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Filing State Tax Returns

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Filing State Tax Returns

Filing state tax returns Publication 587 - Main Content Table of Contents Qualifying for a DeductionExclusive Use Regular Use Trade or Business Use Principal Place of Business Place To Meet Patients, Clients, or Customers Separate Structure Figuring the DeductionUsing Actual Expenses Using the Simplified Method Daycare Facility Standard meal and snack rates. Filing state tax returns Sale or Exchange of Your HomeGain on Sale Depreciation Basis Adjustment Reporting the Sale More Information Business Furniture and EquipmentListed Property Property Bought for Business Use Personal Property Converted to Business Use Recordkeeping Where To DeductSelf-Employed Persons Employees Partners How To Get Tax HelpLow Income Taxpayer Clinics Worksheet To Figure the Deduction for Business Use of Your HomeInstructions for the Worksheet Worksheets To Figure the Deduction for Business Use of Your Home (Simplified Method) Instructions for the Simplified Method Worksheet Instructions for the Daycare Facility Worksheet Instructions for the Area Adjustment Worksheet Qualifying for a Deduction Generally, you cannot deduct items related to your home, such as mortgage interest, real estate taxes, utilities, maintenance, rent, depreciation, or property insurance, as business expenses. Filing state tax returns However, you may be able to deduct expenses related to the business use of part of your home if you meet specific requirements. Filing state tax returns Even then, the deductible amount of these types of expenses may be limited. Filing state tax returns Use this section and Figure A, later, to decide if you can deduct expenses for the business use of your home. Filing state tax returns To qualify to deduct expenses for business use of your home, you must use part of your home: Exclusively and regularly as your principal place of business (defined later), Exclusively and regularly as a place where you meet or deal with patients, clients, or customers in the normal course of your trade or business, In the case of a separate structure which is not attached to your home, in connection with your trade or business, On a regular basis for certain storage use (see Storage of inventory or product samples , later), For rental use (see Publication 527), or As a daycare facility (see Daycare Facility , later). Filing state tax returns Additional tests for employee use. Filing state tax returns   If you are an employee and you use a part of your home for business, you may qualify for a deduction for its business use. Filing state tax returns You must meet the tests discussed earlier plus: Your business use must be for the convenience of your employer, and You must not rent any part of your home to your employer and use the rented portion to perform services as an employee for that employer. Filing state tax returns If the use of the home office is merely appropriate and helpful, you cannot deduct expenses for the business use of your home. Filing state tax returns Exclusive Use To qualify under the exclusive use test, you must use a specific area of your home only for your trade or business. Filing state tax returns The area used for business can be a room or other separately identifiable space. Filing state tax returns The space does not need to be marked off by a permanent partition. Filing state tax returns You do not meet the requirements of the exclusive use test if you use the area in question both for business and for personal purposes. Filing state tax returns Example. Filing state tax returns You are an attorney and use a den in your home to write legal briefs and prepare clients' tax returns. Filing state tax returns Your family also uses the den for recreation. Filing state tax returns The den is not used exclusively in your trade or business, so you cannot claim a deduction for the business use of the den. Filing state tax returns Exceptions to Exclusive Use You do not have to meet the exclusive use test if either of the following applies. Filing state tax returns You use part of your home for the storage of inventory or product samples (discussed next). Filing state tax returns You use part of your home as a daycare facility, discussed later under Daycare Facility . Filing state tax returns Note. Filing state tax returns With the exception of these two uses, any portion of the home used for business purposes must meet the exclusive use test. Filing state tax returns Storage of inventory or product samples. Filing state tax returns    If you use part of your home for storage of inventory or product samples, you can deduct expenses for the business use of your home without meeting the exclusive use test. Filing state tax returns However, you must meet all the following tests. Filing state tax returns You sell products at wholesale or retail as your trade or business. Filing state tax returns You keep the inventory or product samples in your home for use in your trade or business. Filing state tax returns Your home is the only fixed location of your trade or business. Filing state tax returns You use the storage space on a regular basis. Filing state tax returns The space you use is a separately identifiable space suitable for storage. Filing state tax returns Example. Filing state tax returns Your home is the only fixed location of your business of selling mechanics' tools at retail. Filing state tax returns You regularly use half of your basement for storage of inventory and product samples. Filing state tax returns You sometimes use the area for personal purposes. Filing state tax returns The expenses for the storage space are deductible even though you do not use this part of your basement exclusively for business. Filing state tax returns Regular Use To qualify under the regular use test, you must use a specific area of your home for business on a regular basis. Filing state tax returns Incidental or occasional business use is not regular use. Filing state tax returns You must consider all facts and circumstances in determining whether your use is on a regular basis. Filing state tax returns Trade or Business Use To qualify under the trade-or-business-use test, you must use part of your home in connection with a trade or business. Filing state tax returns If you use your home for a profit-seeking activity that is not a trade or business, you cannot take a deduction for its business use. Filing state tax returns Example. Filing state tax returns You use part of your home exclusively and regularly to read financial periodicals and reports, clip bond coupons, and carry out similar activities related to your own investments. Filing state tax returns You do not make investments as a broker or dealer. Filing state tax returns So, your activities are not part of a trade or business and you cannot take a deduction for the business use of your home. Filing state tax returns Principal Place of Business You can have more than one business location, including your home, for a single trade or business. Filing state tax returns To qualify to deduct the expenses for the business use of your home under the principal place of business test, your home must be your principal place of business for that trade or business. Filing state tax returns To determine whether your home is your principal place of business, you must consider: The relative importance of the activities performed at each place where you conduct business, and The amount of time spent at each place where you conduct business. Filing state tax returns Your home office will qualify as your principal place of business if you meet the following requirements. Filing state tax returns You use it exclusively and regularly for administrative or management activities of your trade or business. Filing state tax returns You have no other fixed location where you conduct substantial administrative or management activities of your trade or business. Filing state tax returns If, after considering your business locations, your home cannot be identified as your principal place of business, you cannot deduct home office expenses. Filing state tax returns However, see the later discussions under Place To Meet Patients, Clients, or Customers and Separate Structure for other ways to qualify to deduct home office expenses. Filing state tax returns Administrative or management activities. Filing state tax returns   There are many activities that are administrative or managerial in nature. Filing state tax returns The following are a few examples. Filing state tax returns Billing customers, clients, or patients. Filing state tax returns Keeping books and records. Filing state tax returns Ordering supplies. Filing state tax returns Setting up appointments. Filing state tax returns Forwarding orders or writing reports. Filing state tax returns Administrative or management activities performed at other locations. Filing state tax returns   The following activities performed by you or others will not disqualify your home office from being your principal place of business. Filing state tax returns You have others conduct your administrative or management activities at locations other than your home. Filing state tax returns (For example, another company does your billing from its place of business. Filing state tax returns ) You conduct administrative or management activities at places that are not fixed locations of your business, such as in a car or a hotel room. Filing state tax returns You occasionally conduct minimal administrative or management activities at a fixed location outside your home. Filing state tax returns You conduct substantial nonadministrative or nonmanagement business activities at a fixed location outside your home. Filing state tax returns (For example, you meet with or provide services to customers, clients, or patients at a fixed location of the business outside your home. Filing state tax returns ) You have suitable space to conduct administrative or management activities outside your home, but choose to use your home office for those activities instead. Filing state tax returns Please click here for the text description of the image. Filing state tax returns Can you deduct business use of the home expenses? Example 1. Filing state tax returns John is a self-employed plumber. Filing state tax returns Most of John's time is spent at customers' homes and offices installing and repairing plumbing. Filing state tax returns He has a small office in his home that he uses exclusively and regularly for the administrative or management activities of his business, such as phoning customers, ordering supplies, and keeping his books. Filing state tax returns John writes up estimates and records of work completed at his customers' premises. Filing state tax returns He does not conduct any substantial administrative or management activities at any fixed location other than his home office. Filing state tax returns John does not do his own billing. Filing state tax returns He uses a local bookkeeping service to bill his customers. Filing state tax returns John's home office qualifies as his principal place of business for deducting expenses for its use. Filing state tax returns He uses the home office for the administrative or managerial activities of his plumbing business and he has no other fixed location where he conducts these administrative or managerial activities. Filing state tax returns His choice to have his billing done by another company does not disqualify his home office from being his principal place of business. Filing state tax returns He meets all the qualifications, including principal place of business, so he can deduct expenses (subject to certain limitations, explained later) for the business use of his home. Filing state tax returns Example 2. Filing state tax returns Pamela is a self-employed sales representative for several different product lines. Filing state tax returns