Department of the Treasury Contents
Internal Revenue Service
What’s New . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Reminders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Publication 587 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Cat. No. 15154T
Qualifying for a Deduction . . . . . . . . . . . . . . . . . . . 2
Business Use Figuring the Deduction . . . . . . . . . . . . . . . . . . . . . .
Deducting Expenses . . . . . . . . . . . . . . . . . . . . . . .
6
8
of Your Home Depreciating Your Home . . . . . . . . . . . . . . . . . . . . 9
Daycare Facility . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
(Including Use by Sale or Exchange of Your Home . . . . . . . . . . . . . . 14
Daycare Providers) Business Furniture and Equipment . . . . . . . . . . . . 14
Recordkeeping . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
For use in preparing
Where To Deduct . . . . . . . . . . . . . . . . . . . . . . . . . . 17
2006 Returns Schedule C Example . . . . . . . . . . . . . . . . . . . . . . . 19
Worksheet To Figure the Deduction for
Business Use of Your Home . . . . . . . . . . . . . . 24
Instructions for the Worksheet . . . . . . . . . . . . . . . 25
How To Get Tax Help . . . . . . . . . . . . . . . . . . . . . . . 27
Exhibit A. Family Daycare Provider Meal
and Snack Log . . . . . . . . . . . . . . . . . . . . . . . . . 29
Index . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
What’s New
Standard mileage rate for 2006. The standard mileage
rate for the cost of operating your car, van, pickup, or panel
truck for 2006 is 44.5 cents a mile for all business miles.
Reminders
Standard mileage rate available for small fleets. The
business standard mileage rate may be used for as many
as four vehicles that you own or lease and use simultane-
ously.
Get forms and other information
faster and easier by: Photographs of missing children. The Internal Reve-
nue Service is a proud partner with the National Center for
Internet • www.irs.gov Missing and Exploited Children. Photographs of missing
children selected by the Center may appear in this publica-
tion on pages that would otherwise be blank. You can help
bring these children home by looking at the photographs
www.irs.gov/efile and calling 1-800-THE-LOST (1-800-843-5678) if you rec-
ognize a child.
Introduction National Distribution Center
P.O. Box 8903
The purpose of this publication is to provide information on Bloomington, IL 61702-8903
figuring and claiming the deduction for business use of
your home. The term “home” includes a house, apartment,
condominium, mobile home, boat, or similar property, Tax questions. If you have a tax question, visit www.
which provides basic living accommodations. It also in- irs.gov or call 1-800-829-1040. We cannot answer tax
cludes structures on the property, such as an unattached questions sent to either of the above addresses.
garage, studio, barn, or greenhouse. However, it does not
include any part of your property used exclusively as a Useful Items
hotel or inn. You may want to see:
This publication includes information on the following.
Publications
• The requirements for qualifying to deduct expenses
for the business use of your home (including special ❏ 523 Selling Your Home
rules for storing inventory or product samples).
❏ 551 Basis of Assets
• Types of expenses you can deduct. ❏ 583 Starting a Business and Keeping Records
• How to figure the deduction (including depreciation ❏ 946 How To Depreciate Property
of your home).
• Special rules for daycare providers. Forms (and Instructions)
• Selling a home that was used partly for business. ❏ Schedule C (Form 1040) Profit or Loss from
Business
• Deducting expenses for furniture and equipment
used in your business. ❏ 2106 Employee Business Expenses
• Records you should keep. ❏ 2106-EZ Unreimbursed Employee Business
Expenses
• Where to deduct your expenses.
❏ 4562 Depreciation and Amortization
The rules in this publication apply to individuals.
❏ 8829 Expenses for Business Use of Your Home
If you need information on deductions for renting out See How To Get Tax Help near the end of this publica-
your property, see Publication 527, Residential Rental tion for information about getting publications and forms.
Property.
Comments and suggestions. We welcome your com-
ments about this publication and your suggestions for Qualifying for a Deduction
future editions.
You can write to us at the following address: Generally, you cannot claim expenses such as mortgage
interest and real estate taxes as business expenses. How-
ever, you may be able to deduct expenses related to the
Internal Revenue Service business use of part of your home if you meet specific
Individual Forms and Publications Branch requirements. Even then, your deduction may be limited.
SE:W:CAR:MP:T:I Use this section and Figure A, later, to decide if you can
1111 Constitution Ave. NW, IR-6406 deduct expenses for the business use of your home.
Washington, DC 20224 To qualify to claim expenses for business use of your
home, you must use part of your home:
We respond to many letters by telephone. Therefore, it • Exclusively and regularly as your principal place of
would be helpful if you would include your daytime phone business (defined later),
number, including the area code, in your correspondence.
You can email us at *taxforms@irs.gov. (The asterisk
• Exclusively and regularly as a place where you meet
or deal with patients, clients, or customers in the
must be included in the address.) Please put “Publications
normal course of your trade or business,
Comment” on the subject line. Although we cannot re-
spond individually to each email, we do appreciate your • In the case of a separate structure which is not
feedback and will consider your comments as we revise attached to your home, in connection with your trade
our tax products. or business,
Ordering forms and publications. Visit • On a regular basis for certain storage use (see Stor-
www.irs.gov/formspubs to download forms and publica- age of inventory or product samples, later),
tions, call 1-800-829-3676, or write to the address below
and receive a response within 10 business days after your
• For rental use (see Publication 527), or
request is received. • As a daycare facility (see Daycare Facility, later).
Page 2 Publication 587 (2006)
Additional tests for employee use. If you are an em- Example. Your home is the only fixed location of your
ployee and you use a part of your home for business, you business of selling mechanics’ tools at retail. You regularly
may qualify for a deduction for its business use. You must use half of your basement for storage of inventory and
meet the tests discussed above plus: product samples. You sometimes use the area for per-
sonal purposes. The expenses for the storage space are
• Your business use must be for the convenience of deductible even though you do not use this part of your
your employer, and basement exclusively for business.
• You must not rent any part of your home to your
employer and use the rented portion to perform serv- Regular Use
ices as an employee for that employer.
To qualify under the regular use test, you must use a
If the use of the home office is merely appropriate and
specific area of your home for business on a regular basis.
helpful, you cannot deduct expenses for the business use
Incidental or occasional business use is not regular use.
of your home.
You must consider all facts and circumstances in determin-
ing whether your use is on a regular basis.
Exclusive Use
Trade or Business Use
To qualify under the exclusive use test, you must use a
specific area of your home only for your trade or business. To qualify under the trade-or-business-use-test, you must
The area used for business can be a room or other sepa- use part of your home in connection with a trade or busi-
rately identifiable space. The space does not need to be ness. If you use your home for a profit-seeking activity that
marked off by a permanent partition. is not a trade or business, you cannot take a deduction for
You do not meet the requirements of the exclusive use its business use.
test if you use the area in question both for business and
for personal purposes. Example. You use part of your home exclusively and
regularly to read financial periodicals and reports, clip bond
Example. You are an attorney and use a den in your coupons, and carry out similar activities related to your
home to write legal briefs and prepare clients’ tax returns. own investments. You do not make investments as a
Your family also uses the den for recreation. The den is not broker or dealer. So, your activities are not part of a trade
used exclusively in your profession, so you cannot claim a or business and you cannot take a deduction for the busi-
ness use of your home.
business deduction for its use.
Principal Place of Business
Exceptions to Exclusive Use
You can have more than one business location, including
You do not have to meet the exclusive use test if either of your home, for a single trade or business. To qualify to
the following applies. deduct the expenses for the business use of your home
• You use part of your home for the storage of inven- under the principal place of business test, your home must
tory or product samples (discussed next). be your principal place of business for that trade or busi-
ness. To determine whether your home is your principal
• You use part of your home as a daycare facility, place of business, you must consider:
discussed later under Daycare Facility.
• The relative importance of the activities performed at
each place where you conduct business, and
Storage of inventory or product samples. If you use
part of your home for storage of inventory or product • The amount of time spent at each place where you
samples, you can claim expenses for the business use of conduct business.
your home without meeting the exclusive use test. How-
ever, you must meet all the following tests. Your home office will qualify as your principal place of
business if you meet the following requirements.
• You sell products at wholesale or retail as your trade
or business.
• You use it exclusively and regularly for administra-
tive or management activities of your trade or busi-
• You keep the inventory or product samples in your ness.
home for use in your trade or business.
• You have no other fixed location where you conduct
• Your home is the only fixed location of your trade or substantial administrative or management activities
business. of your trade or business.
• You use the storage space on a regular basis. If, after considering your business locations, your home
• The space you use is a separately identifiable space cannot be identified as your principal place of business,
suitable for storage. you cannot deduct home office expenses. However, see
Publication 587 (2006) Page 3
Figure A. Can You Deduct Business Use of the Home Expenses? Do not use this chart if you use your home for the storage of
inventory or product samples, or to operate a daycare facility. See Exceptions to Exclusive Use, earlier, and Daycare Facility, later.
Start Here:
No Is part of your home
used in connection with
a trade or business?
Yes
No
Are you an employee?
Yes
No Do you work at home
for the convenience of
your employer?
Yes
No
Yes Do you rent part of your
home used for business
to your employer?
No
Is the use regular
Yes and exclusive?
Is it your principal place Yes
of business?
No
Do you meet patients, Yes
clients, or customers in
your home?
No
No Yes
Is it a separate
No deduction Deduction allowed
structure?
the later discussions under Place To Meet Patients, Cli- • You have others conduct your administrative or
ents, or Customers or Separate Structure for other ways to management activities at locations other than your
qualify to deduct home office expenses. home. (For example, another company does your
billing from its place of business.)
Administrative or management activities. There are • You conduct administrative or management activities
many activities that are administrative or managerial in at places that are not fixed locations of your busi-
nature. The following are a few examples. ness, such as in a car or a hotel room.
• Billing customers, clients, or patients. • You occasionally conduct minimal administrative or
management activities at a fixed location outside
• Keeping books and records. your home.
• Ordering supplies. • You conduct substantial nonadministrative or non-
• Setting up appointments. management business activities at a fixed location
outside your home. (For example, you meet with or
• Forwarding orders or writing reports. provide services to customers, clients, or patients at
a fixed location of the business outside your home.)
Administrative or management activities performed at • You have suitable space to conduct administrative or
other locations. The following activities performed by management activities outside your home, but
you or others will not disqualify your home office from choose to use your home office for those activities
being your principal place of business. instead.
Page 4 Publication 587 (2006)
• Preparing for treatments and presentations.
Example 1. John is a self-employed plumber. Most of
John’s time is spent at customers’ homes and offices
• Maintaining billing records and patient logs.
installing and repairing plumbing. He has a small office in • Satisfying continuing medical education require-
his home that he uses exclusively and regularly for the ments.
administrative or management activities of his business,
such as phoning customers, ordering supplies, and keep-
• Reading medical journals and books.
ing his books.
Paul’s home office qualifies as his principal place of
John writes up estimates and records of work com- business for deducting expenses for its use. He conducts
pleted at his customers’ premises. He does not conduct administrative or management activities for his business
any substantial administrative or management activities at as an anesthesiologist there and he has no other fixed
any fixed location other than his home office. John does location where he conducts substantial administrative or
not do his own billing. He uses a local bookkeeping service management activities for this business. His choice to use
to bill his customers. his home office instead of the one provided by the hospital
John’s home office qualifies as his principal place of does not disqualify his home office from being his principal
business for deducting expenses for its use. He uses the place of business. His performance of substantial
home office for the administrative or managerial activities nonadministrative or nonmanagement activities at fixed
of his plumbing business and he has no other fixed location locations outside his home also does not disqualify his
where he conducts these administrative or managerial home office from being his principal place of business. He
activities. His choice to have his billing done by another meets all the qualifications, including principal place of
company does not disqualify his home office from being his business, so he can deduct expenses (to the extent of the
principal place of business. He meets all the qualifications, deduction limit, explained later) for the business use of his
including principal place of business, so he can deduct home.
expenses (to the extent of the deduction limit, explained
later) for the business use of his home. Example 4. Kathleen is employed as a teacher. She is
required to teach and meet with students at the school and
Example 2. Pamela is a self-employed sales representa- to grade papers and tests. The school provides her with a
tive for several different product lines. She has an office in small office where she can work on her lesson plans, grade
her home that she uses exclusively and regularly to set up papers and tests, and meet with parents and students. The
appointments and write up orders and other reports for the school does not require her to work at home.
companies whose products she sells. She occasionally
Kathleen prefers to use the office she has set up in her
writes up orders and sets up appointments from her hotel
home and does not use the one provided by the school.
room when she is away on business overnight.
She uses this home office exclusively and regularly for the
Pamela’s business is selling products to customers at
administrative duties of her teaching job.
various locations throughout her territory. To make these
sales, she regularly visits customers to explain the avail- Kathleen must meet the convenience-of-the-employer
able products and take orders. test, even if her home qualifies as her principal place of
business for deducting expenses for its use. Her employer
Pamela’s home office qualifies as her principal place of
provides her with an office and does not require her to work
business for deducting expenses for its use. She conducts
at home, so she does not meet the convenience-
administrative or management activities there and she has
of-the-employer test and cannot claim a deduction for the
no other fixed location where she conducts substantial
business use of her home.
administrative or management activities. The fact that she
conducts some administrative or management activities in
her hotel room (not a fixed location) does not disqualify her More Than One Trade or Business
home office from being her principal place of business.
She meets all the qualifications, including principal place of The same home office can be the principal place of busi-
business, so she can deduct expenses (to the extent of the ness for two or more separate business activities. Whether
deduction limit, explained later) for the business use of her your home office is the principal place of business for more
home. than one business activity must be determined separately
for each of your trade or business activities. You must use
Example 3. Paul is a self-employed anesthesiologist. He the home office exclusively and regularly for one or more of
spends the majority of his time administering anesthesia the following purposes.
and postoperative care in three local hospitals. One of the
hospitals provides him with a small shared office where he
• As the principal place of business for one or more of
your trades or businesses.
could conduct administrative or management activities.
