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Publication 587 2002 Tax Year

Business Use of Your Home

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Partners

You may be allowed to deduct unreimbursed ordinary and necessary expenses you paid on behalf of the partnership (including qualified expenses for the business use of your home) if you were required to pay these expenses under the partnership agreement.

Use the worksheet near the back of this publication to figure the deduction for the business use of your home.

Deducting unreimbursed partnership expenses.   See the following forms and related instructions for information about deducting unreimbursed partnership expenses.

  • Schedule E, Supplemental Income and Loss.
  • Schedule SE, Self-Employment Tax.
  • Schedule K-1, Partner's Share of Income, Credits, Deductions, etc.

More information.   For more information about partners and partnerships, get Publication 541, Partnerships.

Schedule C Example

The filled-in forms for John Stephens that follow show how to report deductions for the business use of your home if you file Schedule C (Form 1040).

Form 4562.   The following line references apply to Form 4562.

Part I, lines 1-13.   John began using his home for business in January of this year. He purchased a new computer and filing cabinet to use in his business. The computer, used 100% for business, cost $3,200. The filing cabinet cost $600. He elects to take the section 179 deduction for both items.

John completes Part I of Form 4562. He enters the cost of both the computer and filing cabinet, $3,800, on line 2 and completes lines 4 and 5. On line 6, he enters a description of each item, its cost and the cost he elects to expense. He completes the remaining lines in Part I.

Part III, line 19c.   John converted to business use a desk and chair (furniture) he had purchased in 1996 for personal purposes. In 1996, he paid $1,500 for them. The total fair market value in 2002 is $550. The fair market value is less than the cost, so his depreciable basis is $550.

In Part III, line 19c, column (c), he enters $550 for the desk and chair. He completes columns (d) through (f). The furniture is 7-year property under MACRS. He uses the MACRS Percentage Table for 5- and 7-Year Property Using Half-Year Convention in this publication or Table A-1 in Publication 946 to find the rate of 14.29% for property placed in service during the first month of the year. He multiplies $550 by 14.29% (.1429) and enters $79 in column (g).

Part III, line 19i.   This is the first year John used his home for business, so he must figure the depreciation on line 19i. On line 19i, column (c), he enters $11,000, the depreciable basis of the business part of his home. He began using his home for business in January. (For a discussion on how he figures his depreciation deduction, see Step 3 under Form 8829, Part II, later.) He enters $271 in column (g).

Part IV, line 22.   John totals the amounts on line 12 and line 19 in column (g) and enters the total on line 22. He enters both the section 179 deduction ($3,800) and the depreciation on the furniture ($79) on line 13 of Schedule C. He enters the depreciation on his home ($271) on Form 8829, line 28.

Schedule C.   The following line references apply to Schedule C.

Line 13.   John enters the amount from Form 4562 for his section 179 deduction ($3,800) and the depreciation deduction for his office furniture ($79).

Line 16b.   This amount is the interest on installment payments for the business assets John uses in his home office.

Line 25.   John had a separate telephone line in his home office that he used only for business. He can deduct $347 for the line.

Lines 28-30.   On line 28, he totals all his expenses other than those for the business use of his home, and then subtracts that total from his gross income. He uses the result on line 29 to figure the deduction limit on his expenses for the business use of his home. He enters that amount on line 8 of Form 8829 and then completes the form. He enters the amount of his home office deduction from line 34, Form 8829, on line 30 of Schedule C.

Form 8829, Part I.   John uses one room of his home exclusively and regularly to meet clients. In Part I of Form 8829 he shows that, based on the square footage, the room is 10% of his home.

Form 8829, Part II.   John uses Part II of Form 8829 to figure his allowable home office deduction.

Step 1.   First, he figures the business part of expenses that would be deductible even if he did not use part of his home for business. These expenses ($4,500 deductible mortgage interest and $1,000 real estate taxes) relate to his entire home, so he enters them in column (b) on lines 10 and 11. He then subtracts the $550 business part of these expenses (line 14) from his tentative business profit (line 8). The result, $25,002 on line 15, is the most he can deduct for his other home office expenses.