She has an office in her home that she uses exclusively and regularly to set up appointments and write up orders and other reports for the companies whose products she sells. Filing state tax returns She occasionally writes up orders and sets up appointments from her hotel room when she is away on business overnight. Filing state tax returns Pamela's business is selling products to customers at various locations throughout her territory. Filing state tax returns To make these sales, she regularly visits customers to explain the available products and take orders. Filing state tax returns Pamela's home office qualifies as her principal place of business for deducting expenses for its use. Filing state tax returns She conducts administrative or management activities there and she has no other fixed location where she conducts substantial administrative or management activities. Filing state tax returns The fact that she conducts some administrative or management activities in her hotel room (not a fixed location) does not disqualify her home office from being her principal place of business. Filing state tax returns She meets all the qualifications, including principal place of business, so she can deduct expenses (subject to certain limitations, explained later) for the business use of her home. Filing state tax returns Example 3. Filing state tax returns Paul is a self-employed anesthesiologist. Filing state tax returns He spends the majority of his time administering anesthesia and postoperative care in three local hospitals. Filing state tax returns One of the hospitals provides him with a small shared office where he could conduct administrative or management activities. Filing state tax returns Paul very rarely uses the office the hospital provides. Filing state tax returns He uses a room in his home that he has converted to an office. Filing state tax returns He uses this room exclusively and regularly to conduct all the following activities. Filing state tax returns Contacting patients, surgeons, and hospitals regarding scheduling. Filing state tax returns Preparing for treatments and presentations. Filing state tax returns Maintaining billing records and patient logs. Filing state tax returns Satisfying continuing medical education requirements. Filing state tax returns Reading medical journals and books. Filing state tax returns Paul's home office qualifies as his principal place of business for deducting expenses for its use. Filing state tax returns He conducts administrative or management activities for his business as an anesthesiologist there and he has no other fixed location where he conducts substantial administrative or management activities for this business. Filing state tax returns His choice to use his home office instead of the one provided by the hospital does not disqualify his home office from being his principal place of business. Filing state tax returns His performance of substantial nonadministrative or nonmanagement activities at fixed locations outside his home also does not disqualify his home office from being his principal place of business. Filing state tax returns He meets all the qualifications, including principal place of business, so he can deduct expenses (subject to certain limitations, explained later) for the business use of his home. Filing state tax returns Example 4. Filing state tax returns Kathleen is employed as a teacher. Filing state tax returns She is required to teach and meet with students at the school and to grade papers and tests. Filing state tax returns The school provides her with a small office where she can work on her lesson plans, grade papers and tests, and meet with parents and students. Filing state tax returns The school does not require her to work at home. Filing state tax returns Kathleen prefers to use the office she has set up in her home and does not use the one provided by the school. Filing state tax returns She uses this home office exclusively and regularly for the administrative duties of her teaching job. Filing state tax returns Kathleen must meet the convenience-of-the-employer test, even if her home qualifies as her principal place of business for deducting expenses for its use. Filing state tax returns Her employer provides her with an office and does not require her to work at home, so she does not meet the convenience-of-the-employer test and cannot claim a deduction for the business use of her home. Filing state tax returns More Than One Trade or Business The same home office can be the principal place of business for two or more separate business activities. Filing state tax returns Whether your home office is the principal place of business for more than one business activity must be determined separately for each of your trade or business activities. Filing state tax returns You must use the home office exclusively and regularly for one or more of the following purposes. Filing state tax returns As the principal place of business for one or more of your trades or businesses. Filing state tax returns As a place to meet or deal with patients, clients, or customers in the normal course of one or more of your trades or businesses. Filing state tax returns If your home office is a separate structure, in connection with one or more of your trades or businesses. Filing state tax returns You can use your home office for more than one business activity, but you cannot use it for any nonbusiness (i. Filing state tax returns e. Filing state tax returns , personal) activities. Filing state tax returns If you are an employee, any use of the home office in connection with your employment must be for the convenience of your employer. Filing state tax returns See Rental to employer , later, if you rent part of your home to your employer. Filing state tax returns Example. Filing state tax returns Tracy White is employed as a teacher. Filing state tax returns Her principal place of work is the school, which provides her office space to do her school work. Filing state tax returns She also has a mail order jewelry business. Filing state tax returns All her work in the jewelry business is done in her home office and the office is used exclusively for that business. Filing state tax returns If she meets all the other tests, she can deduct expenses for the business use of her home for the jewelry business. Filing state tax returns If Tracy also uses the office for work related to her teaching, she must meet the exclusive use test for both businesses to qualify for the deduction. Filing state tax returns As an employee, Tracy must also meet the convenience-of-the-employer test to qualify for the deduction. Filing state tax returns She does not meet this test for her work as a teacher, so she cannot claim a deduction for the business use of her home for either activity. Filing state tax returns Place To Meet Patients, Clients, or Customers If you meet or deal with patients, clients, or customers in your home in the normal course of your business, even though you also carry on business at another location, you can deduct your expenses for the part of your home used exclusively and regularly for business if you meet both the following tests. Filing state tax returns You physically meet with patients, clients, or customers on your premises. Filing state tax returns Their use of your home is substantial and integral to the conduct of your business. Filing state tax returns Doctors, dentists, attorneys, and other professionals who maintain offices in their homes generally will meet this requirement. Filing state tax returns Using your home for occasional meetings and telephone calls will not qualify you to deduct expenses for the business use of your home. Filing state tax returns The part of your home you use exclusively and regularly to meet patients, clients, or customers does not have to be your principal place of business. Filing state tax returns Example. Filing state tax returns June Quill, a self-employed attorney, works 3 days a week in her city office. Filing state tax returns She works 2 days a week in her home office used only for business. Filing state tax returns She regularly meets clients there. Filing state tax returns Her home office qualifies for a business deduction because she meets clients there in the normal course of her business. Filing state tax returns Separate Structure You can deduct expenses for a separate free-standing structure, such as a studio, workshop, garage, or barn, if you use it exclusively and regularly for your business. Filing state tax returns The structure does not have to be your principal place of business or a place where you meet patients, clients, or customers. Filing state tax returns Example. Filing state tax returns John Berry operates a floral shop in town. Filing state tax returns He grows the plants for his shop in a greenhouse behind his home. Filing state tax returns He uses the greenhouse exclusively and regularly in his business, so he can deduct the expenses for its use, subject to certain limitations, explained later. Filing state tax returns Figuring the Deduction After you determine that you meet the tests under Qualifying for a Deduction , you can begin to figure how much you can deduct. Filing state tax returns When figuring the amount you can deduct for the business use of your home, you will use either your actual expenses or a simplified method. Filing state tax returns Electing to use the simplified method. Filing state tax returns   The simplified method is an alternative to the calculation, allocation, and substantiation of actual expenses. Filing state tax returns You choose whether or not to figure your deduction using the simplified method each taxable year. Filing state tax returns See Using the Simplified Method , later. Filing state tax returns Rental to employer. Filing state tax returns   If you rent part of your home to your employer and you use the rented part in performing services for your employer as an employee, your deduction for the business use of your home is limited. Filing state tax returns You can deduct mortgage interest, qualified mortgage insurance premiums, real estate taxes, and personal casualty losses for the rented part, subject to any limitations. Filing state tax returns However, you cannot deduct otherwise allowable trade or business expenses, business casualty losses, or depreciation related to the use of your home (or use the simplified method as an alternative to deducting these actual expenses) in performing services for your employer. Filing state tax returns Using Actual Expenses If you do not or cannot elect to use the simplified method for a home, you will figure your deduction for that home using your actual expenses. Filing state tax returns You will also need to figure the percentage of your home used for business and the limit on the deduction. Filing state tax returns If you are an employee or a partner, or you use your home in your farming business and you file Schedule F (Form 1040), you can use the Worksheet To Figure the Deduction for Business Use of Your Home, near the end of this publication, to help you figure your deduction. Filing state tax returns If you use your home in a trade or business and you file Schedule C (Form 1040), you will use Form 8829 to figure your deduction. Filing state tax returns Part-year use. Filing state tax returns   You cannot deduct expenses for the business use of your home incurred during any part of the year you did not use your home for business purposes. Filing state tax returns For example, if you begin using part of your home for business on July 1, and you meet all the tests from that date until the end of the year, consider only your expenses for the last half of the year in figuring your allowable deduction. Filing state tax returns Expenses related to tax-exempt income. Filing state tax returns   Generally, you cannot deduct expenses that are related to tax-exempt allowances. Filing state tax returns 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. Filing