Paul very rarely uses the office the hospital provides. He • As a place to meet or deal with patients, clients, or
uses a room in his home that he has converted to an office. customers in the normal course of one or more of
He uses this room exclusively and regularly to conduct all your trades or businesses.
the following activities.
• If your home office is a separate structure, in con-
• Contacting patients, surgeons, and hospitals regard- nection with one or more of your trades or busi-
ing scheduling. nesses.
Publication 587 (2006) Page 5
You can use your home office for more than one busi- exclusively and regularly for your business. The structure
ness activity, but you cannot use it for any nonbusiness does not have to be your principal place of business or a
(personal) activities. place where you meet patients, clients, or customers.
If you are an employee, any use of the home office in
connection with your employment must be for the conve- Example. John Berry operates a floral shop in town. He
nience of your employer. See Rental to employer, later if grows the plants for his shop in a greenhouse behind his
you rent part of your home to your employer. home. He uses the greenhouse exclusively and regularly
in his business, so he can deduct the expenses for its use,
Example. Tracy White is employed as a teacher. Her subject to the deduction limit, explained later.
principal place of work is the school, which provides her
office space to do her school work. She also has a mail
order jewelry business. All her work in the jewelry business Figuring the Deduction
is done in her home office and the office is used exclusively
for that business. If she meets all the other tests, she can After you determine that you meet the tests under Qualify-
deduct expenses for business use of her home for the ing for a Deduction, you can begin to figure how much you
jewelry business. can deduct. You will need to figure the percentage of your
If Tracy also uses the office for work related to her home used for business and the limit on the deduction.
teaching, she must meet the exclusive use test for both If you are an employee or a partner, or you file Schedule
businesses to qualify for the deduction. As an employee, F (Form 1040), Profit or Loss From Farming, use the
Tracy must also meet the convenience-of-the-employer Worksheet To Figure the Deduction for Business Use of
test to qualify for the deduction. She does not meet this test Your Home, near the end of this publication, to help figure
for her work as a teacher, so she cannot claim a deduction your deduction. If you file Schedule C (Form 1040), Profit
for the business use of her home for either activity. or Loss From Business, you must generally use Form
8829, Expenses for Business Use of Your Home. The
Schedule C Example, near the end of this publication,
Place To Meet Patients, Clients, or shows how to report the deduction on Form 8829.
Customers
If you meet or deal with patients, clients, or customers in Business Percentage
your home in the normal course of your business, even
To find the business percentage, compare the size of the
though you also carry on business at another location, you
part of your home that you use for business to your whole
can deduct your expenses for the part of your home used
house. Use the resulting percentage to figure the business
exclusively and regularly for business if you meet both the
part of the expenses for operating your entire home.
following tests.
You can use any reasonable method to determine the
• You physically meet with patients, clients, or custom- business percentage. The following are two commonly
ers on your premises. used methods for figuring the percentage.
• Their use of your home is substantial and integral to 1. Divide the area (length multiplied by the width) used
the conduct of your business. for business by the total area of your home.
Doctors, dentists, attorneys, and other professionals 2. If the rooms in your home are all about the same
who maintain offices in their homes generally will meet this size, you can divide the number of rooms used for
requirement. business by the total number of rooms in your home.
Using your home for occasional meetings and tele-
phone calls will not qualify you to deduct expenses for the Example 1.
business use of your home. • Your office is 240 square feet (12 feet × 20 feet).
The part of your home you use exclusively and regularly
to meet patients, clients, or customers does not have to be • Your home is 1,200 square feet.
your principal place of business. • Your office is 20% (240 ÷ 1,200) of the total area of
your home.
Example. June Quill, a self-employed attorney, works 3
days a week in her city office. She works 2 days a week in • Your business percentage is 20%.
her home office used only for business. She regularly
meets clients there. Her home office qualifies for a busi-
ness deduction because she meets clients there in the
normal course of her business.
Separate Structure
You can deduct expenses for a separate free-standing
structure, such as a studio, garage, or barn, if you use it
Page 6 Publication 587 (2006)
Example 2. the excess to the next year. They are subject to the deduc-
tion limit for that year, whether or not you live in the same
• You use one room in your home for business. home during that year.
• Your home has 10 rooms, all about equal size.
Figuring the deduction limit and carryover. If you are
• Your office is 10% (1 ÷ 10) of the total area of your an employee or a partner, or you file Schedule F (Form
home. 1040), use the worksheet on page 24 to figure your deduc-
• Your business percentage is 10%. tion limit and carryover. If you file Schedule C (Form 1040),
figure your deduction limit and carryover on Form 8829.
Use lines 1 –7 of Form 8829, or lines 1 –3 on the Example. You meet the requirements for deducting ex-
TIP worksheet near the end of this publication, to penses for the business use of your home. You use 20% of
figure your business percentage. your home for business. In 2006, your business expenses
and the expenses for the business use of your home are
Part-Year Use deducted from your gross income in the following order.
Gross income from business . . . . . . . . . . . . . . . . . . . . . $6,000
You cannot deduct expenses for the business use of your Minus:
home incurred during any part of the year you did not use Deductible mortgage interest
your home for business purposes. For example, if you and real estate taxes (20%) . . . . . . . . . . . . . . . . . . . . 3,000
Business expenses not related to the use of your home
begin using part of your home for business on July 1, and (100%) (business phone, supplies, and depreciation on
you meet all the tests from that date until the end of the equipment) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,000
year, consider only your expenses for the last half of the Deduction limit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,000
year in figuring your allowable deduction. Minus other expenses allocable to business use of home:
Maintenance, insurance, and utilities (20%) . . . . . . . . . . 800
Depreciation allowed (20% = $1,600 allowable, but
Deduction Limit subject to balance of deduction limit) . . . . . . . . . . . . .
Other expenses up to the deduction limit . . . . . . . . . . . .
.
.
200
$1,000
Depreciation carryover to 2007 ($1,600 − $200) (subject
If your gross income from the business use of your home to deduction limit in 2007) . . . . . . . . . . . . . . . . . . . . . . . $1,400
equals or exceeds your total business expenses (including
depreciation), you can deduct all your business expenses You can deduct all of the business part of your deducti-
related to the use of your home. ble mortgage interest and real estate taxes ($3,000). You
If your gross income from the business use of your also can deduct all of your business expenses not related
home is less than your total business expenses, your to the use of your home ($2,000). Additionally, you can
deduction for certain expenses for the business use of your deduct all of the business part of your expenses for mainte-
home is limited. nance, insurance, and utilities, because the total ($800) is
Your deduction of otherwise nondeductible expenses, less than the $1,000 deduction limit. Your deduction for
such as insurance, utilities, and depreciation (with depreci- depreciation for the business use of your home is limited to
ation taken last), that are allocable to the business, is $200 ($1,000 minus $800) because of the deduction limit.
limited to the gross income from the business use of your You can carry over the $1,400 balance and add it to your
home minus the sum of the following. depreciation for 2007, subject to your deduction limit in
2007.
1. The business part of expenses you could deduct
even if you did not use your home for business (such More than one place of business. If part of the gross
as mortgage interest, real estate taxes, and casualty income from your trade or business is from the business
and theft losses that are allowable as itemized de- use of part of your home and part is from a place other than
ductions on Schedule A (Form 1040)). These ex- your home, you must determine the part of your gross
penses are discussed in detail under Deducting income from the business use of your home before you
Expenses, later. figure the deduction limit. In making this determination,
consider the time you spend at each location, the business
2. The business expenses that relate to the business
investment in each location, and any other relevant facts
activity in the home (for example, business phone,
and circumstances.
supplies, and depreciation on equipment), but not to
the use of the home itself. If your home office qualifies as your principal
TIP place of business, you can deduct your daily
If you are self-employed, do not include in (2) above your
transportation costs between your home and an-
deduction for half of your self-employment tax.
other work location in the same trade or business. For
Carryover of unallowed expenses. If your deductions more information on transportation costs, see Publication
are greater than the current year’s limit, you can carry over 463, Travel, Entertainment, Gift, and Car Expenses.
Publication 587 (2006) Page 7
If your housing is provided free of charge and the value
Deducting Expenses of the housing is tax exempt, you cannot deduct the rental
value of any portion of the housing.
If you qualify to deduct expenses for the business use of
your home, you must divide the expenses of operating Examples of Expenses
your home between personal and business use. This sec-
tion discusses the types of expenses you may have and Certain expenses are deductible whether or not you use
gives examples and brief explanations of these expenses. your home for business. If you qualify to claim business
use of the home expenses, use the business percentage of
Types of Expenses these expenses to figure your total business use of the
home deduction. These expenses include the following.
The part of a home operating expense you can use to • Real estate taxes.
figure your deduction depends on both of the following.
• Deductible mortgage interest.
• Whether the expense is direct, indirect, or unrelated.
• Casualty losses.
• The percentage of your home used for business.
Other expenses are deductible only if you use your
Table 1, next, describes the types of expenses you may home for business. You can use the business percentage
have and the extent to which they are deductible. of these expenses to figure your total business use of the
home deduction. These expenses generally include (but
Table 1. Types of Expenses are not limited to) the following.
Expense Description Deductibility • Depreciation (covered under Depreciating Your
Home, later).
Direct Expenses only for Deductible in full.*
the business part • Insurance.
of your home.
Examples: Exception:
• Rent.
Painting or repairs May be only partially • Repairs.
only in the area deductible in a daycare
used for business. facility. See Daycare • Security system.
Facility, later.
Indirect Expenses for Deductible based on the
• Utilities and services.
keeping up percentage of your home
and running your used for business.*
entire home. Real Estate Taxes
Examples:
Insurance, To figure the business part of your real estate taxes,
utilities, and multiply the real estate taxes paid by the percentage of
general repairs. your home used for business.
Unrelated Expenses only for Not deductible. For more information on the deduction for real estate
the parts of your taxes, see Publication 530, Tax Information for First-Time
home not used Homeowners.
for business.
Examples:
Lawn care or painting Deductible Mortgage Interest
a room not used
for business. To figure the business part of your deductible mortgage
*Subject to the deduction limit, discussed earlier. interest, multiply this interest by the percentage of your
home used for business. You can include interest on a
Form 8829 and the deduction worksheet (both second mortgage in this computation. If your total mort-
TIP illustrated near the end of this publication) have gage debt is more than $1,000,000 or your home equity
separate columns for direct and indirect ex- debt is more than $100,000, your deduction may be lim-
penses. ited. For more information on what interest is deductible,
see Publication 936, Home Mortgage Interest Deduction.
Expenses related to tax-exempt income. Generally,
you cannot deduct expenses that are related to tax-exempt Casualty Losses
allowances. However, if you receive a tax-exempt parson-
age allowance or a tax-exempt military allowance, your If you have a casualty loss on your home that you use for
expenses for mortgage interest and real estate taxes are business, treat the casualty loss as a direct expense, an
deductible under the normal rules. No deduction is allowed indirect expense, or an unrelated expense, depending on
for other expenses related to the tax-exempt allowance. the property affected.
Page 8 Publication 587 (2006)
• A direct expense is the loss on the portion of the Security System
property you use only in your business. Use the
entire loss to figure the business use of the home If you install a security system that protects all the doors
deduction. and windows in your home, you can deduct the business
part of the expenses you incur to maintain and monitor the
• An indirect expense is the loss on property you use system. You also can take a depreciation deduction for the
for both business and personal purposes. Use only part of the cost of the security system relating to the
the business portion to figure the deduction. business use of your home.
• An unrelated expense is the loss on property you do
not use in your business. Do not use any of the loss
to figure the deduction. Utilities and Services
Expenses for utilities and services, such as electricity, gas,
If you are filing Schedule C (Form 1040), get Form 8829 trash removal, and cleaning services, are primarily per-
and follow the instructions for casualty losses. If you are an sonal expenses. However, if you use part of your home for
employee or a partner, or you file Schedule F (Form 1040), business, you can deduct the business part of these ex-
use the Worksheet To Figure the Deduction for Business penses. Generally, the business percentage for utilities is
Use of Your Home, near the end of this publication. You the same as the percentage of your home used for busi-
will also need to get Form 4684, Casualties and Thefts. ness.
For more information on casualty losses, see Publica-
tion 547, Casualties, Disasters, and Thefts.
Telephone. The basic local telephone service charge,
including taxes, for the first telephone line into your home
Insurance is a nondeductible personal expense. However, charges
for business long-distance phone calls on that line, as well
You can deduct the cost of insurance that covers the as the cost of a second line into your home used exclu-
business part of your home. However, if your insurance sively for business, are deductible business expenses. Do
premium gives you coverage for a period that extends past not include these expenses as a cost of using your home
the end of your tax year, you can deduct only the business for business. Deduct these charges separately on the
percentage of the part of the premium that gives you appropriate form or schedule. For example, if you file
coverage for your tax year. You can deduct the business Schedule C (Form 1040), deduct these expenses on line
percentage of the part that applies to the following year in 25, Utilities, (instead of line 30).
that year.
Rent Depreciating Your Home
If you rent the home you occupy and meet the require-
ments for business use of the home, you can deduct part of If you own your home and qualify to deduct expenses for its
the rent you pay. To figure your deduction, multiply your business use, you can claim a deduction for depreciation.
rent payments by the percentage of your home used for Depreciation is an allowance for the wear and tear on the
business. part of your home used for business. You cannot depreci-
If you own your home, you cannot deduct the fair rental ate the cost or value of the land. You recover its cost when
value of your home. However, see Depreciating Your you sell or otherwise dispose of the property.
Home, later. Before you figure your depreciation deduction, you need
to know the following information.
Repairs • The month and year you started using your home for
business.
The cost of repairs that relate to your business, including
labor (other than your own labor), is a deductible expense. • The adjusted basis and fair market value of your
For example, a furnace repair benefits the entire home. If home (excluding land) at the time you began using it
you use 10% of your home for business, you can deduct for business.