Step 2.   Next, he figures his deduction for operating expenses. He paid $300 to have his office repainted. He enters this amount on line 18, column (a) because it is a direct expense. All his other expenses ($400 homeowner's insurance, $1,400 roof repairs, and $1,800 heating and lighting) relate to his entire home. Therefore, he enters them in column (b) on the appropriate lines. He adds the $300 direct expenses (line 21) to the $360 total for indirect expenses (line 22) and enters the total, $660, on line 24. This amount is less than his deduction limit, so he can deduct it in full. The $24,342 balance of his deduction limit (line 26) is the most he can deduct for depreciation.

Step 3.   Next, he figures his allowable depreciation deduction for the business use of his home in Part III of Form 8829. The adjusted basis of his home is $130,000, which is less than the fair market value of $160,000. He figures the value of the land to be $20,000. He subtracts the land value from the adjusted basis. He multiplies the result ($110,000) by the percentage on line 7 to get the depreciable basis of the business part of his home ($11,000).

He began using the office in January of this year, so he uses the MACRS Percentage Table for 39-Year Nonresidential Real Property in this publication or Table A-7a in Appendix A of Publication 946. The depreciation percentage for the first year of the recovery period for assets placed in service in the first month is 2.461%. His depreciation deduction for 2002 (line 40) is $271 (.02461 × $11,000). He enters that amount in Part II on lines 28 and 30. This is less than the available balance of his deduction limit (line 26), so he can deduct the full amount as depreciation. John also must complete Form 4562 for 2002, so he enters $271 on line 19i, column (g). See Form 4562, earlier.

Step 4.   Finally, he figures his total deduction for his home office by adding together his otherwise deductible expenses (line 14), his operating expenses (line 25), and depreciation (line 31). He enters the result, $1,481, on lines 32 and 34, and on Schedule C, line 30.

John Stephen's—Schedule C

John Stephen's—Schedule C

John Stephen's—Form 8829

John Stephen's—Form 8829

John Stephen's—Form 4562

John Stephen's—Form 4562

Worksheet To Figure the Deduction for Business Use of Your Home Use this worksheet if you file Schedule F (Form 1040) or you are an employee or a partner.
PART 1 - Part of Your Home Used for Business:    
1) Area of home used for business 1)         
2) Total area of home 2)         
3) Percentage of home used for business (divide line 1 by line 2 and show result as percentage) 3)        %
PART 2 - Figure Your Allowable Deduction                
4) Gross income from business (see instructions) 4)         
      (a) Direct Expenses   (b) Indirect Expenses      
5) Casualty losses 5)                      
6) Deductible mortgage interest 6)                      
7) Real estate taxes 7)                      
8) Total of lines 5 through 7 8)                      
9) Multiply line 8, column (b), by line 3     9)             
10) Add line 8, column (a), and line 9     10)             
11) Business expenses not from business use of home (see instructions)     11)             
12) Add lines 10 and 11 12)         
13) Deduction limit. Subtract line 12 from line 4 13)         
14) Excess mortgage interest 14)                      
15) Insurance 15)                      
16) Repairs and maintenance 16)                      
17) Utilities 17)                      
18) Other expenses 18)                      
19) Add lines 14 through 18 19)                      
20) Multiply line 19, column (b) by line 3     20)             
21) Carryover of operating expenses from prior year (see instructions)     21)             
22) Add line 19, column (a), line 20, and line 21 22)         
23) Allowable operating expenses. Enter the smaller of line 13 or line 22 23)         
24) Limit on excess casualty losses and depreciation. Subtract line 23 from line 13 24)         
25) Excess casualty losses (see instructions)     25)             
26) Depreciation of your home from line 38 below     26)             
27) Carryover of excess casualty losses and depreciation from prior year (see instructions)     27)             
28) Add lines 25 through 27 28)         
29) Allowable excess casualty losses and depreciation. Enter the smaller of line 24 or line 28 29)         
30) Add lines 10, 23, and 29 30)         
31) Casualty losses included on lines 10 and 29 (see instructions) 31)         
32) Allowable expenses for business use of your home. (Subtract line 31 from line 30.) See instructions for where to enter on your return 32)         
PART 3 - Depreciation of Your Home                
33) Smaller of adjusted basis or fair market value of home (see instructions) 33)         
34) Basis of land 34)         
35) Basis of building (subtract line 34 from line 33) 35)         
36) Business basis of building (multiply line 35 by line 3) 36)         
37) Depreciation percentage (from applicable table or method) 37)         
38) Depreciation allowable (multiply line 36 by line 37) 38)         
PART 4 - Carryover of Unallowed Expenses to Next Year                
39) Operating expenses. Subtract line 23 from line 22. If less than zero, enter -0- 39)         
40) Excess casualty losses and depreciation. Subtract line 29 from line 28. If less than zero, enter -0- 40)         