state tax returns No deduction is allowed for other expenses related to the tax-exempt allowance. Filing state tax returns   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. Filing state tax returns Actual Expenses You must divide the expenses of operating your home between personal and business use. Filing state tax returns The part of a home operating expense you can use to figure your deduction depends on both of the following. Filing state tax returns Whether the expense is direct, indirect, or unrelated. Filing state tax returns The percentage of your home used for business. Filing state tax returns Table 1, next, describes the types of expenses you may have and the extent to which they are deductible. Filing state tax returns Table 1. Filing state tax returns Types of Expenses  Expense  Description  Deductibility Direct Expenses only for  the business part  of your home. Filing state tax returns Deductible in full. Filing state tax returns *   Examples:  Painting or repairs  only in the area  used for business. Filing state tax returns Exception: May be only partially  deductible in a daycare facility. Filing state tax returns See Daycare Facility , later. Filing state tax returns Indirect Expenses for  keeping up and running your  entire home. Filing state tax returns Deductible based on the percentage of your home used for business. Filing state tax returns *   Examples:  Insurance, utilities, and  general repairs. Filing state tax returns   Unrelated Expenses only for  the parts of your  home not used  for business. Filing state tax returns Not deductible. Filing state tax returns   Examples:  Lawn care or painting  a room not used  for business. Filing state tax returns   *Subject to the deduction limit, discussed later. Filing state tax returns Form 8829 and the Worksheet To Figure the Deduction for Business Use of Your Home have separate columns for direct and indirect expenses. Filing state tax returns Certain expenses are deductible whether or not you use your home for business. Filing state tax returns If you qualify to deduct business use of the home expenses, use the business percentage of these expenses to figure your total business use of the home deduction. Filing state tax returns These expenses include the following. Filing state tax returns Real estate taxes. Filing state tax returns Qualified mortgage insurance premiums. Filing state tax returns Deductible mortgage interest. Filing state tax returns Casualty losses. Filing state tax returns Other expenses are deductible only if you use your home for business. Filing state tax returns You can use the business percentage of these expenses to figure your total business use of the home deduction. Filing state tax returns These expenses generally include (but are not limited to) the following. Filing state tax returns Depreciation (covered under Depreciating Your Home , later). Filing state tax returns Insurance. Filing state tax returns Rent paid for the use of property you do not own but use in your trade or business. Filing state tax returns Repairs. Filing state tax returns Security system. Filing state tax returns Utilities and services. Filing state tax returns Real estate taxes. Filing state tax returns   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. Filing state tax returns   For more information on the deduction for real estate taxes, see Publication 530, Tax Information for Homeowners. Filing state tax returns Deductible mortgage interest. Filing state tax returns   To figure the business part of your deductible mortgage interest, multiply this interest by the percentage of your home used for business. Filing state tax returns You can include interest on a second mortgage in this computation. Filing state tax returns 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. Filing state tax returns For more information on what interest is deductible, see Publication 936, Home Mortgage Interest Deduction. Filing state tax returns Qualified mortgage insurance premiums. Filing state tax returns   To figure the business part of your qualified mortgage insurance premiums, multiply the premiums by the percentage of your home used for business. Filing state tax returns You can include premiums for insurance on a second mortgage in this computation. Filing state tax returns If your adjusted gross income is more than $100,000 ($50,000 if your filing status is married filing separately), your deduction may be limited. Filing state tax returns For more information, see Publication 936, and Line 13 in the Instructions for Schedule A (Form 1040). Filing state tax returns Casualty losses. Filing state tax returns    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. Filing state tax returns A direct expense is the loss on the portion of the property you use only in your business. Filing state tax returns Use the entire loss to figure the business use of the home deduction. Filing state tax returns An indirect expense is the loss on property you use for both business and personal purposes. Filing state tax returns Use only the business portion to figure the deduction. Filing state tax returns An unrelated expense is the loss on property you do not use in your business. Filing state tax returns Do not use any of the loss to figure the deduction. Filing state tax returns Example. Filing state tax returns You meet the rules to take a deduction for an office in your home that is 10% of the total area of your house. Filing state tax returns A storm damages your roof. Filing state tax returns This is an indirect expense as the roof is part of the whole house and is considered to be used both for business and personal purposes. Filing state tax returns You would complete Form 4684, Casualties and Thefts, to report your loss. Filing state tax returns You complete both section A (Personal Use Property) and section B (Business and Income-Producing Property) as your home is used both for business and personal purposes. Filing state tax returns Since you use 90% of your home for personal purposes, use 90% of the cost or adjusted basis of your home, insurance or other reimbursement, and fair market value, both before and after the storm, to figure the amounts to enter on lines 2, 3, 5, and 6 of Form 4684. Filing state tax returns Since you use 10% of your home for business purposes, use 10% of the cost or adjusted basis of your home, insurance or other reimbursement, and fair market value, both before and after the storm, to figure the amounts to enter on lines 20, 21, 23, and 24 of Form 4684. Filing state tax returns Forms and worksheets to use. Filing state tax returns   If you are filing Schedule C (Form 1040), get Form 8829 and follow the instructions for casualty losses. Filing state tax returns 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. Filing state tax returns You will also need to get Form 4684. Filing state tax returns More information. Filing state tax returns   For more information on casualty losses, see Publication 547, Casualties, Disasters, and Thefts. Filing state tax returns Insurance. Filing state tax returns   You can deduct the cost of insurance that covers the business part of your home. Filing state tax returns 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. Filing state tax returns You can deduct the business percentage of the part that applies to the following year in that year. Filing state tax returns Rent. Filing state tax returns   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. Filing state tax returns To figure your deduction, multiply your rent payments by the percentage of your home used for business. Filing state tax returns   If you own your home, you cannot deduct the fair rental value of your home. Filing state tax returns However, see Depreciating Your Home , later. Filing state tax returns Repairs. Filing state tax returns   The cost of repairs that relate to your business, including labor (other than your own labor), is a deductible expense. Filing state tax returns For example, a furnace repair benefits the entire home. Filing state tax returns If you use 10% of your home for business, you can deduct 10% of the cost of the furnace repair. Filing state tax returns   Repairs keep your home in good working order over its useful life. Filing state tax returns Examples of common repairs are patching walls and floors, painting, wallpapering, repairing roofs and gutters, and mending leaks. Filing state tax returns However, repairs are sometimes treated as a permanent improvement and are not deductible. Filing state tax returns See Permanent improvements , later, under Depreciating Your Home. Filing state tax returns Security system. Filing state tax returns   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. Filing state tax returns 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. Filing state tax returns Utilities and services. Filing state tax returns   Expenses for utilities and services, such as electricity, gas, trash removal, and cleaning services, are primarily personal expenses. Filing state tax returns However, if you use part of your home for business, you can deduct the business part of these expenses. Filing state tax returns Generally, the business percentage for utilities is the same as the percentage of your home used for business. Filing state tax returns Telephone. Filing state tax returns   The basic local telephone service charge, including taxes, for the first telephone line into your home (i. Filing state tax returns e. Filing state tax returns , landline) is a nondeductible personal expense. Filing state tax returns 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. Filing state tax returns Do not include these expenses as a cost of using your home for business. Filing state tax returns Deduct these charges separately on the appropriate form or schedule. Filing state tax returns For example, if you file Schedule C (Form 1040), deduct these expenses on line 25, Utilities (instead of line 30, Expenses for business use of your home). Filing state tax returns Depreciating Your Home If you own your home and qualify to deduct expenses for its business use, you can claim a deduction for depreciation. Filing state tax returns Depreciation is an allowance for the wear and tear on the part of your home used for business. Filing state tax returns You cannot depreciate the cost or value of the land. Filing state tax returns You recover its cost when you sell or otherwise dispose of the property. Filing state tax returns Before you figure your depreciation deduction, you need to know the following information. Filing state tax returns The month and year you started using your home for business. Filing state tax returns The adjusted basis and fair market value of your home (excluding land) at the time you began using it for business. Filing state tax returns The cost of any improvements before and after you began using the property for business. Filing state tax returns The percentage of your home used for business. Filing state tax returns See Business Percentage , later. Filing state tax returns Adjusted basis defined. Filing state tax returns   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. Filing state tax returns For a discussion of adjusted basis, see Publication 551. Filing state tax returns Permanent improvements. Filing state tax returns   A permanent improvement increases the value of property, adds to its life, or gives it a new or different use. Filing state tax returns Examples of improvements are replacing electric wiring or plumbing, adding a new roof or addition, paneling, or remodeling. Filing state tax returns    You must carefully distinguish between repairs and improvements. Filing state tax returns See Repairs , earlier, under Actual Expenses. Filing state tax returns You also must keep accurate records of these expenses. Filing state tax returns These records will help you decide whether an expense is a deductible or a capital (added to the basis) expense. Filing