10% of the cost of the furnace repair. • The cost of any improvements before and after you
Repairs keep your home in good working order over its began using the property for business.
useful life. Examples of common repairs are patching walls
and floors, painting, wallpapering, repairing roofs and gut- • The percentage of your home used for business.
ters, and mending leaks. However, repairs are sometimes See Business Percentage, earlier.
treated as a permanent improvement. See Permanent
improvements, later, under Depreciating Your Home. Adjusted basis defined. 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. For a discussion
of adjusted basis, see Publication 551.
Publication 587 (2006) Page 9
Permanent improvements. A permanent improve- For more information on MACRS and other methods of
ment increases the value of property, adds to its life, or depreciation, see Publication 946.
gives it a new or different use. Examples of improvements To figure the depreciation deduction, you must first
are replacing electric wiring or plumbing, adding a new roof figure the part of the cost of your home that can be
or addition, paneling, or remodeling. depreciated (depreciable basis). The depreciable basis is
You must carefully distinguish between repairs and figured by multiplying the percentage of your home used
improvements. See Repairs, earlier. You also must keep for business by the smaller of the following.
accurate records of these expenses. These records will
help you decide whether an expense is a deductible or • The adjusted basis of your home (excluding land) on
capital (added to the basis) expense. However, if you the date you began using your home for business.
make repairs as part of an extensive remodeling or resto-
• The fair market value of your home (excluding land)
ration of your home, the entire job is an improvement.
on the date you began using your home for busi-
ness.
Example. You buy an older home and fix up two rooms
as a beauty salon. You patch the plaster on the ceilings
Depreciation table. If 2006 was the first year you used
and walls, paint, repair the floor, install an outside door,
and install new wiring, plumbing, and other equipment. your home for business, you can figure your 2006 depreci-
Normally, the patching, painting, and floor work are repairs ation for the business part of your home by using the
and the other expenses are permanent improvements. appropriate percentage from the following table.
However, because the work gives your property a new
use, the entire remodeling job is a permanent improvement Table 2. MACRS Percentage Table for
and its cost is added to the basis of the property. You 39-Year Nonresidential Real
cannot deduct any portion of it as a repair expense. Property
Adjusting for depreciation deducted in earlier years. Month First Used for Business Percentage To Use
Decrease the basis of your property by the depreciation
1 2.461%
you deducted, or could have deducted, on your tax returns
under the method of depreciation you properly selected. If 2 2.247%
you took less depreciation than you could have under the 3 2.033%
method you selected, decrease the basis by the amount
4 1.819%
you could have taken under that method. If you did not take
a depreciation deduction, decrease the basis by the 5 1.605%
amount you could have deducted. 6 1.391%
If you deducted more depreciation than you should 7 1.177%
have, decrease your basis by the amount you should have
deducted, plus the part of the excess depreciation you 8 0.963%
deducted that actually decreased your tax liability for any 9 0.749%
year. 10 0.535%
If you deducted the incorrect amount of depreciation,
11 0.321%
see How Do You Correct Depreciation Deductions in chap-
ter 1 of Publication 946. 12 0.107%
Fair market value defined. The fair market value of your Multiply the depreciable basis of the business part of
home is the price at which the property would change your home by the percentage from the table for the first
hands between a buyer and a seller, neither having to buy month you use your home for business. See Table A-7a in
or sell, and both having reasonable knowledge of all nec- Appendix A of Publication 946 for the percentages for the
essary facts. Sales of similar property, on or about the date remaining tax years of the recovery period.
you begin using your home for business, may be helpful in
figuring the property’s fair market value. Example. In May, George Miller began to use one room
in his home exclusively and regularly to meet clients. This
room is 8% of the square footage of his home. He bought
Figuring the Depreciation Deduction the home in 1996 for $125,000. He determined from his
for the Current Year property tax records that his adjusted basis in the house
(exclusive of land) is $115,000. In May, the house had a
If you began using your home for business before 2006,
continue to use the same depreciation method you used in fair market value of $165,000. He multiplies his adjusted
past tax years. basis (which is less than the fair market value) by 8%. The
If you began using your home for business in 2006, result is $9,200, his depreciable basis for the business part
depreciate the business part as nonresidential real prop- of the house.
erty under the modified accelerated cost recovery system George files his return based on the calendar year. May
(MACRS). Under MACRS, nonresidential real property is is the 5th month of his tax year. He multiplies his deprecia-
depreciated using the straight line method over 39 years. ble basis of $9,200 by 1.605% (.01605), the percentage
Page 10 Publication 587 (2006)
from the table for the 5th month. His depreciation deduc- To find what part of the available time you actually
tion is $147.66. TIP 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. You can compare
Depreciating Permanent Improvements the hours of business use in a week with the number of
hours in a week (168). Or you can compare the hours of
Add the costs of permanent improvements made before
business use for the year with the number of hours in the
you began using your home for business to the basis of
year (8,760 in 2006). If you started or stopped using your
your property. Depreciate these costs as part of the cost of
home for daycare in 2006, you must prorate the number of
your home as explained earlier. The costs of improve- hours based on the number of days the home was avail-
ments made after you begin using your home for business able for daycare.
(that affect the business part of your home, such as a new
roof) are depreciated separately. Multiply the cost of the
Example 1. Mary Lake used her basement to operate a
improvement by the business-use percentage and depre-
daycare business for children. She figures the business
ciate the result over the recovery period that would apply to
percentage of the basement as follows.
your home if you began using it for business at the same
time as the improvement. For improvements made this Square footage of the basement 1,600
= = 50%
year, the recovery period is 39 years. For the percentage Square footage of her home 3,200
to use for the first year, see Table 2, earlier. For more
She used the basement for daycare an average of 12
information on recovery periods, see Which Recovery Pe-
hours a day, 5 days a week, for 50 weeks a year. During
riod Applies in chapter 4 of Publication 946.
the other 12 hours a day, the family could use the base-
ment. She figures the percentage of time the basement
was available for use as follows.
Daycare Facility Number of hours used for daycare (12 x 5 x 50) 3,000
= = 34.25%
Total number of hours in the year (24 x 365) 8,760
If you use space in your home on a regular basis for
providing daycare, you may be able to deduct the business Mary can deduct 34.25% of any direct expenses for the
expenses for that part of your home even though you use basement. However, because her indirect expenses are
the same space for nonbusiness purposes. To qualify for for the entire house, she can deduct only 17.13% of the
this exception to the exclusive use rule, you must meet indirect expenses. She figures the percentage for her indi-
both the following requirements. rect expenses as follows.
• You must be in the trade or business of providing Business percentage of the basement . . . . . . . . . . . . . . . 50%
daycare for children, persons age 65 or older, or Multiplied by: Percentage of time used for daycare . . . . . . × 34.25%
persons who are physically or mentally unable to Percentage for indirect expenses . . . . . . . . . . . . . . . . . . 17.13%
care for themselves. Mary completes Form 8829, shown later. In Part I, she
• You must have applied for, been granted, or be figures the percentage of her home used for business,
exempt from having, a license, certification, registra- including the percentage of time the basement was used.
tion, or approval as a daycare center or as a family In Part II, Mary figures her deductible expenses. She
or group daycare home under state law. You do not uses the following information to complete Part II.
meet this requirement if your application was re- Gross income from her daycare business . . . . . . . . . . . . . $50,000
jected or your license or other authorization was Expenses not related to the business use of the home . . . . $25,000
revoked. Tentative profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $25,000
Rent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $8,400
Utilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $850
Figuring the deduction. If you regularly use part of your Painting the basement . . . . . . . . . . . . . . . . . . . . . . . . . $500
home for daycare, figure what part is used for daycare, as Mary enters her tentative profit, $25,000, on line 8. (This
explained earlier under Business Percentage. If you use figure is the same as the amount on line 29 of her Schedule
that part exclusively for daycare, deduct all the allocable C.)
expenses, subject to the deduction limit, as explained The expenses she paid for rent and utilities relate to her
earlier. entire home. Therefore, she enters them in column (b) on
If the use of part of your home as a daycare facility is the appropriate lines. She adds these two expenses (line
regular, but not exclusive, you must figure what part of 22) and multiplies the total by the percentage on line 7 and
available time you actually use it for business. A room that enters the result, $1,585, on line 23.
is available for use throughout each business day and that Mary paid $500 to have the basement painted. The
you regularly use in your business is considered to be used painting is a direct expense. However, because she did not
for daycare throughout each business day. You do not use the basement exclusively for daycare, she must multi-
have to keep records to show the specific hours the area ply $500 by the percentage of time the basement was used
was used for business. You may use the area occasionally for daycare (34.25% — line 6). She enters $171 (34.25% ×
for personal reasons. However, a room you use only occa- $500) on line 19, column (a). She adds line 22, column (a),
sionally for business does not qualify for the deduction. and line 23 and enters $1,756 ($171 + $1,585) on line 25.
Publication 587 (2006) Page 11
This is less than her deduction limit (line 15), so she can expenses for food for eligible children. If your reimburse-
deduct the entire amount. She completes the rest of Part II ments are more than your expenses for food, show the
by entering $1,756 on lines 33 and 35. She then carries the difference as income in Part I of Schedule C. If your food
$1,756 to line 30 of her Schedule C (not shown). expenses are greater than the reimbursements, show the
difference as an expense in Part V of Schedule C. Do not
Example 2. Assume the same facts as in Example 1 include payments or expenses for your own children if they
except that Mary also has another room that was available are eligible for the program. Follow this procedure even if
each business day for children to take naps in. Although you receive a Form 1099 reporting a payment from the
she did not keep a record of the number of hours the room sponsor.
was actually used for naps, it was used for part of each
Standard meal and snack rates. If you qualify as a
business day. Since the room was available for business
family daycare provider, you can use the standard meal
use during regular operating hours each business day and
and snack rates, instead of actual costs, to compute the
was used regularly in the business, it is considered used
deductible cost of meals and snacks provided to eligible
for daycare throughout each business day. The basement
children. For these purposes:
and room are 60% of the total area of her home. In figuring
her expenses, 34.25% of any direct expenses for the • A family daycare provider is a person engaged in the
basement and room are deductible. In addition, 20.55% business of providing family daycare.
(34.25% × 60%) of her indirect expenses are deductible.
• Family daycare is childcare provided to eligible chil-
dren in the home of the family daycare provider. The
Example 3. Assume the same facts as in Example 1
care must be non-medical, not involve a transfer of
except that Mary stopped using her home for a daycare
legal custody, and generally last less than 24 hours
facility on June 24, 2006. She used the basement for
each day.
daycare an average of 12 hours a day, 5 days a week, but
for only 25 weeks of the year. During the other 12 hours a • Eligible children are minor children receiving family
day, the family could still use the basement. She figures daycare in the home of the family daycare provider.
the percentage of time the basement was available for Eligible children do not include children who are
business use as follows. full-time or part-time residents in the home where the
childcare is provided or children whose parents or
Number of hours used for daycare (12 x 5 x 25)
Total number of hours during period used (24 x =
1,500
= 35.71%
guardians are residents of the same home. Eligible
4,200 children do not include children who receive daycare
175)
services for personal reasons of the provider. For
Mary can deduct 35.71% of any direct expenses for the example, if a provider provides daycare services for
basement. However, because her indirect expenses are a relative as a favor to that relative, that child is not
for the entire house, she can deduct only 17.86% of the an eligible child.
indirect expenses. She figures the percentage for her indi-
rect expenses as follows. You can compute the deductible cost of each meal and
snack you actually purchased and served to an eligible
Business percentage of the basement . . . . . . . . . . . . . . . 50%
Multiplied by: Percentage of time used for daycare . . . . . . × 35.71% child during the time period you provided family daycare
Percentage for indirect expenses . . . . . . . . . . . . . . . . . . 17.86% using the standard meal and snack rates shown in Table 3,
later. You can use the standard meal and snack rates for a
maximum of one breakfast, one lunch, one dinner, and
Meals. If you provide food for your daycare recipients, do three snacks per eligible child per day. If you receive
not include the expense as a cost of using your home for reimbursement for a particular meal or snack, you can
business. Claim it as a separate deduction on your Sched- deduct only the portion of the applicable standard meal or
ule C (Form 1040). You can never deduct the cost of food snack rate that exceeds the amount of the reimbursement.
consumed by you or your family. You can deduct as a
business expense 100% of the actual cost of food con- You can use either the standard meal and snack rates
sumed by your daycare recipients (see Standard meal and or actual costs to calculate the deductible cost of food
snack rates, later, for an optional method for eligible chil- provided to eligible children in the family daycare for any
dren) and generally only 50% of the cost of food consumed particular tax year. If you choose to use the standard meal
by your employees. However, you can deduct 100% of the and snack rates for a particular tax year, you must use the
cost of food consumed by your employees if its value can rates for all your deductible food costs for eligible children
be excluded from their wages as a de minimis fringe during that tax year. However, if you use the standard meal
benefit. For more information on meals that meet these and snack rates in any tax year, you can use actual costs
requirements, see Meals in Publication 15-B, Employer’s to compute the deductible cost of food in any other tax
Tax Guide to Fringe Benefits. year.
If you deduct the actual cost of food for your daycare If you use the standard meal and snack rates, you must
business, keep a separate record (with receipts) of your maintain records to substantiate the computation of the
family’s food costs. total amount deducted for the cost of food provided to
Reimbursements you receive from a sponsor under the eligible children. The records kept should include the name
Child and Adult Food Care Program of the Department of of each child, dates and hours of attendance in the day-
Agriculture are taxable only to the extent they exceed your care, and the type and quantity of meals and snacks
Page 12 Publication 587 (2006)
OMB No. 1545-0074
Form 8829 Expenses for Business Use of Your Home
File only with Schedule C (Form 1040). Use a separate Form 8829 for each
2006
home you used for business during the year.