Instructions for the Worksheet

If you are an employee, a partner, or you file Schedule F (Form 1040), use the preceding worksheet to figure your deduction for the business use of your home. The following instructions explain how to complete each part.

Partners.   See Partners, under Where to Deduct, earlier, before completing the worksheet.

CAUTION: If you file Schedule C (Form 1040), use Form 8829 to figure the deductions and attach the form to your return.

Part 1 - Part of Your Home Used for Business

Lines 1-3.   If you figure the percentage based on area, use lines 1 through 3 to figure the business-use percentage. Enter the percentage on line 3.

You can use any other reasonable method that accurately reflects your business-use percentage. If you operate a day-care facility and you meet the exception to the exclusive use test for part or all of the area you use for business, you must figure the business-use percentage for that area as explained under Day-Care Facility, earlier. If you use another method to figure your business percentage, skip lines 1 and 2 and enter the percentage on line 3.

Part 2 - Figure Your Allowable Deduction

Line 4.   If you file Schedule F, enter your total gross income from the business use of your home. This generally would be the amount on line 11 of Schedule F.

If you are an employee, enter your total wages from the business use of the home.

Lines 5-7.   Enter only amounts that would be deductible whether or not you used your home for business. In other words, these amounts normally would be allowable as itemized deductions on Schedule A (Form 1040). Enter your expenses paid for deductible mortgage interest, real estate taxes, and casualty losses. Include only the part of a casualty loss that exceeds $100 plus 10% of adjusted gross income.

Under column (a), Direct Expenses, enter expenses that benefit only the business part of your home. Under column (b), Indirect Expenses, enter expenses that benefit the entire home. You generally enter 100% of the expense. However, if the business percentage of an indirect expense is different from the percentage on line 3, enter only the business part of the expense on the appropriate line in column (a), and leave that line in column (b) blank.

Lines 9-10.   Multiply your total indirect expenses by the business percentage from line 3. Enter the result on line 9. Add this amount to the total direct expenses and enter the total on line 10.

Lines 11-13.   Enter any other business expenses that are not attributable to business use of the home on line 11. For employees, examples include travel, supplies, and business telephone expenses. Farmers generally should enter their total farm expenses before deducting office in the home expenses. Do not enter the deduction for one-half of your self-employment tax. Add the expenses on line 11 to the line 10 amount, and enter the total on line 12. Subtract line 12 from line 4, and enter the result on line 13. This is your deduction limit. You use it to determine whether you can deduct any of your other expenses for business use of the home this year. If you cannot, you will carry them over to next year.

If line 13 is zero or less, enter zero. Deduct your expenses for deductible home mortgage interest, real estate taxes, casualty losses, and any business expenses not attributable to use of your home on the appropriate lines of the schedule(s) for Form 1040 as explained earlier under Where To Deduct.