state tax returns However, if you make repairs as part of an extensive remodeling or restoration of your home, the entire job is an improvement. Filing state tax returns Example. Filing state tax returns You buy an older home and fix up two rooms as a beauty salon. Filing state tax returns You patch the plaster on the ceilings and walls, paint, repair the floor, install an outside door, and install new wiring, plumbing, and other equipment. Filing state tax returns Normally, the patching, painting, and floor work are repairs and the other expenses are permanent improvements. Filing state tax returns However, because the work gives your property a new use, the entire remodeling job is a permanent improvement and its cost is added to the basis of the property. Filing state tax returns You cannot deduct any portion of it as a repair expense. Filing state tax returns Adjusting for depreciation deducted in earlier years. Filing state tax returns   Decrease the basis of your property by the depreciation you deducted, or could have deducted, on your tax returns under the method of depreciation you properly selected. Filing state tax returns If you deducted less depreciation than you could have under the method you selected, decrease the basis by the amount you could have deducted under that method. Filing state tax returns If you did not deduct any depreciation, decrease the basis by the amount you could have deducted. Filing state tax returns   If you deducted more depreciation than you should have, decrease your basis by the amount you should have deducted, plus the part of the excess depreciation you deducted that actually decreased your tax liability for any year. Filing state tax returns   If you deducted the incorrect amount of depreciation, see Publication 946. Filing state tax returns Fair market value defined. Filing state tax returns   The fair market value of your home is the price at which the property would change hands between a buyer and a seller, neither having to buy or sell, and both having reasonable knowledge of all necessary facts. Filing state tax returns Sales of similar property, on or about the date you begin using your home for business, may be helpful in determining the property's fair market value. Filing state tax returns Figuring the depreciation deduction for the current year. Filing state tax returns   If you began using your home for business before 2013, continue to use the same depreciation method you used in past tax years. Filing state tax returns   If you began using your home for business for the first time in 2013, depreciate the business part as nonresidential real property under the modified accelerated cost recovery system (MACRS). Filing state tax returns Under MACRS, nonresidential real property is depreciated using the straight line method over 39 years. Filing state tax returns For more information on MACRS and other methods of depreciation, see Publication 946. Filing state tax returns   To figure the depreciation deduction, you must first figure the part of the cost of your home that can be depreciated (depreciable basis). Filing state tax returns The depreciable basis is figured by multiplying the percentage of your home used for business by the smaller of the following. Filing state tax returns The adjusted basis of your home (excluding land) on the date you began using your home for business. Filing state tax returns The fair market value of your home (excluding land) on the date you began using your home for business. Filing state tax returns Depreciation table. Filing state tax returns   If 2013 was the first year you used your home for business, you can figure your 2013 depreciation for the business part of your home by using the appropriate percentage from the following table. Filing state tax returns Table 2. Filing state tax returns MACRS Percentage Table for 39-Year Nonresidential Real Property Month First Used for Business Percentage To Use 1 2. Filing state tax returns 461% 2 2. Filing state tax returns 247% 3 2. Filing state tax returns 033% 4 1. Filing state tax returns 819% 5 1. Filing state tax returns 605% 6 1. Filing state tax returns 391% 7 1. Filing state tax returns 177% 8 0. Filing state tax returns 963% 9 0. Filing state tax returns 749% 10 0. Filing state tax returns 535% 11 0. Filing state tax returns 321% 12 0. Filing state tax returns 107%   Multiply the depreciable basis of the business part of your home by the percentage from the table for the first month you use your home for business. Filing state tax returns See Publication 946 for the percentages for the remaining tax years of the recovery period. Filing state tax returns Example. Filing state tax returns In May, George Miller began to use one room in his home exclusively and regularly to meet clients. Filing state tax returns This room is 8% of the square footage of his home. Filing state tax returns He bought the home in 2003 for $125,000. Filing state tax returns He determined from his property tax records that his adjusted basis in the house (exclusive of land) is $115,000. Filing state tax returns In May, the house had a fair market value of $165,000. Filing state tax returns He multiplies his adjusted basis of $115,000 (which is less than the fair market value) by 8%. Filing state tax returns The result is $9,200, his depreciable basis for the business part of the house. Filing state tax returns George files his return based on the calendar year. Filing state tax returns May is the 5th month of his tax year. Filing state tax returns He multiplies his depreciable basis of $9,200 by 1. Filing state tax returns 605% (. Filing state tax returns 01605), the percentage from the table for the 5th month. Filing state tax returns His depreciation deduction is $147. Filing state tax returns 66. Filing state tax returns Depreciating permanent improvements. Filing state tax returns   Add the costs of permanent improvements made before you began using your home for business to the basis of your property. Filing state tax returns Depreciate these costs as part of the cost of your home as explained earlier. Filing state tax returns The costs of improvements made after you begin using your home for business (that affect the business part of your home, such as a new roof) are depreciated separately. Filing state tax returns Multiply the cost of the improvement by the business-use percentage and depreciate the result over the recovery period that would apply to your home if you began using it for business at the same time as the improvement. Filing state tax returns For improvements made this year, the recovery period is 39 years. Filing state tax returns For the percentage to use for the first year, see Table 2, earlier. Filing state tax returns For more information on recovery periods, see Publication 946. Filing state tax returns Business Percentage To find the business percentage, compare the size of the part of your home that you use for business to your whole house. Filing state tax returns Use the resulting percentage to figure the business part of the expenses for operating your entire home. Filing state tax returns You can use any reasonable method to determine the business percentage. Filing state tax returns The following are two commonly used methods for figuring the percentage. Filing state tax returns Divide the area (length multiplied by the width) used for business by the total area of your home. Filing state tax returns If the rooms in your home are all about the same size, you can divide the number of rooms used for business by the total number of rooms in your home. Filing state tax returns Example 1. Filing state tax returns Your office is 240 square feet (12 feet × 20 feet). Filing state tax returns Your home is 1,200 square feet. Filing state tax returns Your office is 20% (240 ÷ 1,200) of the total area of your home. Filing state tax returns Your business percentage is 20%. Filing state tax returns Example 2. Filing state tax returns You use one room in your home for business. Filing state tax returns Your home has 10 rooms, all about equal size. Filing state tax returns Your office is 10% (1 ÷ 10) of the total area of your home. Filing state tax returns Your business percentage is 10%. Filing state tax returns Use lines 1-7 of Form 8829, or lines 1-3 on the Worksheet To Figure the Deduction for Business Use of Your Home (near the end of this publication) to figure your business percentage. Filing state tax returns Deduction Limit If your gross income from the business use of your home equals or exceeds your total business expenses (including depreciation), you can deduct all your business expenses related to the use of your home. Filing state tax returns If your gross income from the business use of your home is less than your total business expenses, your deduction for certain expenses for the business use of your home is limited. Filing state tax returns Your deduction of otherwise nondeductible expenses, such as insurance, utilities, and depreciation of your home (with depreciation of your home taken last), that are allocable to the business, is limited to the gross income from the business use of your home minus the sum of the following. Filing state tax returns The business part of expenses you could deduct even if you did not use your home for business (such as mortgage interest, real estate taxes, and casualty and theft losses that are allowable as itemized deductions on Schedule A (Form 1040)). Filing state tax returns These expenses are discussed in detail under Actual Expenses , earlier. Filing state tax returns The business expenses that relate to the business activity in the home (for example, business phone, supplies, and depreciation on equipment), but not to the use of the home itself. Filing state tax returns If you are self-employed, do not include in (2) above your deduction for one-half of your self-employment tax. Filing state tax returns Carryover of unallowed expenses. Filing state tax returns   If your deductions are greater than the current year's limit, you can carry over the excess to the next year in which you use actual expenses. Filing state tax returns They are subject to the deduction limit for that year, whether or not you live in the same home during that year. Filing state tax returns Figuring the deduction limit and carryover. Filing state tax returns   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. Filing state tax returns If you file Schedule C (Form 1040), figure your deduction limit and carryover on Form 8829. Filing state tax returns Example. Filing state tax returns You meet the requirements for deducting expenses for the business use of your home. Filing state tax returns You use 20% of your home for business. Filing state tax returns In 2013, your business expenses and the expenses for the business use of your home are deducted from your gross income in the following order. Filing state tax returns    Gross income from business $6,000 Minus:   Deductible mortgage interest and real estate taxes (20%) 3,000 Business expenses not related to the use of your home (100%) (business phone, supplies, and depreciation on equipment) 2,000 Deduction limit $1,000 Minus other expenses allocable to business use of home:   Maintenance, insurance, and utilities (20%) 800 Depreciation allowed (20% = $1,600 allowable, but subject to balance of deduction limit) 200 Other expenses up to the deduction limit $1,000 Depreciation carryover to 2014 ($1,600 − $200) (subject to deduction limit in 2014) $1,400   You can deduct all of the business part of your deductible mortgage interest and real estate taxes ($3,000). Filing state tax returns You also can deduct all of your business expenses not related to the use of your home ($2,000). Filing state tax returns Additionally, you can deduct all of the business part of your expenses for maintenance, insurance, and utilities, because the total ($800) is less than the $1,000 deduction limit. Filing state tax returns Your deduction for depreciation for