Department of the Treasury Attachment
Internal Revenue Service (99) See separate instructions. Sequence No. 66
Name(s) of proprietor(s) Your social security number
Mary Lake 412 00 1234
Part I Part of Your Home Used for Business
1 Area used regularly and exclusively for business, regularly for daycare, or for storage of inventory
or product samples (see instructions) 1 1,600
2 Total area of home 2 3,200
3 Divide line 1 by line 2. Enter the result as a percentage 3 50 %
For daycare facilities not used exclusively for business go to line 4. All others go to line 7.
4 Multiply days used for daycare during year by hours used per day 4 3,000 hr.
5 Total hours available for use during the year (365 days 24 hours) (see instructions) 5 8,760 hr.
6 Divide line 4 by line 5. Enter the result as a decimal amount 6 . 3425
7 Business percentage. For daycare facilities not used exclusively for business, multiply line 6 by
line 3 (enter the result as a percentage). All others, enter the amount from line 3 7 17.13 %
Part II Figure Your Allowable Deduction
8 Enter the amount from Schedule C, line 29, plus any net gain or (loss) derived from the business use of your
home and shown on Schedule D or Form 4797. If more than one place of business, see instructions 8 25,000
See instructions for columns (a) and (b) before (a) Direct expenses (b) Indirect expenses
completing lines 9–21.
9 Casualty losses (see instructions) 9
10 Deductible mortgage interest (see instructions) 10
11 Real estate taxes (see instructions) 11
12 Add lines 9, 10, and 11 12
13 Multiply line 12, column (b) by line 7 13
14 Add line 12, column (a) and line 13 14 -0-
15 Subtract line 14 from line 8. If zero or less, enter -0- 15 25,000
16 Excess mortgage interest (see instructions) 16
17 Insurance 17
18 Rent 18 8,400
19 Repairs and maintenance 19 171
20 Utilities 20 850
21 Other expenses (see instructions) 21
22 Add lines 16 through 21 22 171 9,250
23 Multiply line 22, column (b) by line 7 23 1,585
24 Carryover of operating expenses from 2005 Form 8829, line 41 24
25 Add line 22 in column (a), line 23, and line 24 25 1,756
26 Allowable operating expenses. Enter the smaller of line 15 or line 25 26 1,756
27 Limit on excess casualty losses and depreciation. Subtract line 26 from line 15 27 23,244
28 Excess casualty losses (see instructions) 28
29 Depreciation of your home from Part III below 29
30 Carryover of excess casualty losses and depreciation from 2005 Form 8829, line 42 30
31 Add lines 28 through 30 31 -0-
32 Allowable excess casualty losses and depreciation. Enter the smaller of line 27 or line 31 32 -0-
33 Add lines 14, 26, and 32 33 1,756
34 Casualty loss portion, if any, from lines 14 and 32. Carry amount to Form 4684, Section B 34 -0-
35 Allowable expenses for business use of your home. Subtract line 34 from line 33. Enter here and
on Schedule C, line 30. If your home was used for more than one business, see instructions 35 1,756
Part III Depreciation of Your Home
36 Enter the smaller of your home’s adjusted basis or its fair market value (see instructions) 36
37 Value of land included on line 36 37
38 Basis of building. Subtract line 37 from line 36 38
39 Business basis of building. Multiply line 38 by line 7 39
40 Depreciation percentage (see instructions) 40 %
41 Depreciation allowable (see instructions). Multiply line 39 by line 40. Enter here and on line 29 above 41
Part IV Carryover of Unallowed Expenses to 2007
42 Operating expenses. Subtract line 26 from line 25. If less than zero, enter -0- 42
43 Excess casualty losses and depreciation. Subtract line 32 from line 31. If less than zero, enter -0- 43
For Paperwork Reduction Act Notice, see page 4 of separate instructions. Cat. No. 13232M Form 8829 (2006)
Publication 587 (2006) Page 13
served. This information can be recorded in a log similar to could have under the method you properly selected, you
the one shown in Exhibit A, later. must decrease the basis by the amount you could have
The standard meal and snack rates include beverages, taken under that method. If you took more depreciation
but do not include non-food supplies used for food prepa- than you should have under the method you properly
ration, service, or storage, such as containers, paper prod- selected, you must decrease the basis by the amount you
ucts, or utensils. These expenses can be claimed as a should have deducted, plus the part of the excess de-
separate deduction on your Schedule C (Form 1040). ducted that actually decreased your tax liability for any
year. For more information on reducing the basis of your
property for depreciation, see Publication 551.
Table 3. 2006 Standard Meal and Snack
Rates More information. This section covers only the basic
rules for the sale or exchange of your home. For more
information, see Publication 523.
Location of Breakfast Lunch Dinner Snack
Family
Daycare
Provider
Business Furniture and
States other Equipment
than Alaska $1.06 $1.96 $1.96 $0.58
and Hawaii This section discusses the depreciation and section 179
deductions you may be entitled to take for furniture and
Alaska $1.68 $3.17 $3.17 $0.94 equipment you use in your home for business or work as
Hawaii $1.23 $2.29 $2.29 $0.68 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.
Sale or Exchange of
• Listed property.
Your Home • Property bought for business use.
If you sell or exchange your home, you may be able to • Personal property converted to business use.
exclude up to $250,000 ($500,000 for certain married
persons filing a joint return) of the gain on the sale or
exchange if you meet the ownership and use tests.
Listed Property
Ownership and use tests. To claim the exclusion, you
must meet the ownership and use tests. This means that If you use certain types of property, called listed property,
during the 5-year period ending on the date of the sale, you in your home, special rules apply. Listed property includes
met both the following tests. computers and related equipment and any property of a
type generally used for entertainment, recreation, and
• You owned the home for at least 2 years (ownership amusement (including photographic, phonographic, com-
test). munication, and video recording equipment).
• You lived in the home as your main home for at least Exception for certain use of computers. Computers
2 years (use test). and related equipment used exclusively in a qualifying
office in your home are not listed property. If you qualify to
Business use of your home. The rules for computing deduct expenses for the business use of your home (see
the exclusion for business use of your home vary depend- Qualifying for a Deduction, earlier) and you use your com-
ing on the facts and circumstances involved. See Business puter exclusively in your qualifying office in the home, do
Use or Rental of Home, in Publication 523 for details. not use the listed property rules discussed below. Instead,
Depreciation. If you were entitled to take depreciation follow the rules discussed under Property Bought for Busi-
deductions because you used your home for business, you ness Use, later.
cannot exclude the part of your gain equal to any deprecia-
More-than-50%-use test. If you bought listed property
tion allowed or allowable as a deduction for periods after
and placed it in service during the year, you must use it
May 6, 1997. If you can show by adequate records or other
more than 50% for business (including work as an em-
evidence that the depreciation deduction allowed was less
ployee) to claim a section 179 deduction or an accelerated
than the amount allowable, the amount you cannot ex-
depreciation deduction.
clude is the amount allowed.
If your business use of listed property is 50% or less,
Basis adjustment. If you used any part of your home for you cannot take a section 179 deduction and you must
business, you must adjust the basis of your home for any depreciate the property using the Alternative Depreciation
depreciation that was allowable for its business use, even System (ADS) (straight line method). For more information
if you did not claim it. If you took less depreciation than you on ADS, see chapter 4 in Publication 946.
Page 14 Publication 587 (2006)
Listed property meets the more-than-50%-use test for For more information, see Recapture of Excess Depreci-
any year if its qualified business use is more than 50% of ation under What Is the Business-Use Requirement in
its total use. You must allocate the use of any item of listed Publication 946.
property used for more than one purpose during the year
among its various uses. You cannot use the percentage of Reporting and recordkeeping requirements. If you use
listed property in your business, you must file Form 4562 to
investment use as part of the percentage of qualified busi-
claim a depreciation or section 179 deduction. Begin with
ness use to meet the more-than-50%-use test. However,
Part V, Section A, of that form.
you do use the combined total of business and investment
use to figure your depreciation deduction for the property. You cannot take any depreciation or section 179
deduction for the use of listed property unless you
Example 1. Sarah does not qualify to claim a deduction RECORDS can prove your business/investment use with ad-
for the business use of her home, but she uses her home equate records or sufficient evidence to support your own
computer 40% of the time for a business she operates out statements.
of her home. She also uses the computer 50% of the time To meet the adequate records requirement, you must
to manage her investments. Sarah’s home computer is maintain an account book, diary, log, statement of ex-
listed property because it is not used in a qualified office in pense, trip sheet, or similar record or other documentary
her home. She does not use the computer more than 50% evidence that is sufficient to establish business/investment
use. For more information on what records to keep, see
for business, so she cannot elect a section 179 deduction.
What Records Must Be Kept in chapter 5 of Publication
She can use her combined business/investment use
946.
(90%) to figure her depreciation deduction using ADS.
Example 2. If Sarah uses her computer 60% of the time Property Bought for Business Use
for her business and 30% for managing her investments,
her computer meets the more-than-50%-use test. She can If you bought certain property during 2006 to use in your
elect a section 179 deduction. She can use her combined business, you can do any one of the following (subject to
the limits discussed later).
business/investment use (90%) to figure her depreciation
deduction using the General Depreciation System (GDS). • Elect a section 179 deduction for the full cost of the
property.
Employee. If you use your own listed property (or listed
property you rent) in your work as an employee, the prop- • Depreciate the full cost of the property.
erty is business-use property only if you meet the following • Take part of the cost as a section 179 deduction and
requirements. depreciate the balance.
• The use is for your employer’s convenience.
• The use is required as a condition of your employ- Section 179 Deduction
ment.
You can claim the section 179 deduction for the cost of
The use of property as a condition of your employment depreciable tangible personal property bought for use in
means that it is necessary for you to properly perform your your trade or business. You can choose how much (sub-
work. Whether the use of the property is required for this ject to the limit) of the cost you want to deduct under
section 179 and how much you want to depreciate. You
purpose depends on all the facts and circumstances. Your
can spread the section 179 deduction over several items of
employer does not have to tell you specifically to use the
property in any way you choose as long as the total does
property. Nor is a statement by your employer to that effect not exceed the maximum allowable. You cannot take a
sufficient. section 179 deduction for the basis of the business part of
your home.
Years following the year placed in service. If, in a year You elect the section 179 deduction by completing Part I
after you place an item of listed property in service, you fail of Form 4562.
to meet the more-than-50%-use test for that item of prop-
erty, you may be required to do the following. More information. For more information on the section
179 deduction, qualifying property, the dollar limit, and the
1. Figure depreciation, beginning with the year you no business income limit, see chapter 2 in Publication 946.
longer use the property more than 50% for business,
using the straight line method.
Depreciation
2. Figure any excess depreciation (include any section
179 deduction on the property in figuring excess de- You can take an additional 30% Liberty Zone
preciation) and add it to: TIP depreciation allowance to recover part of the cost
of qualified Liberty Zone property placed in serv-
a. Your gross income, and
ice during the tax year. The allowance applies for the first
b. The adjusted basis of your property. year you place the property in service. The allowance is an
Publication 587 (2006) Page 15
additional deduction you can take after any section 179 year was $3,000 without any deduction for the office furni-
deduction and before you figure regular depreciation under ture. Donald can elect to do one of the following.
MACRS for the year you place the property in service. For
more information, see chapter 3, Claiming the Special
• Take a section 179 deduction for the full cost of the
office furniture.
Depreciation Allowance, in Publication 946.
• Take part of the cost of the furniture as a section 179
You can take a special depreciation allowance to deduction and depreciate the balance.
TIP recover part of the cost of qualified Gulf Opportu-
nity Zone (GO Zone) property placed in service • Depreciate the full cost of the office furniture.
during the tax year. The allowance applies for the first year
you place the property in service. For qualified property The furniture is 7-year property under MACRS. Donald
placed in service after August 27, 2005, you can take an does not take a section 179 deduction. He multiplies
additional deduction of 50% of the property’s depreciable $1,975 by 14.29% (.1429) to get his MACRS depreciation
basis (after any section 179 deduction and before you deduction of $282.23.
figure regular depreciation). For more information, see
Claiming the Special Depreciation Allowance in chapter 3 Personal Property Converted to
of Publication 946. Business Use
Use Parts II and III of Form 4562 to claim your deduction
for depreciation on property placed in service during the If you use property in your home office that was used
year. Do not include any costs deducted in Part I (section previously for personal purposes, you cannot take a sec-
179 deduction). tion 179 deduction for the property. You also cannot take a
Most business property used in a home office is either Liberty Zone or GO Zone depreciation allowance for the
5-year or 7-year property under MACRS. property. You can depreciate it, however. The method of
depreciation you use depends on when you first used the
• 5-year property includes computers and peripheral property for personal purposes.
equipment, typewriters, calculators, adding ma- If you began using the property for personal purposes
chines, and copiers. after 1986 and change it to business use in 2006, depreci-
• 7-year property includes office furniture and fixtures ate the property under MACRS.
such as desks, files, and safes. The basis for depreciation of property changed from
personal to business use is the lesser of the following.
Under MACRS, you generally use the half-year conven- • The adjusted basis of the property on the date of
tion, which allows you to deduct a half year of depreciation change.
in the first year you use the property in your business. If
you place more than 40% of your depreciable property in • The fair market value of the property on the date of
service during the last 3 months of your tax year, you must change.
use the mid-quarter convention instead of the half-year
convention. If you began using the property for personal purposes
After you have determined the cost of the depreciable after 1980 and before 1987 and change it to business use
property (minus any section 179 deduction and special in 2006, you generally depreciate the property under the
depreciation allowance taken on the property) and whether accelerated cost recovery system (ACRS). However, if the
it is 5-year or 7-year property, use the table, shown next, to depreciation under ACRS is greater in the first year than
figure your depreciation if the half-year convention applies. the depreciation under MACRS, you must depreciate it
under MACRS. For information on ACRS, see Publication
Table 4. MACRS Percentage Table for 5- and 534, Depreciating Property Placed in Service Before 1987.
7-Year Property Using Half-Year If you began using the property for personal purposes
Convention before 1981 and change it to business use in 2006, depre-
ciate the property by the straight line or declining balance
Recovery Year 5-Year Property 7-Year Property method based on salvage value and useful life.