Lines 14-21.   On lines 14 through 18, enter your otherwise nondeductible expenses for the business use of your home. These include utilities, insurance, repairs, and maintenance. If you rent, include the amount paid on line 18. If you file Schedule F, include any part of your home mortgage interest that is more than the limits given in Publication 936. (If you are an employee, do not enter any excess home mortgage interest.) In column (a), enter the expenses that benefit only the business part of your home (direct expenses). In column (b), enter the expenses that benefit the entire home (indirect expenses). Multiply line 19, column (b) by the business-use percentage (line 3) and enter this amount on line 20.

If you claimed a deduction for business use of your home on your 2001 tax return, enter the amount from line 39 of your 2001 worksheet on line 21.

Lines 24-29.   On lines 24 through 29, figure your limit on deductions for excess casualty losses and depreciation.

On line 25, figure the excess casualty loss by multiplying the business use percentage from line 3 by the part of casualty losses that would not be allowable if you did not use your home for business ($100 plus 10% of your adjusted gross income).

On line 26, enter the depreciation deduction from Part 3.

If you claimed a deduction for business use of your home on your 2001 tax return, enter on line 27 the amount from line 40 of your 2001 worksheet.

On lines 28 and 29, figure your allowable excess casualty losses and depreciation.

Lines 30-32.   On line 30, total all allowable business use of the home deductions.

On line 31, enter the total of the casualty losses shown on lines 10 and 29. Enter the amount from line 31 on line 27 of Form 4684, Section B. See the instructions for Form 4684 for more information on completing that form.

Line 32 is the total (other than casualty losses) allowable as a deduction for business use of your home. If you file Schedule F (Form 1040), enter this amount on line 34 of Schedule F and write Business Use of Home on the line beside the entry. Do not add the specific expenses into other line totals of Part II of Schedule F.

If you are an employee or partner, see Where To Deduct, earlier, for information on how to claim the deduction.

Part 3 - Depreciation of Your Home

Figure your depreciation deduction on lines 33 through 38. On line 33, enter the smaller of the adjusted basis or the fair market value of the property at the time you first used it for business. Do not adjust this amount for changes in basis or value after that date. Allocate the basis between the land and the building on lines 34 and 35. You cannot depreciate any part of the land. On line 37, enter the correct percentage for the current year from the tables in Publication 946. Multiply this percentage by the business basis to get the depreciation deduction. Enter this figure on lines 38 and 26. Complete and attach Form 4562 to your return if this is the first year you used your home, or an improvement or addition to your home, in business.

Part 4 - Carryover of Unallowed Expenses to Next Year

Complete these lines to figure the expenses that must be carried forward to next year.

How to Get Tax Help

You can get help with unresolved tax issues, order free publications and forms, ask tax questions, and get more information from the IRS in several ways. By selecting the method that is best for you, you will have quick and easy access to tax help.

Contacting your Taxpayer Advocate.   If you have attempted to deal with an IRS problem unsuccessfully, you should contact your Taxpayer Advocate.

The Taxpayer Advocate represents your interests and concerns within the IRS by protecting your rights and resolving problems that have not been fixed through normal channels. While Taxpayer Advocates cannot change the tax law or make a technical tax decision, they can clear up problems that resulted from previous contacts and ensure that your case is given a complete and impartial review.

To contact your Taxpayer Advocate:

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For more information, see Publication 1546, The Taxpayer Advocate Service of the IRS.

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The CD-ROM can be purchased from National Technical Information Service (NTIS) by calling 1-877-233-6767 or on the Internet at http://www.irs.gov/cdorders. The first release is available in early January and the final release is available in late February.

CDROM: CD-ROM for small businesses. IRS Publication 3207, Small Business Resource Guide, is a must for every small business owner or any taxpayer about to start a business. This handy, interactive CD contains all the business tax forms, instructions and publications needed to successfully manage a business. In addition, the CD provides an abundance of other helpful information, such as how to prepare a business plan, finding financing for your business, and much more. The design of the CD makes finding information easy and quick and incorporates file formats and browsers that can be run on virtually any desktop or laptop computer.

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