the business use of your home is limited to $200 ($1,000 minus $800) because of the deduction limit. Filing state tax returns You can carry over the $1,400 balance and add it to your depreciation for 2014, subject to your deduction limit in 2014. Filing state tax returns More than one place of business. Filing state tax returns   If part of the gross income from your trade or business is from the business use of part of your home and part is from a place other than your home, you must determine the part of your gross income from the business use of your home before you figure the deduction limit. Filing state tax returns In making this determination, consider the time you spend at each location, the business investment in each location, and any other relevant facts and circumstances. Filing state tax returns If your home office qualifies as your principal place of business, you can deduct your daily transportation costs between your home and another work location in the same trade or business. Filing state tax returns For more information on transportation costs, see Publication 463, Travel, Entertainment, Gift, and Car Expenses. Filing state tax returns Using the Simplified Method The simplified method is an alternative to the calculation, allocation, and substantiation of actual expenses. Filing state tax returns In most cases, you will figure your deduction by multiplying $5, the prescribed rate, by the area of your home used for a qualified business use. Filing state tax returns The area you use to figure your deduction is limited to 300 square feet. Filing state tax returns See Simplified Amount , later, for information about figuring the amount of the deduction. Filing state tax returns For more information about the simplified method, see Revenue Procedure 2013-13, 2013-06 I. Filing state tax returns R. Filing state tax returns B. Filing state tax returns 478, available at www. Filing state tax returns irs. Filing state tax returns gov/irb/2013-06_IRB/ar09. Filing state tax returns html. Filing state tax returns Actual expenses and depreciation of your home. Filing state tax returns   If you elect to use the simplified method, you cannot deduct any actual expenses for the business except for business expenses that are not related to the use of the home. Filing state tax returns You also cannot deduct any depreciation (including any additional first-year depreciation) or section 179 expense for the portion of the home that is used for a qualified business use. Filing state tax returns The depreciation deduction allowable for that portion of the home is deemed to be zero for a year you use the simplified method. Filing state tax returns If you figure your deduction for business use of the home using actual expenses in a subsequent year, you will have to use the appropriate optional depreciation table for MACRS to figure your depreciation. Filing state tax returns More information. Filing state tax returns   For more information about claiming depreciation in a subsequent year, see Revenue Procedure 2013-13, 2013-06 I. Filing state tax returns R. Filing state tax returns B. Filing state tax returns 478, available at www. Filing state tax returns irs. Filing state tax returns gov/irb/2013-06_IRB/ar09. Filing state tax returns html. Filing state tax returns See Publication 946 for the optional depreciation tables Although you cannot deduct any depreciation or section 179 expense for the portion of your home used for a qualified business use, you may still claim depreciation or the section 179 expense deduction on other assets used in the business (for example, furniture and equipment). Filing state tax returns Expenses deductible without regard to business use. Filing state tax returns   When using the simplified method, treat as personal expenses those business expenses related to the use of the home that are deductible without regard to whether there is a qualified business use of the home. Filing state tax returns These expenses include mortgage interest, real estate taxes, and casualty losses, subject to any limitations. Filing state tax returns See Where To Deduct , later. Filing state tax returns If you also rent part of your home, you must still allocate these expenses between rental use and personal use (for this purpose, personal use includes business use reported using the simplified method). Filing state tax returns No deduction of carryover of actual expenses. Filing state tax returns   If you used actual expenses to figure your deduction for business use of the home in a prior year and your deduction was limited, you cannot deduct the disallowed amount carried over from the prior year during a year you figure your deduction using the simplified method. Filing state tax returns Instead, you will continue to carry over the disallowed amount to the next year that you use actual expenses to figure your deduction. Filing state tax returns Electing the Simplified Method You choose whether or not to figure your deduction using the simplified method each taxable year. Filing state tax returns Make the election for a home by using the simplified method to figure the deduction for the qualified business use of that home on a timely filed, original federal income tax return. Filing state tax returns An election for a taxable year, once made, is irrevocable. Filing state tax returns A change from using the simplified method in one year to actual expenses in a succeeding taxable year, or vice-versa, is not a change in method of accounting and does not require the consent of the Commissioner. Filing state tax returns Shared use. Filing state tax returns   If you share your home with someone else who also uses the home in a business that qualifies for this deduction, each of you make your own election. Filing state tax returns More than one qualified business use. Filing state tax returns   If you conduct more than one business that qualifies for this deduction in your home, your election to use the simplified method applies to all your qualified business uses of that home. Filing state tax returns More than one home. Filing state tax returns   If you used more than one home during the year (for example, you moved during the year), you can elect to use the simplified method for only one of the homes. Filing state tax returns You must figure the deduction for any other home using actual expenses. Filing state tax returns Simplified Amount Your deduction for the qualified business use of a home is the sum of each amount you figure for a separate qualified business use of your home. Filing state tax returns To figure your deduction for the business use of a home using the simplified method, you will need to know the following information for each qualified business use of the home. Filing state tax returns The allowable area of your home used in conducting the business. Filing state tax returns If you did not conduct the business for the entire year in the home or the area changed during the year, you will need to know the allowable area you used and the number of days you conducted the business for each month. Filing state tax returns The gross income from the business use of your home. Filing state tax returns The amount of the business expenses that are not related to the use of your home. Filing state tax returns If the qualified business use is for a daycare facility that uses space in your home on a regular (but not exclusive) basis, you will also need to know the percentage of time that part of your home is used for daycare. Filing state tax returns To figure the amount you can deduct for qualified business use of your home using the simplified method, follow these 3 steps. Filing state tax returns Multiply the allowable area by $5 (or less than $5 if the qualified business use is for a daycare that uses space in your home on a regular, but not exclusive, basis). Filing state tax returns See Allowable area and Space used regularly for daycare , later. Filing state tax returns Subtract the expenses from the business that are not related to the use of the home from the gross income related to the business use of the home. Filing state tax returns If these expenses are greater than the gross income from the business use of the home, then you cannot take a deduction for this business use of the home. Filing state tax returns See Gross income limitation , later. Filing state tax returns Take the smaller of the amounts from (1) and (2). Filing state tax returns This is the amount you can deduct for this qualified business use of your home using the simplified method. Filing state tax returns If you are an employee or a partner, or you use your home in your farming business and file Schedule F (Form 1040), you can use the Simplified Method Worksheet, near the end of this publication, to help you figure your deduction. Filing state tax returns If you use your home in a trade or business and you file Schedule C (Form 1040), you will use the Simplified Method Worksheet in your Instructions for Schedule C to figure your deduction. Filing state tax returns Allowable area. Filing state tax returns   In most cases, the allowable area is the smaller of the actual area (in square feet) of your home used in conducting the business and 300 square feet. Filing state tax returns Your allowable area may be smaller if you conducted the business as a qualified joint venture with your spouse, the area used by the business was shared with another qualified business use, you used the home for the business for only part of the year, or the area used by the business changed during the year. Filing state tax returns You can use the Area Adjustment Worksheet (for simplified method), near the end of this publication, to help you figure your allowable area for a qualified business use. Filing state tax returns Area used by a qualified joint venture. Filing state tax returns   If the qualified business use of the home is also a qualified joint venture, you and your spouse will figure the deduction for the business use separately. Filing state tax returns Split the actual area used in conducting business between you and your spouse in the same manner you split your other tax attributes. Filing state tax returns Then, each spouse will figure the allowable area separately. Filing state tax returns For more information about qualified joint ventures, see Qualified Joint Venture in the Instructions for Schedule C. Filing state tax returns Shared use. Filing state tax returns   If you share your home with someone else who uses the home to conduct business that also qualifies for this deduction, you may not include the same square feet to figure your deduction as the other person. Filing state tax returns You must allocate the shared space between you and the other person in a reasonable manner. Filing state tax returns Example. Filing state tax returns Kristin and Lindsey are roommates. Filing state tax returns Kristin uses 300 square feet of their home for a qualified business use. Filing state tax returns Lindsey uses 200 square feet of their home for a separate qualified business use. Filing state tax returns The qualified business uses share 100 square feet. Filing state tax returns In addition to the portion that they do not share, Kristin and Lindsey can both claim 50 of the 100 square feet or divide the 100 square feet between them in any reasonable manner. Filing state tax returns If divided evenly, Kristin could claim 250 square feet using the simplified method and Lindsey could claim 150 square feet. Filing state tax returns More than one qualified business use. Filing state tax returns   If you conduct more than one business qualifying for the deduction, you are limited to a maximum of 300 square feet for all of the businesses. Filing state tax returns Allocate the actual square footage used (up to the maximum of 300 square feet) among your qualified business uses in a reasonable manner. Filing state tax returns However, do not allocate more square feet to a qualified business use than