Pub 587 - Home Business Deductions

Deducting Expenses    

http://www.irs.gov/publications/p587/ar02.html#d0e1041                                                         

If you qualify to deduct expenses for the business use of your home, you must divide the expenses of operating your home between personal and business use. This section discusses the types of expenses you may have and gives examples and brief explanations of these expenses.

Types of Expenses                      

The part of a home operating expense you can use to figure your deduction depends on both of the following.    

• Whether the expense is      direct, indirect, or unrelated.
• The percentage of your home      used for business.                               

Table 1, next, describes the types of expenses you may have and the extent to which they are deductible.

Table 1. Types of Expenses                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                

                                                     

Expense	Description	Deductibility
Direct	Expenses only for                                             the business part                                             of your home.	Deductible   in full.*
	Examples:                                             Painting or repairs                                             only in the area                                             used for business.	Exception:                                             May be only partially                                             deductible in a daycare                                             facility. See Daycare                                                   Facility, later.
Indirect	Expenses for                                             keeping up                                             and running your                                             entire home.	Deductible based on the percentage of your home used for business.*
	Examples:                                             Insurance,                                             utilities, and                                             general repairs.
Unrelated	Expenses only for                                             the parts of your                                             home not used                                             for business.	Not   deductible.
	Examples:                                             Lawn care or painting                                             a room not used                                             for business.
*Subject to the deduction limit, discussed earlier.

                      

                      

                      

 

Form 8829 and the deduction worksheet (both illustrated near the end of this publication) have separate columns for direct and indirect expenses.

Expenses related to tax-exempt income.   Generally, you cannot deduct expenses that are related to tax-exempt allowances. However, if you receive a tax-exempt parsonage allowance or a tax-exempt military allowance, your expenses for mortgage interest and real estate taxes are deductible under the normal rules. No deduction is allowed for other expenses related to the tax-exempt allowance.    If your housing is provided free of charge and the value of the housing is tax exempt, you cannot deduct the rental value of any portion of the housing. 

Examples of Expenses               

Certain expenses are deductible whether or not you use your home for business. If you qualify to claim business use of the home expenses, use the business percentage of these expenses to figure your total business use of the home deduction.

These expenses include the following.

• Real estate taxes.           
• Deductible mortgage      interest.
• Casualty losses.           
• Other expenses are      deductible only if you use your home for business. You can use the      business percentage of these expenses to figure your total business use of      the home deduction.

These expenses generally include (but are not limited to) the following.

• Depreciation (covered under Depreciating Your Home, later).
• Insurance.
• Rent.
• Repairs.
• Security system.
• Utilities and services.

Real Estate Taxes                   

To figure the business part of your real estate taxes, multiply the real estate taxes paid by the percentage of your home used for business.

For more information on the deduction for real estate taxes, see Publication 530, Tax Information for First-Time Homeowners.

Deductible Mortgage Interest       

To figure the business part of your deductible mortgage interest, multiply this interest by the percentage of your home used for business. You can include interest on a second mortgage in this computation. If your total mortgage debt is more than $1,000,000 or your home equity debt is more than $100,000, your deduction may be limited. For more information on what interest is deductible, see Publication 936, Home Mortgage Interest Deduction.

Casualty Losses                                  

If you have a casualty loss on your home that you use for business, treat the casualty loss as a direct expense, an indirect expense, or an unrelated expense, depending on the property affected.

A direct expense is the loss on the portion of the property you use only in your business. Use the entire loss to figure the business use of the home deduction.
An indirect expense is the loss on property you use for both business and personal purposes. Use only the business portion to figure the deduction.

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.

If you are filing Schedule C (Form 1040), get Form 8829 and follow the instructions for casualty losses.

If you are an employee or a partner, or you file Schedule F (Form 1040), use the Worksheet To Figure the Deduction for Business Use of Your Home, near the end of this publication. You will also need to get Form 4684, Casualties and Thefts. For more information on casualty losses, see Publication 547, Casualties, Disasters, and Thefts.

Insurance                            

You can deduct the cost of insurance that covers the business part of your home. However, if your insurance premium gives you coverage for a period that extends past the end of your tax year, you can deduct only the business percentage of the part of the premium that gives you coverage for your tax year. You can deduct the business percentage of the part that applies to the following year in that year.

Rent                                        

If you rent the home you occupy and meet the requirements for business use of the home, you can deduct part of the rent you  pay.

To figure your deduction, multiply your rent payments by the percentage of your home used for business.

If you own your home, you cannot deduct the fair rental value of your home. However, see Depreciating Your Home, later.

Repairs                                      

The cost of repairs that relate to your business, including labor (other than your own labor), is a deductible expense.

For example, a furnace repair benefits the entire home.  If you use 10% of your home for business, you can deduct 10% of the cost of the furnace repair. 

Repairs keep your home in good working order over its useful life.  Examples of common repairs are patching walls and floors, painting, wallpapering, repairing roofs and gutters, and mending leaks.

However, repairs are sometimes treated as a permanent improvement. See Permanent improvements, later, under Depreciating Your Home.   

Security System                                

If you install a security system that protects all the doors and windows in your home, you can deduct the business part of the expenses you incur to maintain and monitor the system. You also can take a depreciation deduction for the part of the cost of the security system relating to the business use of your home.

Utilities and Services                                                           

Expenses for utilities and services, such as electricity, gas, trash removal, and cleaning services, are primarily personal expenses. However, if you use part of your home for business, you can deduct the business part of these expenses. Generally, the business percentage for utilities is the same as the percentage of your home used for business.

Telephone. 

The basic local telephone service charge, including taxes, for the first telephone line into your home is a nondeductible personal expense. However, charges for business long-distance phone calls on that line, as well as the cost of a second line into your home used exclusively for business, are deductible business expenses.

Do not include these expenses as a cost of using your home for business.

Deduct these charges separately on the appropriate form or schedule.

For example, if you file Schedule C (Form 1040), deduct these expenses on line 25, Utilities, (instead of line 30).