1 20.00% 14.29%
2 32.00% 24.49%
3
4
19.20%
11.52%
17.49%
12.49%
Recordkeeping
5 11.52% 8.93%
6 5.76% 8.92%
7 8.93%
You do not have to use a particular method of
8 4.46% recordkeeping, but you must keep records that
RECORDS provide the information needed to figure your
See Publication 946 for a discussion of the mid-quarter deductions for the business use of your home. You should
convention and for complete MACRS percentage tables. keep canceled checks, receipts, and other evidence of
expenses you paid.
Example. In June 2006, Donald Kent bought a desk
Your records must show the following information.
and three chairs for use in his office. His total bill for the
furniture was $1,975. His taxable business income for the • The part of your home you use for business.
Page 16 Publication 587 (2006)
• That you use part of your home exclusively and If you file Schedule F (Form 1040), include the business
regularly for business as either your principal place part of your deductible home mortgage interest with your
of business or as the place where you meet or deal total business use of the home expenses on line 34. You
with clients or customers in the normal course of can use the worksheet on page 24 to figure the deductible
your business. (However, see the earlier discussion, part of mortgage interest. Enter the nonbusiness part of the
Exceptions to Exclusive Use.) deductible mortgage interest on Schedule A, line 10 or 11.
To determine if the limits on qualified home mortgage
• The depreciation and expenses for the business interest apply to you, see the instructions for Schedule A or
part. Publication 936.
You must keep your records for as long as they are impor-
Real estate taxes. If you file Schedule C (Form 1040),
tant for any tax law. This is usually the later of the following
enter all your deductible real estate taxes on Form 8829,
dates.
line 11. After you have figured the business part of your
• 3 years from the return due date or the date filed. taxes on lines 12 and 13, subtract that amount from your
total real estate taxes on line 11. The remainder is deducti-
• 2 years after the tax was paid.
ble on Schedule A (Form 1040), line 6.
If you file Schedule F (Form 1040), include the business
Keep records to prove your home’s depreciable basis.
part of real estate taxes with your total business use of the
This includes records of when and how you acquired your
home expenses on line 34. Enter the nonbusiness part of
home, your original purchase price, any improvements to
your real estate taxes on line 6 of Schedule A.
your home, and any depreciation you are allowed because
you maintained an office in your home. You can keep If you itemize your deductions, be sure to claim
copies of Forms 8829 or the Publication 587 worksheets !
CAUTION
only the personal part of your deductible mort-
gage interest and real estate taxes on Schedule A
as records of depreciation.
For more information on recordkeeping, see Publication (Form 1040). Do not deduct any of the business part on
583. Schedule A. For example, if your business percentage on
Form 8829, line 7, or line 3 of the worksheet on page 24 is
30%, you can claim only 70% of your deductible mortgage
interest and real estate taxes as personal expenses on
Where To Deduct Schedule A.
Deduct expenses for the business use of your home on Casualty losses. If you are using Form 8829, refer to the
Form 1040. Where you deduct these expenses on the form specific instructions for line 9 and enter the amount from
depends on whether you are: line 34 on line 30 of Form 4684, Section B. Enter “See
• A self-employed person, or Form 8829” above line 30.
If you file Schedule F (Form 1040), enter the business
• An employee. part of casualty losses (line 32 of the worksheet) on line 30
of Form 4684, Section B. Enter “See attached statement”
If you are a partner, see Partners, later, for information above line 30.
on where to deduct expenses for the business use of your
home. Other expenses. If you file Schedule C (Form 1040),
report the other home expenses that would not be allowa-
Self-Employed Persons ble if you did not use your home for business (insurance,
maintenance, utilities, depreciation, etc.) on the appropri-
If you are self-employed and file Schedule C (Form 1040), ate lines of your Form 8829. If you rent rather than own
complete and attach Form 8829 to your return. your home, report the rent you paid on line 18. If these
If you file Schedule F (Form 1040), report your entire expenses exceed the deduction limit, carry the excess
deduction for business use of the home (line 33 of the over to next year. The carryover will be subject to next
year’s deduction limit.
worksheet), up to the deduction limit discussed under
If you file Schedule F (Form 1040), include your other-
Figuring the Deduction, earlier, on line 34 of Schedule F.
wise nondeductible expenses (insurance, maintenance,
Enter “Business Use of Home” on the dotted line beside
utilities, depreciation, etc.) with your total business use of
the entry.
the home expenses on Schedule F, line 34. If these ex-
penses exceed the deduction limit, carry the excess over
Deductible mortgage interest. If you file Schedule C
to the next year. The carryover will be subject to next year’s
(Form 1040), enter all your deductible mortgage interest on deduction limit.
line 10 of Form 8829. After you have figured the business
part of the mortgage interest on lines 12 and 13, subtract Business expenses not for the use of your home.
that amount from the total mortgage interest on line 10. Deduct in full your business expenses that are not for the
The remainder is deductible on Schedule A (Form 1040), use of your home itself (dues, salaries, supplies, certain
line 10 or 11. If the interest you deduct on Schedule A for telephone expenses, etc.) on the appropriate lines of
your home mortgage is limited, enter the excess on line 16 Schedule C (Form 1040) or Schedule F (Form 1040).
of Form 8829. These expenses are not for the use of your home, so they
Publication 587 (2006) Page 17
are not subject to the deduction limit for business use of the You also may be treated as adequately accounting to
home expenses. your employer if your employer gives you a per diem or car
allowance similar in form to, and not more than, the federal
Employees rate and you verify the time, place, and business purpose
of each expense. For more information, see Publication
As an employee, you must itemize deductions on Sched- 463 and the instructions for Form 2106.
ule A (Form 1040) to claim expenses for the business use Rental to employer. If you rent part of your home to your
of your home and any other employee business expenses. employer and you use the rented part in performing serv-
This generally applies to all employees, including outside ices for your employer as an employee, your deduction for
salespersons. If you are a statutory employee, use Sched- the business use of your home is limited. You can deduct
ule C (Form 1040) to claim the expenses. Follow the mortgage interest, real estate taxes, and personal casualty
instructions given earlier under Self-Employed Persons. losses for the rented part, subject to any limitations. How-
The statutory employee box within box 13 on your Form ever, you cannot deduct otherwise allowable trade or busi-
W-2 will be checked if you are a statutory employee. ness expenses, business casualty losses, or depreciation
If you have employee expenses for which you were not related to the use of your home in performing services for
reimbursed, report them on Schedule A, line 20. You also your employer.
generally must complete Form 2106 if either of the follow-
ing apply. Deductible mortgage interest. Although you generally
deduct expenses for the business use of your home on
• You claim any job-related vehicle, travel, transporta- Schedule A (Form 1040), line 20, do not include any
tion, meal, or entertainment expenses. deductible home mortgage interest on that line. Instead,
• Your employer paid you for any of your job expenses deduct both the business and nonbusiness parts of this
reportable on line 20. (Amounts your employer in- interest on line 10 or 11 of Schedule A.
cluded in box 1 of your Form W-2 are not considered If the home mortgage interest you can deduct on lines
10 or 11 is limited by the home mortgage interest rules, you
paid by your employer.)
cannot deduct the excess as an employee business ex-
However, you can use the simpler Form 2106-EZ, in- pense on Schedule A, line 20, even though you use part of
your home for business. To determine if the limits on home
stead of Form 2106, if you meet the following require-
mortgage interest apply to you, see Publication 936 or the
ments.
instructions for Schedule A.
• You were not reimbursed for your expenses by your
employer, or if you were reimbursed, the reimburse- Real estate taxes. Deduct both the business and non-
ment was included in box 1 of your Form W-2. business parts of your real estate taxes on line 6 of Sched-
ule A. For more information on amounts allowable as a
• If you claim car expenses, you use the standard deduction for real estate taxes, see Publication 530, Tax
mileage rate. Information for First-Time Homeowners.
When your employer pays for your expenses using a Casualty losses. Enter the business part of casualty
reimbursement or allowance arrangement, the payments losses (line 32 of the worksheet) on Form 4684, Section B,
generally should not be on your Form W-2 if all the follow- line 30. Enter “See attached statement” above line 30.
ing rules for an accountable plan are met. Other expenses. If you file Form 2106 or Form 2106-EZ,
• You adequately account to your employer for the report on line 4 the following expenses.
expenses within a reasonable period of time. • The business part of your otherwise nondeductible
• You return any payments not spent for business expenses (utilities, maintenance, insurance, depreci-
expenses (excess reimbursements) within a reason- ation, etc.) that do not exceed the deduction limit.
able period of time. • The employee business expenses not related to the
• You must have paid or incurred deductible expenses use of your home, such as advertising.
while performing services as an employee. Add these to your other employee business expenses and
complete the rest of the form. Enter the total from Form
If you meet the accountable plan rules and your busi- 2106, or Form 2106-EZ, on Schedule A, line 20, where it is
ness expenses equal your reimbursement, do not report subject to the 2%-of-adjusted-gross-income limit. If you do
the reimbursement as income and do not deduct the ex- not have to file Form 2106 or Form 2106-EZ, enter your
penses. total expenses directly on Schedule A, line 20.
Adequately accounting to employer. You adequately Example. You are an employee who works at home for
account to your employer when you give your employer the convenience of your employer. You meet all the re-
documentary evidence of your travel, mileage, and other quirements to deduct expenses for the business use of
employee business expenses, such as receipts, along with your home. Your employer does not reimburse you for any
an account book, diary, or similar record in which you of your business expenses and you are not otherwise
entered each expense at or near the time you had it. required to file Form 2106 or Form 2106-EZ.
Page 18 Publication 587 (2006)
As an employee, you do not have gross receipts, cost of Deducting unreimbursed partnership expenses. See
goods sold, etc. You begin with gross income from the the following forms and related instructions for information
business use of your home, which you determine to be about deducting unreimbursed partnership expenses.
$6,000. • Schedule E (Form 1040), Supplemental Income and
The percentage of expenses due to the business use of Loss.
your home is 20%. You have the following expenses.
• Schedule SE (Form 1040), Self-Employment Tax.
Deductible mortgage interest (20%) . . . . . . . . . . . . . . . . . $1,500
Real estate taxes (20%) . . . . . . . . . . . . . . . . . . . . . . . . . 1,000 • Schedule K-1 (Form 1065), Partner’s Share of In-
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $2,500 come, Credits, Deductions, etc.
Expenses not related to business use of the home (100%):
Supplies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $500
Advertising . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,300 More information. For more information about partners
Telephone . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 200 and partnerships, see Publication 541, Partnerships.
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $2,000
Otherwise nondeductible expenses:
Maintenance (20%) . . . . . . . . . . . . . . . . . . . . . . . . . . . $200
Utilities (20%) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 350 Schedule C Example
Insurance (20%) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 250
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $800 The filled-in forms for John Stephens that follow show how
Depreciation (20%) . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,600 to report deductions for the business use of your home if
you file Schedule C (Form 1040).
Based on the above expenses, you figure your deduc-
tion limit as follows. Form 4562. Based on the following facts, John completes
Form 4562 as follows:
Gross income . . . . . . . . . . . . . . . . . . . . . . . . . $6,000
Less: Part I, lines 1 –13. John began using his home for
Deductible mortgage interest (20%) . . . . . . . . . $1,500 business in January of this year. He purchased a new
Real estate taxes (20%) . . . . . . . . . . . . . . . . . 1,000 computer and filing cabinet to use in his business. The
Expenses not related to business use of the home
(100%) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,000 4,500
computer, used 100% for business, cost $3,200. The filing
Deduction limit . . . . . . . . . . . . . . . . . . . . . . . $1,500 cabinet cost $600. John elects to take the section 179
deduction for both items.
Your deduction for otherwise nondeductible expenses and John completes Part I of Form 4562. He enters the cost
depreciation is limited to $1,500. You can deduct all your of both the computer and filing cabinet, $3,800, on line 2
otherwise nondeductible expenses ($800) and $700 and completes lines 4 and 5. On line 6, he enters a
($1,500 − $800) of your depreciation. description of each item, its cost, and the cost he elects to
You deduct your expenses for business use of your expense. Line 11 is the smaller of line 5 ($108,000) or the
home on Schedule A (Form 1040) as shown in the follow- taxable income from all trades and businesses without
ing table. regard to the section 179 deduction. Since he has no other
business income, he adds line 31 of Schedule C and the
Expense Amount Schedule A
amount of the section 179 deduction ($3,800) for a total
Deductible mortgage interest $1,500 Line 10 or 11* business income of $27,871. This amount goes on line 11
Real estate taxes $1,000 Line 6* since it is smaller than $108,000. He enters $3,800 on line
12.
Expenses not related to the
business use of the home $2,000 Line 20** Part III, line 19c. John converted to business use a
Otherwise nondeductible expenses $800 Line 20** desk and chair (furniture) he had purchased in 1999 for
Depreciation $700 Line 20**
personal purposes. In 1999, he paid $1,500 for them. The
total fair market value in 2006 is $550. The fair market
*In addition to the 80% nonbusiness part of the expense. value is less than the cost, so his depreciable basis is
**Subject to the 2%-of-adjusted-gross-income limit.
$550.
You can carry over the $900 of depreciation that ex- Because the furniture is 7-year property under MACRS,
ceeds the deduction limit to next year, subject to the John enters $550 in Part III, line 19c, column (c). He
deduction limit for that year. completes columns (d) through (f). He uses the MACRS
Percentage Table for 5- and 7-Year Property Using
Partners Half-Year Convention in this publication or Table A-1 in
Publication 946 to find the rate of 14.29% for property
You may be allowed to deduct unreimbursed ordinary and placed in service during the first month of the year. He
necessary expenses you paid on behalf of the partnership multiplies $550 by 14.29% (.1429) and enters $79 in col-
(including qualified expenses for the business use of your umn (g).
home) if you were required to pay these expenses under Part III, line 19i. This is the first year John used his
the partnership agreement. home for business, so he must figure the depreciation on
Use the worksheet on page 24 to figure the deduction line 19i. On line 19i, column (c), he enters $11,000, the
for the business use of your home. depreciable basis of the business part of his home. He
Publication 587 (2006) Page 19
began using his home for business in January. (For a these expenses (line 14) from his tentative business profit
discussion on how he figures his depreciation deduction, (line 8). The result, $25,002 on line 15, is the most he can
see Step 3 under Form 8829, Part II, later.) He enters $271 deduct for his other home office expenses.
in column (g).