you actually use for that business. Filing state tax returns Rental use. Filing state tax returns   The simplified method does not apply to rental use. Filing state tax returns A rental use that qualifies for the deduction must be figured using actual expenses. Filing state tax returns If the rental use and a qualified business use share the same area, you will have to allocate the actual area used between the two uses. Filing state tax returns You cannot use the same area to figure a deduction for the qualified business use as you are using to figure the deduction for the rental use. Filing state tax returns Part-year use or area changes. Filing state tax returns   If your qualified business use was for a portion of the taxable year (for example, a seasonal business or a business that begins during the taxable year) or you changed the square footage of your qualified business use, your deduction is limited to the average monthly allowable square footage. Filing state tax returns You calculate the average monthly allowable square footage by adding the amount of allowable square feet you used in each month and dividing the sum by 12. Filing state tax returns When determining the average monthly allowable square footage, you cannot take more than 300 square feet into account for any one month. Filing state tax returns Additionally, if your qualified business use was less than 15 days in a month, you must use -0- for that month. Filing state tax returns Example 1. Filing state tax returns Andy files his federal income tax return on a calendar year basis. Filing state tax returns On July 20, he began using 420 square feet of his home for a qualified business use. Filing state tax returns He continued to use the 420 square feet until the end of the year. Filing state tax returns His average monthly allowable square footage is 125 square feet, which is figured using 300 square feet for each month August through December divided by the number of months in the taxable year ((0 + 0 + 0 + 0 + 0 + 0 + 0 + 300 + 300 + 300 + 300 + 300)/12). Filing state tax returns Example 2. Filing state tax returns Amy files her federal income tax return on a calendar year basis. Filing state tax returns On April 20, she began using 100 square feet of her home for a qualified business use. Filing state tax returns On August 5, she expanded the area of her qualified use to 330 square feet. Filing state tax returns Amy continued to use the 330 square feet until the end of the year. Filing state tax returns Her average monthly allowable square footage is 150 square feet, which is figured using 100 square feet for May through July and 300 square feet for August through December divided by the number of months in the taxable year ((0 + 0 + 0 + 0 + 100 + 100 +100 + 300 + 300 + 300 + 300 + 300)/12). Filing state tax returns Gross income limitation. Filing state tax returns   Your deduction for business use of the home is limited to an amount equal to the gross income derived from the qualified business use of the home reduced by the business deductions that are unrelated to the use of your home. Filing state tax returns If the business deductions that are unrelated to the use of your home are greater than the gross income derived from the qualified business use of your home, then you cannot take a deduction for this qualified business use of your home. Filing state tax returns Business expenses not related to use of the home. Filing state tax returns   These expenses relate to the business activity in the home, but not to the use of the home itself. Filing state tax returns You can still deduct business expenses that are unrelated to the use of the home. Filing state tax returns See Where To Deduct , later. Filing state tax returns Examples of business expenses that are unrelated to the use of the home are advertising, wages, supplies, dues, and depreciation for equipment. Filing state tax returns Space used regularly for daycare. Filing state tax returns   If you do not use the area of your home exclusively for daycare, you must reduce the prescribed rate (maximum $5 per square foot) before figuring your deduction. Filing state tax returns The reduced rate will equal the prescribed rate times a fraction. Filing state tax returns The numerator of the fraction is the number of hours that the space was used during the year for daycare and the denominator is the total number of hours during the year that the space was available for all uses. Filing state tax returns You can use the Daycare Facility Worksheet (for simplified method), near the end of this publication, to help you figure the reduced rate. Filing state tax returns    If you used at least 300 square feet for daycare regularly and exclusively during the year, then you do not need to reduce the prescribed rate or complete the Daycare Facility Worksheet. Filing state tax returns Daycare Facility If you use space in your home on a regular basis for providing daycare, you may be able to claim a deduction for that part of your home even if you use the same space for nonbusiness purposes. Filing state tax returns To qualify for this exception to the exclusive use rule, you must meet both of the following requirements. Filing state tax returns You must be in the trade or business of providing daycare for children, persons age 65 or older, or persons who are physically or mentally unable to care for themselves. Filing state tax returns You must have applied for, been granted, or be exempt from having, a license, certification, registration, or approval as a daycare center or as a family or group daycare home under state law. Filing state tax returns You do not meet this requirement if your application was rejected or your license or other authorization was revoked. Filing state tax returns Figuring the deduction. Filing state tax returns   If you elect to use the simplified method for your home, figure your deduction as described earlier in Using the Simplified Method under Figuring the Deduction. Filing state tax returns    If you are figuring your deduction using actual expenses and you regularly use part of your home for daycare, figure what part is used for daycare, as explained in Business Percentage , earlier, under Figuring the Deduction. Filing state tax returns If you also use that part exclusively for daycare, deduct all the allocable expenses, subject to the deduction limit, as explained earlier. Filing state tax returns   If the use of part of your home as a daycare facility is regular, but not exclusive, you must figure the percentage of time that part of your home is used for daycare. Filing state tax returns A room that is available for use throughout each business day and that you regularly use in your business is considered to be used for daycare throughout each business day. Filing state tax returns You do not have to keep records to show the specific hours the area was used for business. Filing state tax returns You can use the area occasionally for personal reasons. Filing state tax returns However, a room you use only occasionally for business does not qualify for the deduction. Filing state tax returns To find the percentage of time you actually use your home for business, compare the total time used for business to the total time that part of your home can be used for all purposes. Filing state tax returns You can compare the hours of business use in a week with the number of hours in a week (168). Filing state tax returns Or you can compare the hours of business use for the year with the number of hours in the year (8,760 in 2013). Filing state tax returns If you started or stopped using your home for daycare in 2013, you must prorate the number of hours based on the number of days the home was available for daycare. Filing state tax returns Example 1. Filing state tax returns Mary Lake used her basement to operate a daycare business for children. Filing state tax returns She figures the business percentage of the basement as follows. Filing state tax returns Square footage of the basement Square footage of her home = 1,600 3,200 = 50%           She used the basement for daycare an average of 12 hours a day, 5 days a week, for 50 weeks a year. Filing state tax returns During the other 12 hours a day, the family could use the basement. Filing state tax returns She figures the percentage of time the basement was used for daycare as follows. Filing state tax returns Number of hours used for daycare (12 x 5 x 50) Total number of hours in the year (24 x 365) = 3,000 8,760 = 34. Filing state tax returns 25%           Mary can deduct 34. Filing state tax returns 25% of any direct expenses for the basement. Filing state tax returns However, because her indirect expenses are for the entire house, she can deduct only 17. Filing state tax returns 13% of the indirect expenses. Filing state tax returns She figures the percentage for her indirect expenses as follows. Filing state tax returns Business percentage of the basement 50% Multiplied by: Percentage of time used for daycare × 34. Filing state tax returns 25% Percentage for indirect expenses 17. Filing state tax returns 13% Mary completes Form 8829, Part I, figuring the percentage of her home used for business, including the percentage of time the basement was used. Filing state tax returns In Part II, Mary figures her deductible expenses. Filing state tax returns She uses the following information to complete Part II. Filing state tax returns Gross income from her daycare business $50,000 Expenses not related to the business use of the home $25,000 Tentative profit $25,000 Rent $8,400 Utilities $850 Painting the basement $500 Mary enters her tentative profit, $25,000, on line 8. Filing state tax returns (This figure is the same as the amount on line 29 of her Schedule C (Form 1040). Filing state tax returns ) The expenses she paid for rent and utilities relate to her entire home. Filing state tax returns Therefore, she enters the amount paid for rent on line 18, column (b), and the amount paid for utilities on line 20, column (b). Filing state tax returns She shows the total of these expenses on line 22, column (b). Filing state tax returns For line 23, she multiplies the amount on line 22, column (b) by the percentage on line 7 and enters the result, $1,585. Filing state tax returns Mary paid $500 to have the basement painted. Filing state tax returns The painting is a direct expense. Filing state tax returns However, because she did not use the basement exclusively for daycare, she must multiply $500 by the percentage of time the basement was used for daycare (34. Filing state tax returns 25% – line 6). Filing state tax returns She enters $171 (34. Filing state tax returns 25% × $500) on line 19, column (a). Filing state tax returns She adds line 22, column (a), and line 23 and enters $1,756 ($171 + $1,585) on line 25. Filing state tax returns This is less than her deduction limit (line 15), so she can deduct the entire amount. Filing state tax returns She follows the instructions to complete the rest of Part II and enters $1,756 on lines 33 and 35. Filing state tax returns She then carries the $1,756 to line 30 of her Schedule C (Form 1040). Filing state tax returns Example 2. Filing state tax returns Assume the same facts as in Example 1 except that Mary also has another room that was available each business day for children to take naps in. Filing state tax returns Although she did not keep a record of the number of hours the room was actually used for naps, it was used for part of each business day. Filing state tax returns Since the room was available for business use during regular operating hours each business day and was used regularly in the business, it is considered used for daycare throughout each business day. Filing state tax returns The basement and room are 60% of the total area of her home. Filing state tax returns In figuring her expenses, 34. Filing state tax returns 25% of any direct expenses for the basement and room are deductible. Filing state tax returns