enterprise Zone Businesses under How Much Can You Deduct? in chapter 2 of Publication 946.
You can claim the section 179 deduction for the cost of depreciable tangible personal property bought for use in your trade or business. You can choose how much (subject to the limit) of the cost you want to deduct under section 179 and how much you want to depreciate. You can spread the section 179 deduction over several items of property in any way you choose as long as the total does not exceed the maximum allowable. You cannot take a section 179 deduction for the basis of the business part of your home.
You elect the section 179 deduction by completing Part I of Form 4562.
More information. For more information on the section 179 deduction, see chapter 2 in Publication 946.
Depreciation
You may be entitled to take a special depreciation allowance (or Liberty Zone depreciation allowance) for qualified property (or Liberty Zone property) you place in service during 2002. The allowance is an additional deduction of 30% of the property's depreciable basis. For more information, see chapter 3, Claiming the Special Depreciation Allowance (or Liberty Zone Depreciation Allowance) in Publication 946.
Use Parts II and III of Form 4562 to claim your deduction for depreciation on property placed in service during the year. Do not include any costs deducted in Part I (section 179 deduction).
Most business property used in a home office is either 5-year or 7-year property under MACRS.
- 5-year property includes computers and peripheral equipment, typewriters, calculators, adding machines, and copiers.
- 7-year property includes office furniture and fixtures such as desks, files, and safes.
Under MACRS, you generally use the half-year convention, which allows you to deduct a half year of depreciation in the first year you use the property in your business. If you place more than 40% of your depreciable property in service during the last 3 months of your tax year, you must use the mid-quarter convention instead of the half-year convention.
After you have determined the cost of the depreciable property (minus any section 179 deduction and special depreciation allowance taken on the property) and whether it is 5-year or 7-year property, use the table, shown next, to figure your depreciation if the half-year convention applies.
MACRS Percentage Table for 5- and 7-Year Property Using Half-Year Convention
| Recovery Year |
5-Year Property |
7-Year Property |
| 1 |
20.00% |
14.29% |
| 2 |
32.00% |
24.49% |
| 3 |
19.20% |
17.49% |
| 4 |
11.52% |
12.49% |
| 5 |
11.52% |
8.93% |
| 6 |
5.76% |
8.92% |
| 7 |
|
8.93% |
| 8 |
|
4.46% |
See Publication 946 for a discussion of the mid-quarter convention and for complete MACRS percentage tables.
Example. During the year, Donald Kent bought a desk and three chairs for use in his office. His total bill for the furniture was $1,975. His taxable business income for the year was $3,000 without any deduction for the office furniture. Donald can elect to do one of the following.
- Take a section 179 deduction for the full cost of the office furniture.
- Take part of the cost of the furniture as a section 179 deduction and depreciate the balance.
- Depreciate the full cost of the office furniture.
The furniture is 7-year property. If Donald does not take a section 179 deduction, he multiplies $1,975, the cost of the furniture, by 30% to figure his special depreciation allowance of $593. His depreciable basis after the special allowance is $1,382 ($1,975 - $593). He then multiplies $1,382 by 14.29% (.1429) to get his MACRS depreciation deduction of $197.49.
Personal Property Converted to Business Use
If you use property in your home office that was used previously for personal purposes, you cannot take a section 179 deduction for the property. You can depreciate it, however. The method of depreciation you use depends on when you first used the property for personal purposes.
If you began using the property for personal purposes after 1986 and change it to business use in 2002, depreciate the property under MACRS.
The basis for depreciation of property changed from personal to business use is the lesser of the following.
- The adjusted basis of the property on the date of change.
- The fair market value of the property on the date of change.
If you began using the property for personal purposes after 1980 and before 1987 and change it to business use in 2002, you generally depreciate the property under the accelerated cost recovery system (ACRS). However, if the depreciation under ACRS is greater in the first year than the depreciation under MACRS, you must depreciate it under MACRS. For information on ACRS, see Publication 534, Depreciating Property Placed in Service Before 1987.
If you began using the property for personal purposes before 1981 and change it to business use in 2002, depreciate the property by the straight line or declining balance method based on salvage value and useful life.
Recordkeeping
You do not have to use a particular method of recordkeeping, but you must keep records that provide the information needed to figure your deductions for the business use of your home. You should keep canceled checks, receipts, and other evidence of expenses you paid.
Your records must show the following information.
- The part of your home you use for business.
- That you use part of your home exclusively and regularly for business as either your principal place of business or as the place where you meet or deal with clients or customers in the normal course of your business. (However, see the earlier discussion, Exceptions to Exclusive Use.)
- The depreciation and expenses for the business part.
You must keep your records for as long as they are important for any tax law. This is usually the later of the following dates.
- 3 years from the return due date or the date filed.
- 2 years from the date the tax was paid.
Keep records to prove your home's depreciable basis. This includes records of when and how you acquired your home, your original purchase price, any improvements to your home, and any depreciation you are allowed because you maintained an office in your home. You can keep copies of Forms 8829 or the Publication 587 worksheets as records of depreciation.