Step 2. Next, he figures his deduction for operating
Part IV, line 22. John totals the amounts on line 12 and expenses. He paid $300 to have his office repainted. He
line 19 in column (g) and enters the total on line 22. He enters this amount on line 19, column (a) because it is a
enters both the section 179 deduction ($3,800) and the direct expense. All his other expenses ($400 homeowner’s
depreciation on the furniture ($79) on line 13 of Schedule insurance, $1,400 roof repairs, and $1,800 gas and elec-
C. He enters the depreciation on his home ($271) on Form tric) relate to his entire home. Therefore, he enters them in
8829, line 29. column (b) on the appropriate lines. He adds the $300
Schedule C. John completes Schedule C as follows: direct expenses (line 22, column (a)) to the $360 total for
indirect expenses (line 23) and enters the total, $660, on
Line 13. As discussed previously, John enters the line 25. This amount is less than his deduction limit, so he
amount from Form 4562 for his section 179 deduction
can deduct it in full. The $24,342 balance of his deduction
($3,800) and the depreciation deduction for his office furni-
limit (line 27) is the most he can deduct for depreciation.
ture ($79) for a total of $3,879.
Step 3. Next, he figures his allowable depreciation de-
Line 16b. This amount is the interest on installment
duction for the business use of his home in Part III of Form
payments for the business assets John uses in his home
8829. The adjusted basis of his home is $130,000, which is
office.
less than the fair market value of $160,000. He figures the
Line 25. John had a separate telephone line in his value of the land to be $20,000. He subtracts the land
home office that he used only for business. He can deduct value from the adjusted basis. He multiplies the result
$347 for the line. ($110,000) by the percentage on line 7 to get the deprecia-
Lines 28–30. On line 28, he totals all his expenses ble basis of the business part of his home ($11,000).
other than those for the business use of his home, and then He began using the office in January of this year, so he
subtracts that total from his gross income. He uses the uses the MACRS Percentage Table for 39-Year Nonresi-
result on line 29 to figure the deduction limit on his ex- dential Real Property in this publication or Table A-7a in
penses for the business use of his home. He enters that Appendix A of Publication 946. The depreciation percent-
amount on Form 8829, line 8, and then completes the age for the first year of the recovery period for assets
form. He enters the amount of his home office deduction placed in service in the first month is 2.461%. His deprecia-
from Form 8829, line 35, on Schedule C, line 30. tion deduction for 2006 (line 41) is $271 (.02461 ×
Form 8829, Part I. John uses one room of his home $11,000). He enters that amount in Part II on lines 29 and
exclusively and regularly to meet clients. In Part I of Form 31. This is less than the available balance of his deduction
8829 he shows that, based on the square footage, the limit (line 27), so he can deduct the full amount as depreci-
room is 10% of the total area of his home. ation. John also must complete Form 4562 for 2006, so he
enters $271 on line 19i, column (g). See Form 4562,
Form 8829, Part II. John uses Part II of Form 8829 to earlier.
figure his allowable home office deduction.
Step 4. Finally, he figures his total deduction for his
Step 1. First, he figures the business part of expenses home office by adding together his otherwise deductible
that would be deductible even if he did not use part of his expenses (line 14), his operating expenses (line 26), and
home for business. These expenses ($4,500 deductible depreciation (line 32). He enters the result, $1,481, on
mortgage interest and $1,000 real estate taxes) relate to
lines 33 and 35, and on Schedule C, line 30.
his entire home, so he enters them in column (b) on lines
10 and 11. He then subtracts the $550 business part of
Page 20 Publication 587 (2006)
OMB No. 1545-0074
SCHEDULE C Profit or Loss From Business
(Form 1040)
Department of the Treasury
(Sole Proprietorship)
Partnerships, joint ventures, etc., must file Form 1065 or 1065-B.
2006
Attachment
Internal Revenue Service (99) Attach to Form 1040, 1040NR, or 1041. See Instructions for Schedule C (Form 1040). Sequence No. 09
Name of proprietor Social security number (SSN)
John Stephens 465 00 0001
A Principal business or profession, including product or service (see page C-2 of the instructions) B Enter code from pages C-8, 9, & 10
Tax Preparation Services 5 4 1 2 1 3
C Business name. If no separate business name, leave blank. D Employer ID number (EIN), if any
Stephens Tax Service
E Business address (including suite or room no.) 821 Union Street
City, town or post office, state, and ZIP code Hometown, IA 52761
F Accounting method: (1) X Cash (2) Accrual (3) Other (specify)
G Did you “materially participate” in the operation of this business during 2006? If “No,” see page C-3 for limit on losses X Yes No
H If you started or acquired this business during 2006, check here
Part I Income
1 Gross receipts or sales. Caution. If this income was reported to you on Form W-2 and the “Statutory
employee” box on that form was checked, see page C-3 and check here 1 34,280
2 Returns and allowances 2
3 Subtract line 2 from line 1 3 34,280
4 Cost of goods sold (from line 42 on page 2) 4
5 Gross profit. Subtract line 4 from line 3 5 34,280
6 Other income, including federal and state gasoline or fuel tax credit or refund (see page C-3) 6
7 Gross income. Add lines 5 and 6 7 34,280
Part II Expenses. Enter expenses for business use of your home only on line 30.
8 Advertising 8 250 18 Office expense 18 600
9 Car and truck expenses (see 19 Pension and profit-sharing plans 19
page C-4) 9 1,266 20 Rent or lease (see page C-5):
10 Commissions and fees 10 a Vehicles, machinery, and equipment 20a
11 Contract labor (see page C-4) 11 b Other business property 20b
12 Depletion 12 21 Repairs and maintenance 21
22 Supplies (not included in Part III) 22 253
13 Depreciation and section 179
23 Taxes and licenses 23
expense deduction (not
included in Part III) (see 24 Travel, meals, and entertainment:
page C-4) 13 3,879 a Travel 24a 310
14 Employee benefit programs b Deductible meals and
(other than on line 19) 14 entertainment (see page C-6) 24b 256
15 Insurance (other than health) 15 750 25 Utilities 25 347
16 Interest: 26 Wages (less employment credits) 26
a Mortgage (paid to banks, etc.) 16a 27 Other expenses (from line 48 on
b Other 16b 200 page 2) 27 267
17 Legal and professional
services 17 350
28 Total expenses before expenses for business use of home. Add lines 8 through 27 in columns 28 8,728
29 Tentative profit (loss). Subtract line 28 from line 7 29 25,552
30 Expenses for business use of your home. Attach Form 8829 30 1,481
31 Net profit or (loss). Subtract line 30 from line 29.
● If a profit, enter on both Form 1040, line 12, and Schedule SE, line 2, or on Form 1040NR,
line 13 (statutory employees, see page C-6). Estates and trusts, enter on Form 1041, line 3. 31 24,071
● If a loss, you must go to line 32.
32 If you have a loss, check the box that describes your investment in this activity (see page C-6).
● If you checked 32a, enter the loss on both Form 1040, line 12, and Schedule SE, line 2, or on 32a All investment is at risk.
Form 1040NR, line 13 (statutory employees, see page C-6). Estates and trusts, enter on Form 1041, 32b Some investment is not
line 3. at risk.
● If you checked 32b, you must attach Form 6198. Your loss may be limited.
For Paperwork Reduction Act Notice, see page C-8 of the instructions. Cat. No. 11334P Schedule C (Form 1040) 2006
Publication 587 (2006) Page 21
OMB No. 1545-0074
Form 8829 Expenses for Business Use of Your Home
File only with Schedule C (Form 1040). Use a separate Form 8829 for each
2006
home you used for business during the year.
Department of the Treasury Attachment
Internal Revenue Service (99) See separate instructions. Sequence No. 66
Name(s) of proprietor(s) Your social security number
John Stephens 465 00 0001
Part I Part of Your Home Used for Business
1 Area used regularly and exclusively for business, regularly for daycare, or for storage of inventory
or product samples (see instructions) 1 200
2 Total area of home 2 2,000
3 Divide line 1 by line 2. Enter the result as a percentage 3 10 %
For daycare facilities not used exclusively for business go to line 4. All others go to line 7.
4 Multiply days used for daycare during year by hours used per day 4 hr.
5 Total hours available for use during the year (365 days 24 hours) (see instructions) 5 8,760 hr.
6 Divide line 4 by line 5. Enter the result as a decimal amount 6 .
7 Business percentage. For daycare facilities not used exclusively for business, multiply line 6 by
line 3 (enter the result as a percentage). All others, enter the amount from line 3 7 10 %
Part II Figure Your Allowable Deduction
8 Enter the amount from Schedule C, line 29, plus any net gain or (loss) derived from the business use of your
home and shown on Schedule D or Form 4797. If more than one place of business, see instructions 8 25,552
See instructions for columns (a) and (b) before (a) Direct expenses (b) Indirect expenses
completing lines 9–21.
9 Casualty losses (see instructions) 9
10 Deductible mortgage interest (see instructions) 10 4,500
11 Real estate taxes (see instructions) 11 1,000
12 Add lines 9, 10, and 11 12 5,500
13 Multiply line 12, column (b) by line 7 13 550
14 Add line 12, column (a) and line 13 14 550
15 Subtract line 14 from line 8. If zero or less, enter -0- 15 25,002
16 Excess mortgage interest (see instructions) 16
17 Insurance 17 400
18 Rent 18
19 Repairs and maintenance 19 300 1,400
20 Utilities 20 1,800
21 Other expenses (see instructions) 21
22 Add lines 16 through 21 22 300 3,600
23 Multiply line 22, column (b) by line 7 23 360
24 Carryover of operating expenses from 2005 Form 8829, line 41 24 – 0 –
25 Add line 22 in column (a), line 23, and line 24 25 660
26 Allowable operating expenses. Enter the smaller of line 15 or line 25 26 660
27 Limit on excess casualty losses and depreciation. Subtract line 26 from line 15 27 24,342
28 Excess casualty losses (see instructions) 28
29 Depreciation of your home from Part III below 29 271
30 Carryover of excess casualty losses and depreciation from 2005 Form 8829, line 42 30
31 Add lines 28 through 30 31 271
32 Allowable excess casualty losses and depreciation. Enter the smaller of line 27 or line 31 32 271
33 Add lines 14, 26, and 32 33 1,481
34 Casualty loss portion, if any, from lines 14 and 32. Carry amount to Form 4684, Section B 34
35 Allowable expenses for business use of your home. Subtract line 34 from line 33. Enter here and
on Schedule C, line 30. If your home was used for more than one business, see instructions 35 1,481
Part III Depreciation of Your Home
36 Enter the smaller of your home’s adjusted basis or its fair market value (see instructions) 36 130,000
37 Value of land included on line 36 37 20,000
38 Basis of building. Subtract line 37 from line 36 38 110,000
39 Business basis of building. Multiply line 38 by line 7 39 11,000
40 Depreciation percentage (see instructions) 40 2.461 %
41 Depreciation allowable (see instructions). Multiply line 39 by line 40. Enter here and on line 29 above 41 271
Part IV Carryover of Unallowed Expenses to 2007
42 Operating expenses. Subtract line 26 from line 25. If less than zero, enter -0- 42
43 Excess casualty losses and depreciation. Subtract line 32 from line 31. If less than zero, enter -0- 43
For Paperwork Reduction Act Notice, see page 4 of separate instructions. Cat. No. 13232M Form 8829 (2006)
Page 22 Publication 587 (2006)
Depreciation and Amortization
Form 4562 (Including Information on Listed Property)
OMB No. 1545-0172
2006
Department of the Treasury
Internal Revenue Service
Attachment
See separate instructions. Attach to your tax return. Sequence No. 67
Name(s) shown on return Business or activity to which this form relates Identifying number
John Stephens Tax Preparation 465-00-0001
Part I Election To Expense Certain Property Under Section 179
Note: If you have any listed property, complete Part V before you complete Part I.
1 Maximum amount. See the instructions for a higher limit for certain businesses 1 $108,000
2 Total cost of section 179 property placed in service (see instructions) 2 3,800
3 Threshold cost of section 179 property before reduction in limitation 3 $430,000
4 Reduction in limitation. Subtract line 3 from line 2. If zero or less, enter -0- 4 -0-
5 Dollar limitation for tax year. Subtract line 4 from line 1. If zero or less, enter -0-. If married filing
separately, see instructions 5 108,000
(a) Description of property (b) Cost (business use only) (c) Elected cost
6 Computer 3,200 3,200
File Cabinet 600 600
7 Listed property. Enter the amount from line 29 7
8 Total elected cost of section 179 property. Add amounts in column (c), lines 6 and 7 8 3,800
9 Tentative deduction. Enter the smaller of line 5 or line 8 9 3,800
10 Carryover of disallowed deduction from line 13 of your 2005 Form 4562 10 -0-
11 Business income limitation. Enter the smaller of business income (not less than zero) or line 5 (see instructions) 11 27,871
12 Section 179 expense deduction. Add lines 9 and 10, but do not enter more than line 11 12 3,800
13 Carryover of disallowed deduction to 2007. Add lines 9 and 10, less line 12 13 -0-
Note: Do not use Part II or Part III below for listed property. Instead, use Part V.
Part II Special Depreciation Allowance and Other Depreciation (Do not include listed property.) (See instructions.)