In addition, 20. Filing state tax returns 55% (34. Filing state tax returns 25% × 60%) of her indirect expenses are deductible. Filing state tax returns Example 3. Filing state tax returns Assume the same facts as in Example 1 except that Mary stopped using her home for a daycare facility on June 24, 2013. Filing state tax returns She used the basement for daycare an average of 12 hours a day, 5 days a week, but for only 25 weeks of the year. Filing state tax returns During the other 12 hours a day, the family could still use the basement. Filing state tax returns She figures the percentage of time the basement was used for business as follows. Filing state tax returns Number of hours used for daycare (12 x 5 x 25) Total number of hours during period used (24 x 175) = 1,500 4,200 = 35. Filing state tax returns 71%           Mary can deduct 35. Filing state tax returns 71% of any direct expenses for the basement. Filing state tax returns However, because her indirect expenses are for the entire house, she can deduct only 17. Filing state tax returns 86% of the indirect expenses. Filing state tax returns She figures the percentage for her indirect expenses as follows. Filing state tax returns Business percentage of the basement 50% Multiplied by: Percentage of time used for daycare × 35. Filing state tax returns 71% Percentage for indirect expenses 17. Filing state tax returns 86% Meals. Filing state tax returns   If you provide food for your daycare recipients, do not include the expense as a cost of using your home for business. Filing state tax returns Claim it as a separate deduction on your Schedule C (Form 1040). Filing state tax returns You can never deduct the cost of food consumed by you or your family. Filing state tax returns You can deduct as a business expense 100% of the actual cost of food consumed by your daycare recipients (see Standard meal and snack rates , later, for an optional method for eligible children) and generally only 50% of the cost of food consumed by your employees. Filing state tax returns However, you can deduct 100% of the cost of food consumed by your employees if its value can be excluded from their wages as a de minimis fringe benefit. Filing state tax returns For more information on meals that meet these requirements, see Meals in chapter 2 of Publication 15-B, Employer's Tax Guide to Fringe Benefits. Filing state tax returns   If you deduct the actual cost of food for your daycare business, keep a separate record (with receipts) of your family's food costs. Filing state tax returns   Reimbursements you receive from a sponsor under the Child and Adult Care Food Program of the Department of Agriculture are taxable only to the extent they exceed your expenses for food for eligible children. Filing state tax returns If your reimbursements are more than your expenses for food, show the difference as income in Part I of Schedule C (Form 1040). Filing state tax returns If your food expenses are greater than the reimbursements, show the difference as an expense in Part V of Schedule C (Form 1040). Filing state tax returns Do not include payments or expenses for your own children if they are eligible for the program. Filing state tax returns Follow this procedure even if you receive a Form 1099-MISC, Miscellaneous Income, reporting a payment from the sponsor. Filing state tax returns Standard meal and snack rates. Filing state tax returns   If you qualify as a family daycare provider, you can use the standard meal and snack rates, instead of actual costs, to compute the deductible cost of meals and snacks provided to eligible children. Filing state tax returns For these purposes: A family daycare provider is a person engaged in the business of providing family daycare. Filing state tax returns Family daycare is childcare provided to eligible children in the home of the family daycare provider. Filing state tax returns The care must be non-medical, not involve a transfer of legal custody, and generally last less than 24 hours each day. Filing state tax returns Eligible children are minor children receiving family daycare in the home of the family daycare provider. Filing state tax returns Eligible children do not include children who are full-time or part-time residents in the home where the childcare is provided or children whose parents or guardians are residents of the same home. Filing state tax returns Eligible children do not include children who receive daycare services for personal reasons of the provider. Filing state tax returns For example, if a provider provides daycare services for a relative as a favor to that relative, that child is not an eligible child. Filing state tax returns   You can compute the deductible cost of each meal and snack you actually purchased and served to an eligible child during the time period you provided family daycare using the standard meal and snack rates shown in Table 3, later. Filing state tax returns You can use the standard meal and snack rates for a maximum of one breakfast, one lunch, one dinner, and three snacks per eligible child per day. Filing state tax returns If you receive reimbursement for a particular meal or snack, you can deduct only the portion of the applicable standard meal or snack rate that is more than the amount of the reimbursement. Filing state tax returns   You can use either the standard meal and snack rates or actual costs to calculate the deductible cost of food provided to eligible children in the family daycare for any particular tax year. Filing state tax returns If you choose to use the standard meal and snack rates for a particular tax year, you must use the rates for all your deductible food costs for eligible children during that tax year. Filing state tax returns However, if you use the standard meal and snack rates in any tax year, you can use actual costs to compute the deductible cost of food in any other tax year. Filing state tax returns   If you use the standard meal and snack rates, you must maintain records to substantiate the computation of the total amount deducted for the cost of food provided to eligible children. Filing state tax returns The records kept should include the name of each child, dates and hours of attendance in the daycare, and the type and quantity of meals and snacks served. Filing state tax returns This information can be recorded in a log similar to the one shown in Exhibit A, near the end of this publication. Filing state tax returns   The standard meal and snack rates include beverages, but do not include non-food supplies used for food preparation, service, or storage, such as containers, paper products, or utensils. Filing state tax returns These expenses can be claimed as a separate deduction on your Schedule C (Form 1040). Filing state tax returns     Table 3. Filing state tax returns Standard Meal and Snack Rates1 Location of Family Daycare Provider Breakfast Lunch Dinner Snack States other than Alaska an
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The Filing State Tax Returns

Filing state tax returns 10. Filing state tax returns   Self-Employment (SE) Tax Table of Contents Who Must Pay SE Tax?Special Rules and Exceptions Figuring Earnings Subject to SE Tax Farm Optional Method Using Both Optional Methods Reporting Self-Employment Tax The SE tax rules apply no matter how old you are and even if you are already receiving social security and Medicare benefits. Filing state tax returns Who Must Pay SE Tax? Generally, you must pay SE tax and file Schedule SE (Form 1040) if your net earnings from self-employment were $400 or more. Filing state tax returns Use Schedule SE to figure net earnings from self-employment. Filing state tax returns Sole proprietor or independent contractor. Filing state tax returns   If you are self-employed as a sole proprietor or independent contractor, you generally use Schedule C or C-EZ (Form 1040) to figure your earnings subject to SE tax. Filing state tax returns SE tax rate. Filing state tax returns    For 2013, the SE tax rate on net earnings is 15. Filing state tax returns 3% (12. Filing state tax returns 4% social security tax plus 2. Filing state tax returns 9% Medicare tax). Filing state tax returns Maximum earnings subject to self-employment tax. Filing state tax returns    Only the first $113,700 of your combined wages, tips, and net earnings in 2013 is subject to any combination of the 12. Filing state tax returns 4% social security part of SE tax, social security tax, or railroad retirement (tier 1) tax. Filing state tax returns   All of your combined wages, tips, and net earnings in 2013 are subject to any combination of the 2. Filing state tax returns 9% Medicare part of SE tax, social security tax, or railroad retirement (tier 1) tax. Filing state tax returns   If your wages and tips are subject to either social security or railroad retirement (tier 1) tax, or both, and total at least $113,700, do not pay the 12. Filing state tax returns 4% social security part of the SE tax on any of your net earnings. Filing state tax returns However, you must pay the 2. Filing state tax returns 9% Medicare part of the SE tax on all your net earnings. Filing state tax returns Special Rules and Exceptions Aliens. Filing state tax returns   Generally, resident aliens must pay self-employment tax under the same rules that apply to U. Filing state tax returns S. Filing state tax returns citizens. Filing state tax returns Nonresident aliens are not subject to SE tax unless an international social security agreement in effect determines that they are covered under the U. Filing state tax returns S. Filing state tax returns social security system. Filing state tax returns However, residents of the Virgin Islands, Puerto Rico, Guam, the Commonwealth of the Northern Mariana Islands, or American Samoa are subject to self-employment tax, as they are considered U. Filing state tax returns S. Filing state tax returns residents for self-employment tax purposes. Filing state tax returns For more information on aliens, see Publication 519, U. Filing state tax returns S. Filing state tax returns Tax Guide for Aliens. Filing state tax returns Child employed by parent. Filing state tax returns   You are not subject to SE tax if you are under age 18 and you are working for your father or mother. Filing state tax returns Church employee. Filing state tax returns    If you work for a church or a qualified church-controlled organization (other than as a minister or member of a religious order) that elected an exemption from social security and Medicare taxes, you are subject to SE tax if you receive $108. Filing state tax returns 28 or more in wages from the church or organization. Filing state tax returns For more information, see Publication 517, Social Security and Other Information for Members of the Clergy and Religious Workers. Filing state tax returns Fishing crew member. Filing state tax returns   If you are a member of the crew on a boat that catches fish or other water life, your earnings are subject to SE tax if all the following conditions apply. Filing state tax returns You do not get any pay for the work except your share of the catch or a share of the proceeds from the sale of the catch, unless the pay meets all the following conditions. Filing state tax returns The pay is not more than $100 per trip. Filing state tax returns The pay is received only if there is a minimum catch. Filing state tax returns The pay is solely for additional duties (such as mate, engineer, or cook) for which additional cash pay is traditional in the fishing industry. Filing state tax returns You get a share of the catch or a share of the proceeds from the sale of the catch. Filing state tax returns Your share depends on the amount of the catch. Filing state tax returns The boat's operating crew normally numbers fewer than 10 individuals. Filing state tax returns (An operating crew is considered as normally made up of fewer than 10 if the average size of the crew on trips made during the last four calendar quarters