For more information on recordkeeping, see Publication 583.
Where To Deduct
Deduct expenses for the business use of your home on Form 1040. Where you deduct these expenses on the form depends on whether you are:
- A self-employed person, or
- An employee.
If you are a partner, see Partners, later, for information on where to deduct expenses for the business use of your home.
Self-Employed Persons
If you are self-employed and file Schedule C (Form 1040), complete and attach Form 8829 to your return. If you file Schedule F (Form 1040), report your entire deduction for business use of the home, up to the deduction limit discussed under Figuring the Deduction, earlier (line 32 if you used the worksheet), on line 34 of Schedule F. Write Business Use of Home on the dotted line beside the entry.
Deductible mortgage interest. If you file Schedule C (Form 1040), enter all your deductible mortgage interest on line 10 of Form 8829. After you have figured the business part of the mortgage interest on lines 12 and 13, subtract that amount from the total mortgage interest on line 10. The remainder is deductible on Schedule A (Form 1040), lines 10 and 11. If the interest you deduct on Schedule A for your home mortgage is limited, enter the excess on line 16 of Form 8829.
If you file Schedule F (Form 1040), include the business part of your deductible home mortgage interest with your total business use of the home expenses on line 34. You can use the worksheet near the back of this publication to figure the deductible part of mortgage interest. Enter the nonbusiness part of the deductible mortgage interest on Schedule A, lines 10 and 11.
To determine if the limits on qualified home mortgage interest apply to you, see the instructions for Schedule A or Publication 936.
Real estate taxes. If you file Schedule C (Form 1040), enter all your deductible real estate taxes on line 11 of Form 8829. After you have figured the business part of your taxes on lines 12 and 13, subtract that amount from your total real estate taxes on line 11. The remainder is deductible on Schedule A, line 6.
If you file Schedule F (Form 1040), include the business part of real estate taxes with your total business use of the home expenses on line 34. Enter the nonbusiness part of your real estate taxes on line 6 of Schedule A.
If you itemize your deductions, be sure to claim only the personal part of your deductible mortgage interest and real estate taxes on Schedule A (Form 1040). Do not deduct any of the business part on Schedule A. For example, if your business percentage on line 7 of Form 8829 or line 3 of the worksheet near the back of this publication is 30%, you can claim only 70% of your deductible mortgage interest and real estate taxes as personal expenses on Schedule A.
Casualty losses. If you are using Form 8829, refer to the specific instructions for lines 9 and 27 and enter the amount from line 33 on line 27 of Form 4684, Section B. Write See Form 8829 above line 27.
If you file Schedule F (Form 1040), enter the business part of casualty losses (line 31 if you use the worksheet) on line 27 of Form 4684, Section B. Write See attached statement above line 27.
Other expenses. Report the other home expenses that would not be allowable if you did not use your home for business (insurance, maintenance, utilities, depreciation, etc.) on the appropriate lines of your Form 8829. If you rent rather than own your home, include the rent you paid on line 20. If these expenses exceed the deduction limit, carry the excess over to next year. The carryover will be subject to next year's deduction limit.
If you file Schedule F (Form 1040), include your otherwise nondeductible expenses (insurance, maintenance, utilities, depreciation, etc.) with your total business use of the home expenses on line 34 of Schedule F. If these expenses exceed the deduction limit, carry the excess over to the next year. The carryover will be subject to next year's deduction limit.
Business expenses not for the use of your home. Deduct in full your business expenses that are not for the use of your home itself (dues, salaries, supplies, certain telephone expenses, etc.) on the appropriate lines of Schedule C (Form 1040) or Schedule F (Form 1040). These expenses are not for the use of your home, so they are not subject to the deduction limit for business use of the home expenses.
Employees
As an employee, you must itemize deductions on Schedule A (Form 1040) to claim expenses for the business use of your home and any other employee business expenses. This generally applies to all employees, including outside salespersons. If you are a statutory employee, use Schedule C (Form 1040) to claim the expenses. Follow the instructions given earlier under Self-Employed Persons. The statutory employee box within box 13 on your Form W-2 will be checked if you are a statutory employee.
If you have employee expenses for which you were not reimbursed, report them on line 20 of Schedule A. You also generally must complete Form 2106 if either of the following apply.
- You claim any job-related vehicle, travel, transportation, meal, or entertainment expenses.
- Your employer paid you for any of your job expenses reportable on line 20. (Amounts your employer included in box 1 of your Form W-2 are not considered paid by your employer).
However, you can use the simpler Form 2106-EZ, instead of Form 2106, if you meet the following requirements.
- You were not reimbursed for your expenses by your employer, or if you were reimbursed, the reimbursement was included in box 1 of your Form W-2.
- If you claim car expenses, you use the standard mileage rate.
When your employer pays for your expenses using a reimbursement or allowance arrangement, the payments generally should not be on your Form W-2 if the following rules for an accountable plan are met.
- You adequately account to your employer for the expenses within a reasonable period of time.