14 Special allowance for qualified New York Liberty or Gulf Opportunity Zone property (other than listed
property) placed in service during the tax year (see instructions) 14
15 Property subject to section 168(f)(1) election 15
16 Other depreciation (including ACRS) 16
Part III MACRS Depreciation (Do not include listed property.) (See instructions.)
Section A
17 MACRS deductions for assets placed in service in tax years beginning before 2006 17
18 If you are electing to group any assets placed in service during the tax year into one or more
general asset accounts, check here
Section B—Assets Placed in Service During 2006 Tax Year Using the General Depreciation System
(b) Month and (c) Basis for depreciation
(d) Recovery
(a) Classification of property year placed in (business/investment use (e) Convention (f) Method (g) Depreciation deduction
period
service only—see instructions)
19a 3-year property
b 5-year property
c 7-year property 550 7 HY 200DB 79
d 10-year property
e 15-year property
f 20-year property
g 25-year property 25 yrs. S/L
h Residential rental 27.5 yrs. MM S/L
property 27.5 yrs. MM S/L
i Nonresidential real 11,000 39 yrs. MM
271 S/L
property MM S/L
Section C—Assets Placed in Service During 2006 Tax Year Using the Alternative Depreciation System
20a Class life S/L
b 12-year 12 yrs. S/L
c 40-year 40 yrs. MM S/L
Part IV Summary (see instructions)
21 Listed property. Enter amount from line 28 21
22 Total. Add amounts from line 12, lines 14 through 17, lines 19 and 20 in column (g), and line 21.
Enter here and on the appropriate lines of your return. Partnerships and S corporations—see instr. 22 4,150
23 For assets shown above and placed in service during the current year,
enter the portion of the basis attributable to section 263A costs 23
For Paperwork Reduction Act Notice, see separate instructions. Cat. No. 12906N Form 4562 (2006)
Publication 587 (2006) Page 23
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) (b)
Direct Indirect
Expenses 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) Rent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16)
17) Repairs and maintenance . . . . . . . . . . . . . . . . . . . . . . . . . 17)
18) Utilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18)
19) Other expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19)
20) Add lines 14 through 19 . . . . . . . . . . . . . . . . . . . . . . . . . . . 20)
21) Multiply line 20, column (b) by line 3 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21)
22) Carryover of operating expenses from prior year (see instructions) . . . . . . . . . . 22)
23) Add line 20, column (a), line 21, and line 22 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23)
24) Allowable operating expenses. Enter the smaller of line 13 or line 23 . . . . . . . . . . . . . . . . . . . . . . 24)
25) Limit on excess casualty losses and depreciation. Subtract line 24 from line 13 . . . . . . . . . . . . . . . 25)
26) Excess casualty losses (see instructions) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26)
27) Depreciation of your home from line 39 below . . . . . . . . . . . . . . . . . . . . . . . . . 27)
28) Carryover of excess casualty losses and depreciation from prior year (see
instructions) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28)
29) Add lines 26 through 28 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29)
30) Allowable excess casualty losses and depreciation. Enter the smaller of line 25 or line 29 . . . . . . . 30)
31) Add lines 10, 24, and 30 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31)
32) Casualty losses included on lines 10 and 30 (see instructions) . . . . . . . . . . . . . . . . . . . . . . . . . . . 32)
33) Allowable expenses for business use of your home. (Subtract line 32 from line 31.) See instructions
for where to enter on your return . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33)
PART 3 — Depreciation of Your Home
34) Smaller of adjusted basis or fair market value of home (see instructions) . . . . . . . . . . . . . . . . . . . . 34)
35) Basis of land . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35)
36) Basis of building (subtract line 35 from line 34) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36)
37) Business basis of building (multiply line 36 by line 3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37)
38) Depreciation percentage (from applicable table or method) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38) %
39) Depreciation allowable (multiply line 37 by line 38) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39)
PART 4 — Carryover of Unallowed Expenses to Next Year
40) Operating expenses. Subtract line 24 from line 23. If less than zero, enter -0- . . . . . . . . . . . . . . . . . 40)
41) Excess casualty losses and depreciation. Subtract line 30 from line 29. If less than zero, enter -0- . . 41)
Page 24 Publication 587 (2006)
Lines 9–10.
Instructions for the Worksheet Multiply your total indirect expenses (line 8, column (b))
by the business percentage from line 3. Enter the result on
If you are an employee or a partner, or you file Schedule F line 9. Add this amount to the total direct expenses (line 8,
(Form 1040), Profit or Loss From Farming, use the preced- column (a)) and enter the total on line 10.
ing worksheet to figure your deduction for the business use
of your home. The following instructions explain how to Lines 11 –13.
complete each part. Enter any other business expenses that are not attribu-
table to business use of the home on line 11. For employ-
Partners. See Partners, under Where To Deduct, earlier, ees, examples include travel, supplies, and business
before completing the worksheet. telephone expenses. Farmers generally should enter their
total farm expenses before deducting office in the home
If you file Schedule C (Form 1040), use Form
expenses. Do not enter the deduction for one-half of your
!
CAUTION
8829 to figure the deductions and attach the form
to your return.
self-employment tax. Add the amounts on lines 10 and 11,
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.
Part 1—Part of Your Home Used for You use it to determine whether you can deduct any of
your other expenses for business use of the home this
Business year. If you cannot, you will carry them over to next year.
If line 13 is zero or less, enter zero. Deduct your ex-
Lines 1–3. penses for deductible home mortgage interest, real estate
If you figure the percentage based on area, use lines 1 taxes, casualty losses, and any business expenses not
through 3 to figure the business-use percentage. Enter the attributable to use of your home on the appropriate lines of
percentage on line 3. the schedule(s) for Form 1040 as explained earlier under
You can use any other reasonable method that accu- Where To Deduct.
rately reflects your business-use percentage. If you oper-
ate a daycare facility and you meet the exception to the Lines 14 –22.
exclusive use test for part or all of the area you use for On lines 14 through 19, enter your otherwise nonde-
business, you must figure the business-use percentage for ductible expenses for the business use of your home.
that area as explained under Daycare Facility, earlier. If These include utilities, insurance, repairs, and mainte-
you use another method to figure your business percent- nance. If you rent, report the amount paid on line 16. If you
age, skip lines 1 and 2 and enter the percentage on line 3. file Schedule F, include any part of your home mortgage
interest that is more than the limits given in Publication
Part 2—Figure Your Allowable 936. (If you are an employee, do not enter any excess
home mortgage interest.) In column (a), enter the ex-
Deduction penses that benefit only the business part of your home
(direct expenses). In column (b), enter the expenses that
Line 4. benefit the entire home (indirect expenses). Multiply line
If you file Schedule F, enter your total gross income that 20, column (b) by the business-use percentage (line 3) and
is related to the business use of your home. This generally enter this amount on line 21.
would be the amount on line 11 of Schedule F. If you claimed a deduction for business use of your
If you are an employee, enter your total wages that are home on your 2005 tax return, enter the amount from line
related to the business use of your home. 39 of your 2005 worksheet on line 22.
Lines 5–7. Lines 25 –30.
Enter only the amounts that would be deductible On lines 25 through 30, figure your limit on deductions
whether or not you used your home for business. In other for excess casualty losses and depreciation.
words, enter only the amounts that would be allowable as On line 26, figure the excess casualty loss by multiply-
itemized deductions on Schedule A (Form 1040). ing the business use percentage from line 3 by the part of
Include only the part of a casualty loss that exceeds casualty losses that would not be allowable if you did not
$100 plus 10% of adjusted gross income. If your loss use your home for business (i.e., the casualty losses in
occurred after August 24, 2005, and was the result of excess of the amount on line 5).
Hurricane Katrina, you can include the entire casualty loss. On line 27, enter the depreciation deduction from Part 3.
See Publication 4492. If you claimed a deduction for business use of your
Under column (a), Direct Expenses, enter expenses home on your 2005 tax return, enter on line 28 the amount
that benefit only the business part of your home. Under from line 40 of your 2005 worksheet.
column (b), Indirect Expenses, enter expenses that benefit On lines 29 and 30, figure your allowable excess casu-
the entire home. You generally enter 100% of the expense. alty losses and depreciation.
However, if the business percentage of an indirect ex-
pense is different from the percentage on line 3, enter only Lines 31 –33.
the business part of the expense on the appropriate line in On line 31, total all allowable business use of the home
column (a), and leave that line in column (b) blank. deductions.
Publication 587 (2006) Page 25
On line 32, enter the total of the casualty losses shown for business. Do not adjust this amount for changes in
on lines 10 and 30. Enter the amount from line 32 on line 30 basis or value after that date. Allocate the basis between
of Form 4684, Section B. See the instructions for Form the land and the building on lines 35 and 36. You cannot
4684 for more information on completing that form. depreciate any part of the land. On line 38, enter the
Line 33 is the total (other than casualty losses) allowa- correct percentage for the current year from the tables in
ble as a deduction for business use of your home. If you file Publication 946. Multiply this percentage by the business
Schedule F (Form 1040), enter this amount on line 34, basis to get the depreciation deduction. Enter this figure on
Other expenses, of Schedule F and enter “Business Use of lines 39 and 27. Complete and attach Form 4562 to your
Home” on the line beside the entry. Do not add the specific return if this is the first year you used your home, or an
expenses into other line totals of Part II of Schedule F. improvement or addition to your home, in business.
If you are an employee or partner, see Where To De-
duct, earlier, for information on how to claim the deduction. Part 4—Carryover of Unallowed
Expenses to Next Year
Part 3—Depreciation of Your Home
Complete these lines to figure the expenses that must be
Figure your depreciation deduction on lines 34 through 39. carried forward to next year.
On line 34, enter the smaller of the adjusted basis or the
fair market value of the property at the time you first used it
Page 26 Publication 587 (2006)
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Publication 587 (2006) Page 27
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tax law applies to your individual tax return, or you’re the CD for $25 (plus a $5 handling fee). Price is subject to
more comfortable talking with someone in person, change.
visit your local Taxpayer Assistance Center where
CD for small businesses. Publication 3207,
you can spread out your records and talk with an
The Small Business Resource Guide CD for
IRS representative face-to-face. No appointment is
2006, is a must for every small business owner
necessary, but if you prefer, you can call your local
or any taxpayer about to start a business. This year’s CD
Center and leave a message requesting an appoint-
includes:
ment to resolve a tax account issue. A representa-
tive will call you back within 2 business days to • Helpful information, such as how to prepare a busi-
schedule an in-person appointment at your conve- ness plan, find financing for your business, and
nience. To find the number, go to much more.
www.irs.gov/localcontacts or look in the phone book • All the business tax forms, instructions, and publica-
under United States Government, Internal Revenue tions needed to successfully manage a business.
Service. • Tax law changes for 2006.
• Tax Map: an electronic research tool and finding aid.
Mail. You can send your order for forms, instruc- • Web links to various government agencies, business
tions, and publications to the address below. You associations, and IRS organizations.
should receive a response within 10 business • “Rate the Product” survey —your opportunity to sug-
days after your request is received. gest changes for future editions.
• A site map of the CD to help you navigate the pages
National Distribution Center of the CD with ease.
P.O. Box 8903 • An interactive “Teens in Biz” module that gives prac-
Bloomington, IL 61702-8903 tical tips for teens about starting their own business,
creating a business plan, and filing taxes.
CD for tax products. You can order Publication
1796, IRS Tax Products CD, and obtain:
An updated version of this CD is available each year in
early April. You can get a free copy by calling
• A CD that is released twice so you have the latest 1-800-829-3676 or by visiting www.irs.gov/smallbiz.
products. The first release ships in January and the
final release ships in March.
• Current-year forms, instructions, and publications.
Page 28 Publication 587 (2006)
Exhibit A. Family Daycare Provider Meal and Snack Log
Name of Provider _______________________________ TIN/SSN _____________
Week of _____________________________
Keep For Your Records
Child’s
Monday Tuesday Wednesday Thursday Friday Saturday Sunday Totals
Name
Hours of Hours of Hours of Hours of Hours of Hours of Hours of
attendance: attendance: attendance: attendance: attendance: attendance: attendance: Number
_____ _____ _____ _____ _____ _____ _____ served:
❏ Bkfst ❏ Bkfst ❏ Bkfst ❏ Bkfst ❏ Bkfst ❏ Bkfst ❏ Bkfst
❏ Snack ❏ Snack ❏ Snack ❏ Snack ❏ Snack ❏ Snack ❏ Snack Breakfasts:
❏ Lunch ❏ Lunch ❏ Lunch ❏ Lunch ❏ Lunch ❏ Lunch ❏ Lunch _____
❏ Snack ❏ Snack ❏ Snack ❏ Snack ❏ Snack ❏ Snack ❏ Snack Lunches:
❏ Dinner ❏ Dinner ❏ Dinner ❏ Dinner ❏ Dinner ❏ Dinner ❏ Dinner _____
❏ Snack ❏ Snack ❏ Snack ❏ Snack ❏ Snack ❏ Snack ❏ Snack Dinners:
______
Snacks:
______
Hours of Hours of Hours of Hours of Hours of Hours of Hours of
attendance: attendance: attendance: attendance: attendance: attendance: attendance: Number
_____ _____ _____ _____ _____ _____ _____ served:
❏ Bkfst ❏ Bkfst ❏ Bkfst ❏ Bkfst ❏ Bkfst ❏ Bkfst ❏ Bkfst
❏ Snack ❏ Snack ❏ Snack ❏ Snack ❏ Snack ❏ Snack ❏ Snack Breakfasts:
❏ Lunch ❏ Lunch ❏ Lunch ❏ Lunch ❏ Lunch ❏ Lunch ❏ Lunch _____
❏ Snack ❏ Snack ❏ Snack ❏ Snack ❏ Snack ❏ Snack ❏ Snack Lunches:
❏ Dinner ❏ Dinner ❏ Dinner ❏ Dinner ❏ Dinner ❏ Dinner ❏ Dinner _____
❏ Snack ❏ Snack ❏ Snack ❏ Snack ❏ Snack ❏ Snack ❏ Snack Dinners:
_____
Snacks:
_____
Hours of Hours of Hours of Hours of Hours of Hours of Hours of
attendance: attendance: attendance: attendance: attendance: attendance: attendance: Number
_____ _____ _____ _____ _____ _____ _____ served:
❏ Bkfst ❏ Bkfst ❏ Bkfst ❏ Bkfst ❏ Bkfst ❏ Bkfst ❏ Bkfst
❏ Snack ❏ Snack ❏ Snack ❏ Snack ❏ Snack ❏ Snack ❏ Snack Breakfasts:
❏ Lunch ❏ Lunch ❏ Lunch ❏ Lunch ❏ Lunch ❏ Lunch ❏ Lunch _____
❏ Snack ❏ Snack ❏ Snack ❏ Snack ❏ Snack ❏ Snack ❏ Snack Lunches:
❏ Dinner ❏ Dinner ❏ Dinner ❏ Dinner ❏ Dinner ❏ Dinner ❏ Dinner _____
❏ Snack ❏ Snack ❏ Snack ❏ Snack ❏ Snack ❏ Snack ❏ Snack Dinners:
_____
Snacks:
_____
Hours of Hours of Hours of Hours of Hours of Hours of Hours of
attendance: attendance: attendance: attendance: attendance: attendance: attendance: Number
_____ _____ _____ _____ _____ _____ _____ served:
❏ Bkfst ❏ Bkfst ❏ Bkfst ❏ Bkfst ❏ Bkfst ❏ Bkfst ❏ Bkfst
❏ Snack ❏ Snack ❏ Snack ❏ Snack ❏ Snack ❏ Snack ❏ Snack Breakfasts:
❏ Lunch ❏ Lunch ❏ Lunch ❏ Lunch ❏ Lunch ❏ Lunch ❏ Lunch _____
❏ Snack ❏ Snack ❏ Snack ❏ Snack ❏ Snack ❏ Snack ❏ Snack Lunches:
❏ Dinner ❏ Dinner ❏ Dinner ❏ Dinner ❏ Dinner ❏ Dinner ❏ Dinner _____
❏ Snack ❏ Snack ❏ Snack ❏ Snack ❏ Snack ❏ Snack ❏ Snack Dinners:
_____
Snacks:
_____
Publication 587 (2006) Page 29
To help us develop a more useful index, please let us know if you have ideas for index entries.