- You return any payments not spent for business expenses (excess reimbursements) within a reasonable period of time.
- You must have paid or incurred deductible expenses while performing services as an employee.
If you meet the accountable plan rules and your business expenses equal your reimbursement, do not report the reimbursement as income and do not deduct the expenses.
Adequately accounting to employer. You adequately account to your employer when you give your employer documentary evidence of your travel, mileage, and other employee business expenses, such as receipts, along with an account book, diary, or similar record in which you entered each expense at or near the time you had it.
You also may be treated as adequately accounting to your employer if your employer gives you a per diem or car allowance similar in form to, and not more than, the federal rate and you verify the time, place, and business purpose of each expense. For more information, see the instructions for Form 2106 and Publication 463, Travel, Entertainment, Gift, and Car Expenses.
Rental to employer. If you rent part of your home to your employer and you use the rented part in performing services for your employer as an employee, your deduction for the business use of your home is limited. You can deduct mortgage interest, real estate taxes, and personal casualty losses for the rented part, subject to any limitations. However, you cannot deduct otherwise allowable trade or business expenses, business casualty losses, or depreciation related to the use of your home in performing services for your employer.
Deductible mortgage interest. Although you generally can deduct expenses for the business use of your home on line 20 of Schedule A (Form 1040), do not include any deductible home mortgage interest on that line. Instead, deduct both the business and nonbusiness parts of this interest on line 10 or 11 of Schedule A.
If the home mortgage interest you can deduct on lines 10 or 11 is limited by the home mortgage interest rules, you cannot deduct the excess as an employee business expense on line 20 of Schedule A, even though you use part of your home for business. To determine if the limits on home mortgage interest apply to you, see the instructions for Schedule A or Publication 936.
Real estate taxes. Deduct both the business and nonbusiness parts of your real estate taxes on line 6 of Schedule A. For more information on amounts allowable as a deduction for real estate taxes, see Publication 530, Tax Information for First-Time Homeowners.
Casualty losses. Enter the business part of casualty losses (line 31 of the worksheet) on line 27 of Form 4684, Section B. Write See attached statement above line 27.
Other expenses. If you file Form 2106 or Form 2106-EZ, report on line 4 the following expenses.
- The business part of your otherwise nondeductible expenses (utilities, maintenance, insurance, depreciation, etc.) that do not exceed the deduction limit.
- The employee business expenses not related to the use of your home, such as advertising.
Add these to your other employee business expenses and complete the rest of the form. Enter the total from Form 2106, or Form 2106-EZ, on line 20 of Schedule A, where it is subject to the 2%-of-adjusted-gross-income limit. If you do not have to file Form 2106 or Form 2106-EZ, enter your total expenses directly on line 20 of Schedule A.
Example. You are an employee who works at home for the convenience of your employer. You meet all the requirements to deduct expenses for the business use of your home. Your employer does not reimburse you for any of your business expenses and you are not otherwise required to file Form 2106 or Form 2106-EZ.
As an employee, you do not have gross receipts, cost of goods sold, etc. You begin with gross income from the business use of your home, which you determine to be $6,000.
The percentage of expenses due to the business use of your home is 20%. You have the following expenses.
| Deductible mortgage interest (20%) |
$1,500 |
| Real estate taxes (20%) |
1,000 |
| Total |
$2,500 |
| Expenses not related to business use of the home (100%): |
|
| Supplies |
$500 |
| Advertising |
1,300 |
| Telephone |
200 |
| Total |
$2,000 |
| Otherwise nondeductible expenses: |
|
| Maintenance (20%) |
$200 |
| Utilities (20%) |
350 |
| Insurance (20%) |
250 |
| Total |
$800 |
| Depreciation (20%) |
$1,600 |
Based on the above expenses, you figure your deduction limit as follows.
| Gross income |
|
$6,000 |
| Less: |
|
|
| Deductible mortgage interest (20%) |
$1,500 |
|
| Real estate taxes (20%) |
1,000 |
|
| Expenses not related to business use of the home (100%) |
2,000 |
4,500 |
| Deduction limit |
|
$1,500 |
expenses ($800) and $700 ($1,500 - $800) of your depreciation.
You deduct your expenses for business use of your home on Schedule A (Form 1040) as shown in the following table.
| Expense |
Amount |
Schedule A |
| Deductible mortgage interest |
$1,500 |
Line 10 or 11* |
| Real estate taxes |
$1,000 |
Line 6* |
| Expenses not related to the business use of the home |
$2,000 |
Line 20** |
| Otherwise nondeductible expenses |
$800 |
Line 20** |
| Depreciation |
$700 |
Line 20** |
| *In addition to the 80% nonbusiness part of the expense. |
| **Subject to the 2%-of-adjusted-gross-income limit. |
You can carry over the $900 of depreciation that exceeds the deduction limit to next year, subject to the deduction limit for that year.
Previous | First | Next
Publication Index | 2002 Tax Help Archives | Tax Help Archives | Home