Index See “Comments and Suggestions” in the “Introduction” for the ways you can reach us.
A Deductions: Mortgage interest . . . . . . . . . . . . . . . . 8
Adjusted basis defined . . . . . . . . . . . 9 Figuring . . . . . . . . . . . . . . . . . . . . . . 6, 25 Real estate taxes . . . . . . . . . . . . . . . . 8
Administrative or management Limit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 Related to tax-exempt
activities . . . . . . . . . . . . . . . . . . . . . . . . 4 Qualifying for . . . . . . . . . . . . . . . . . . 2-6 income . . . . . . . . . . . . . . . . . . . . . . . . 8
Assistance (See Tax help) Unreimbursed partnership Rent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
expenses . . . . . . . . . . . . . . . . . . . . . 19 Repairs . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Attorneys . . . . . . . . . . . . . . . . . . . . . . . . . 6
Dentists . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 Security system . . . . . . . . . . . . . . . . . . 9
Depreciation: Telephone . . . . . . . . . . . . . . . . . . . . . . . 9
B 5-year property . . . . . . . . . . . . . . . . . 15 Types of . . . . . . . . . . . . . . . . . . . . . . . . . 8
Business expenses not for use of 7-year property . . . . . . . . . . . . . . . . . 15 Unrelated . . . . . . . . . . . . . . . . . . . . . . . . 8
home . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 Adjusted basis . . . . . . . . . . . . . . . . . . . 9 Utilities and services . . . . . . . . . . . . . 9
Business furniture and Fair market value . . . . . . . . . . . . . . . 10 Where to deduct . . . . . . . . . . . . . . . . 17
equipment . . . . . . . . . . . . . . . . . . . . . 14 Figuring depreciation for the
Business percentage . . . . . . . . . . . . . 6 current year . . . . . . . . . . . . . . . . . . 10 F
Business use of the home Furniture and equipment . . . . 14, 15 Fair market value . . . . . . . . . . . . . . . . 10
requirements (See Qualifying for a Home . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 Family Daycare Provider Meal and
deduction) Nonresidential real property . . . . 10 Snack Log, Exhibit A . . . . . . . . . . 29
Percentage table for 39-year Family daycare providers:
nonresidential real Meal and snack log (Exhibit
C property . . . . . . . . . . . . . . . . . . . . . . 10 A) . . . . . . . . . . . . . . . . . . . . . . . . 12, 28
Carryover of expenses . . . . . . . . . . . 7 Percentage table for 5- and 7-year Standard meal and snack
Casualty losses . . . . . . . . . . . . . . . . . . . 8 property . . . . . . . . . . . . . . . . . . . . . . 16 rates . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Child and Adult Food Care Permanent improvements . . . . . 10, 2006 rates (Table 3) . . . . . . . . . . 14
Program reimbursements . . . . . 12 11 Figuring the deduction:
Comments on publication . . . . . . . . 2 Depreciation of home . . . . . . . . . . . . 9 Business percentage . . . . . . . . . . . . 6
Computer: Basis adjustment . . . . . . . . . . . . . . . 14 Deduction limit . . . . . . . . . . . . . . . . . . . 7
Listed property . . . . . . . . . . . . . . . . . . 14 MACRS (Table 2) . . . . . . . . . . . . . . . 10 Part-year use . . . . . . . . . . . . . . . . . . . . 7
Property bought for business Form:
use . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 1040, Schedule C:
D Sale or exchange of home . . . . . . 14 Filled in, example . . . . . . . . . . 19-20
Daycare facilities: (See also Family Doctors . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 1040, Schedule F . . . . . . . . . . . . . . . 17
daycare providers) . . . . . . . . . . . . . . 12
Worksheet . . . . . . . . . . . . . . . . . . . . 20
Eligible children for standard meal 2106 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
and snack rates . . . . . . . . . . . . . . 12 E 4562 . . . . . . . . . . . . . . . . . . . . 15, 19, 20
Exceptions for regular use Employee use of home . . . . . . . . . . . 3 4684 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
requirement . . . . . . . . . . . . . . . . . . 11 Employees: 8829 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Family daycare . . . . . . . . . . . . . . . . . 12 Adequately accounting to Completed sample (Figure
Family daycare provider . . . . . . . . 12 employer . . . . . . . . . . . . . . . . . . . . . 18 B) . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Meals . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 Casualty losses . . . . . . . . . . . . . . . . . 18 W-2:
Regular use . . . . . . . . . . . . . . . . . . . . 11 Mortgage interest . . . . . . . . . . . . . . . 18 Reimbursed expenses . . . . . . . 18
Standard meal and snack Other expenses . . . . . . . . . . . . . . . . . 18 Free tax services . . . . . . . . . . . . . . . . 27
rates . . . . . . . . . . . . . . . . . . . . . . . . . . 12 Real estate taxes . . . . . . . . . . . . . . . 18 Furniture and equipment . . . . . . . . 14
Deducting expenses . . . . . . . . . . . . . . 8 Rental to employer . . . . . . . . . . . . . 18
Deduction limit . . . . . . . . . . . . . . . . . . . . 7 Worksheet to figure
Deduction requirements: deduction . . . . . . . . . . . . . . . . . . . . . 20 G
Employee use . . . . . . . . . . . . . . . . . . . 3 Example: GO Zone depreciation
Exceptions to exclusive use . . . . . 3 Form 4562 . . . . . . . . . . . . . . . . . . . . . . 19 allowance . . . . . . . . . . . . . . . . . . . . . . 16
Exclusive use . . . . . . . . . . . . . . . . . . . . 3 Form 8829 . . . . . . . . . . . . . . . . . . . . . . 20
More than one trade or Schedule C . . . . . . . . . . . . . . . . . 19, 20 H
business . . . . . . . . . . . . . . . . . . . . . . 5 Exclusive use . . . . . . . . . . . . . . . . . . . . . 3 Help (See Tax help)
Place to meet clients . . . . . . . . . . . . 6 Expenses: Home:
Principal place of business . . . . . . 3 Casualty losses . . . . . . . . . . . . . . . . . . 8 Business percentage . . . . . . . . . . . . 6
Regular use . . . . . . . . . . . . . . . . . . . . . 3 Deducting . . . . . . . . . . . . . . . . . . . . . . . . 8 Defined . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Separate structure . . . . . . . . . . . . . . . 6 Direct . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 Depreciation . . . . . . . . . . . . . . . . . . . . . 9
Storage of inventory or product Examples of . . . . . . . . . . . . . . . . . . . . . 8 Sale of . . . . . . . . . . . . . . . . . . . . . . . . . . 14
samples . . . . . . . . . . . . . . . . . . . . . . . 3 Indirect . . . . . . . . . . . . . . . . . . . . . . . . . . 8 Home expenses, Can you deduct
Trade or business use . . . . . . . . . . . 3 Insurance . . . . . . . . . . . . . . . . . . . . . . . . 9 business use of, Figure A . . . . . . 5
Page 30 Publication 587 (2006)
I Principal place of business . . . . . . 3 Self-employed persons:
Improvements (See Permanent Product samples . . . . . . . . . . . . . . . . . . 3 Deduction of expenses . . . . . . . . . 17
improvements) Property bought for business use: Separate structure . . . . . . . . . . . . . . . . 6
Insurance . . . . . . . . . . . . . . . . . . . . . . . . . 9 Depreciation . . . . . . . . . . . . . . . . . . . . 15 Small fleets . . . . . . . . . . . . . . . . . . . . . . . 1
Inventory, storage of . . . . . . . . . . . . . 3 Section 179 deduction . . . . . . . . . . 15 Standard meal and snack
Property converted to business rates . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
L use, Personal . . . . . . . . . . . . . . . . . . 16 Standard mileage rate . . . . . . . . . . . . 1
Liberty Zone depreciation Publications (See Tax help) . . . . . . . 2 Storage of inventory . . . . . . . . . . . . . . 3
allowance . . . . . . . . . . . . . . . . . . . . . . 15 Suggestions for publication . . . . . 2
Listed property: Q
Computers . . . . . . . . . . . . . . . . . . . . . . 14 Qualifying for a deduction . . . . . . . 2 T
Defined . . . . . . . . . . . . . . . . . . . . . . . . . 14 Tables and figures:
Employee requirements . . . . . . . . 15 R MACRS:
Reporting and recordkeeping Real estate taxes . . . . . . . . . . . . . . . . . 8 Depreciation of home (Table
requirements . . . . . . . . . . . . . . . . . 15 Recordkeeping . . . . . . . . . . . . . . . . . . . 16 2) . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Years following the year placed in Recordkeeping requirements: Percentage table for 5- and
service . . . . . . . . . . . . . . . . . . . . . . . 15 Business furniture and 7-year property (Table
equipment . . . . . . . . . . . . . . . . . . . . 15 4) . . . . . . . . . . . . . . . . . . . . . . . . . . 16
M Family daycare provider meal and Qualifying for deduction (Figure
MACRS percentage table: snack log (Exhibit A) . . . . . 12, 28 A) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
39-year nonresidential real Standard meal and snack rates
Regular use . . . . . . . . . . . . . . . . . . . . . . . 3
property . . . . . . . . . . . . . . . . . . . . . . 10 (Table 3) . . . . . . . . . . . . . . . . . . . . . 14
Reminders . . . . . . . . . . . . . . . . . . . . . . . . 1
5- and 7-year property . . . . . . . . . . 16 Types of expenses (Table 1) . . . . 8
Rent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Meals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 Tax help . . . . . . . . . . . . . . . . . . . . . . . . . . 27
Rental to employer . . . . . . . . . . . . . . 18
Meeting with patients, clients, or Taxpayer Advocate . . . . . . . . . . . . . . 27
Repairs . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
customers on premises . . . . . . . . 6 Telephone . . . . . . . . . . . . . . . . . . . . . . . . . 9
Reporting requirements:
More information (See Tax help) Trade or business use . . . . . . . . . . . . 3
Business furniture and
More than one place of TTY/TDD information . . . . . . . . . . . . 27
equipment . . . . . . . . . . . . . . . . . . . . 15
business . . . . . . . . . . . . . . . . . . . . . . . . 7 Types of expenses . . . . . . . . . . . . . . . 8
More than one trade or S
business . . . . . . . . . . . . . . . . . . . . . . . . 5
Sale or exchange of your home:
U
More-than-50%-use test . . . . . . . . . 14 Basis adjustment . . . . . . . . . . . . . . . 14 Utilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Mortgage interest . . . . . . . . . . . . . . . . . 8 Business use . . . . . . . . . . . . . . . . . . . 14
Depreciation taken . . . . . . . . . . . . . . 14 W
P Ownership and use tests . . . . . . . 14 Where to deduct expenses . . . . . . 17
Part-year use . . . . . . . . . . . . . . . . . . . . . . 7 Schedule C Example . . . . . . . . . . . . 19 Employees . . . . . . . . . . . . . . . . . . . . . 18
Partners (See Worksheet to figure Schedule F (See Worksheet to figure Self-employed . . . . . . . . . . . . . . . . . . 17
the deduction) the deduction) Worksheet to figure the deduction
Partnership expenses, Section 179: for business use of your
unreimbursed . . . . . . . . . . . . . . . . . 19 Furniture and equipment . . . . . . . . 14 home . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Permanent improvements . . . . . . 10, Listed property . . . . . . . . . . . . . . . . . . 14 Worksheet, instructions . . . . . . . . . 25
11 Personal property converted to
Personal property converted to business use . . . . . . . . . . . . . . . . . 16 ■
business use . . . . . . . . . . . . . . . . . . 16 Property bought for business
Place of business, more than use . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
one . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 Security system . . . . . . . . . . . . . . . . . . 9
Publication 587 (2006) Page 31