is fewer than 10. Filing state tax returns ) Notary public. Filing state tax returns   Fees you receive for services you perform as a notary public are reported on Schedule C or C-EZ but are not subject to self-employment tax (see the Instructions for Schedule SE (Form 1040)). Filing state tax returns State or local government employee. Filing state tax returns   You are subject to SE tax if you are an employee of a state or local government, are paid solely on a fee basis, and your services are not covered under a federal-state social security agreement. Filing state tax returns Foreign government or international organization employee. Filing state tax returns   You are subject to SE tax if both the following conditions are true. Filing state tax returns You are a U. Filing state tax returns S. Filing state tax returns citizen employed in the United States, Puerto Rico, Guam, American Samoa, the Commonwealth of the Northern Mariana Islands, or the Virgin Islands by: A foreign government, A wholly-owned agency of a foreign government, or An international organization. Filing state tax returns Your employer is not required to withhold social security and Medicare taxes from your wages. Filing state tax returns U. Filing state tax returns S. Filing state tax returns citizen or resident alien residing abroad. Filing state tax returns    If you are a self-employed U. Filing state tax returns S. Filing state tax returns citizen or resident alien living outside the United States, in most cases you must pay SE tax. Filing state tax returns Do not reduce your foreign earnings from self-employment by your foreign earned income exclusion. Filing state tax returns Exception. Filing state tax returns    The United States has social security agreements with many countries to eliminate double taxation under two social security systems. Filing state tax returns Under these agreements, you generally must only pay social security and Medicare taxes to the country in which you live. Filing state tax returns The country to which you must pay the tax will issue a certificate which serves as proof of exemption from social security tax in the other country. Filing state tax returns   For more information, see the Instructions for Schedule SE (Form 1040). Filing state tax returns More Than One Business If you have earnings subject to SE tax from more than one trade, business, or profession, you must combine the net profit (or loss) from each to determine your total earnings subject to SE tax. Filing state tax returns A loss from one business reduces your profit from another business. Filing state tax returns Community Property Income If any of the income from a trade or business, other than a partnership, is community property income under state law, it is included in the earnings subject to SE tax of the spouse carrying on the trade or business. Filing state tax returns Gain or Loss Do not include in earnings subject to SE tax a gain or loss from the disposition of property that is neither stock in trade nor held primarily for sale to customers. Filing state tax returns It does not matter whether the disposition is a sale, exchange, or an involuntary conversion. Filing state tax returns Lost Income Payments If you are self-employed and reduce or stop your business activities, any payment you receive from insurance or other sources for the lost business income is included in earnings subject to SE tax. Filing state tax returns If you are not working when you receive the payment, it still relates to your business and is included in earnings subject to SE tax, even though your business is temporarily inactive. Filing state tax returns Figuring Earnings Subject to SE Tax Methods for Figuring Net Earnings There are three ways to figure your net earnings from self-employment. Filing state tax returns The regular method. Filing state tax returns The nonfarm optional method. Filing state tax returns The farm optional method. Filing state tax returns You must use the regular method unless you are eligible to use one or both of the optional methods. Filing state tax returns Why use an optional method?    You may want to use the optional methods (discussed later) when you have a loss or a small net profit and any one of the following applies. Filing state tax returns You want to receive credit for social security benefit coverage. Filing state tax returns You incurred child or dependent care expenses for which you could claim a credit. Filing state tax returns (An optional method may increase your earned income, which could increase your credit. Filing state tax returns ) You are entitled to the earned income credit. Filing state tax returns (An optional method may increase your earned income, which could increase your credit. Filing state tax returns ) You are entitled to the additional child tax credit. Filing state tax returns (An optional method may increase your earned income, which could increase your credit. Filing state tax returns ) Effects of using an optional method. Filing state tax returns   Using an optional method could increase your SE tax. Filing state tax returns Paying more SE tax could result in your getting higher benefits when you retire. Filing state tax returns   If you use either or both optional methods, you must figure and pay the SE tax due under these methods even if you would have had a smaller tax or no tax using the regular method. Filing state tax returns   The optional methods may be used only to figure your SE tax. Filing state tax returns To figure your income tax, include your actual earnings in gross income, regardless of which method you use to determine SE tax. Filing state tax returns Regular Method Multiply your total earnings subject to SE tax by 92. Filing state tax returns 35% (. Filing state tax returns 9235) to get your net earnings under the regular method. Filing state tax returns See Short Schedule SE, line 4, or Long Schedule SE, line 4a. Filing state tax returns Net earnings figured using the regular method are also called actual net earnings. Filing state tax returns Nonfarm Optional Method Use the nonfarm optional method only for earnings that do not come from farming. Filing state tax returns You may use this method if you meet all the following tests. Filing state tax returns You are self-employed on a regular basis. Filing state tax returns This means that your actual net earnings from self-employment were $400 or more in at least 2 of the 3 tax years before the one for which you use this method. Filing state tax returns The net earnings can be from either farm or nonfarm earnings or both. Filing state tax returns You have used this method less than 5 years. Filing state tax returns (There is a 5-year lifetime limit. Filing state tax returns ) The years do not have to be one after another. Filing state tax returns Your net nonfarm profits were: Less than $5,024, and Less than 72. Filing state tax returns 189% of your gross nonfarm income. Filing state tax returns Net nonfarm profits. Filing state tax returns   Net nonfarm profit generally is the total of the amounts from: Line 31, Schedule C (Form 1040), Line 3, Schedule C-EZ (Form 1040), Box 14, code A, Schedule K-1 (Form 1065) (from nonfarm partnerships), and Box 9, code J1, Schedule K-1 (Form 1065-B). Filing state tax returns   However, you may need to adjust the amount reported on Schedule K-1 if you are a general partner or if it is a loss. Filing state tax returns Gross nonfarm income. Filing state tax returns   Your gross nonfarm income generally is the total of the amounts from: Line 7, Schedule C (Form 1040), Line 1, Schedule C-EZ (Form 1040), Box 14, code C, Schedule K-1 (Form 1065) (from nonfarm partnerships), and Box 9, code J2, Schedule K-1 (Form 1065-B). Filing state tax returns Figuring Nonfarm Net Earnings If you meet the three tests explained earlier, use the following table to figure your net earnings from self-employment under the nonfarm optional method. Filing state tax returns Table 10-1. Filing state tax returns Figuring Nonfarm Net Earnings IF your gross nonfarm income is. Filing state tax returns . Filing state tax returns . Filing state tax returns THEN your net earnings are equal to. Filing state tax returns . Filing state tax returns . Filing state tax returns $6,960 or less Two-thirds of your gross nonfarm income. Filing state tax returns More than $6,960 $4,640 Actual net earnings. Filing state tax returns   Your actual net earnings are 92. Filing state tax returns 35% of your total earnings subject to SE tax (that is, multiply total earnings subject to SE tax by 92. Filing state tax returns 35% (. Filing state tax returns 9235) to get actual net earnings). Filing state tax returns Actual net earnings are equivalent to net earnings figured using the regular method. Filing state tax returns Optional net earnings less than actual net earnings. Filing state tax returns   You cannot use this method to report an amount less than your actual net earnings from self-employment. Filing state tax returns Gross nonfarm income of $6,960 or less. Filing state tax returns   The following examples illustrate how to figure net earnings when gross nonfarm income is $6,960 or less. Filing state tax returns Example 1. Filing state tax returns Net nonfarm profit less than $5,024 and less than 72. Filing state tax returns 189% of gross nonfarm income. Filing state tax returns Ann Green runs a craft business. Filing state tax returns Her actual net earnings from self-employment were $800 in 2011 and $900 in 2012. Filing state tax returns She meets the test for being self-employed on a regular basis. Filing state tax returns She has used the nonfarm optional method less than 5 years. Filing state tax returns Her gross income and net profit in 2013 are as follows: Gross nonfarm income $5,400 Net nonfarm profit $1,200 Ann's actual net earnings for 2013 are $1,108 ($1,200 × . Filing state tax returns 9235). Filing state tax returns Because her net profit is less than $5,024 and less than 72. Filing state tax returns 189% of her gross income, she can use the nonfarm optional method to figure net earnings of $3,600 (2/3 × $5,400). Filing state tax returns Because these net earnings are higher than her actual net earnings, she can report net earnings of $3,600 for 2013. Filing state tax returns Example 2. Filing state tax returns Net nonfarm profit less than $5,024 but not less than 72. Filing state tax returns 189% of gross nonfarm income. Filing state tax returns Assume that in Example 1 Ann's gross income is $1,000 and her net profit is $800. Filing state tax returns She must use the regular method to figure her net earnings. Filing state tax returns She cannot use the nonfarm optional method because her net profit is not less than 72. Filing state tax returns 189% of her gross income. Filing state tax returns Example 3. Filing state tax returns Net loss from a nonfarm business. Filing state tax returns Assume that in Example 1 Ann has a net loss of $700. Filing state tax returns She can use the nonfarm optional method and report $3,600 (2/3 × $5,400) as her net earnings. Filing state tax returns Example 4. Filing state tax returns Nonfarm net earnings less than $400. Filing state tax returns Assume that in Example 1 Ann has gross income of $525 and a net profit of $175. Filing state tax returns In this situation, she would not pay any SE tax under either the regular method or the nonfarm optional method because her net earnings under both methods are less than $400. Filing state tax returns Gross nonfarm income of more than $6,960. Filing state tax returns   The following examples illustrate how to figure net earnings when gross nonfarm income is more than $6,960. Filing state tax returns Example 1. Filing state tax returns Net nonfarm profit less than $5,024 and less than 72. Filing state tax returns 189% of gross nonfarm income. Filing state tax returns John White runs an appliance repair shop. Filing state tax returns His actual net earnings from self-employment were $10,500 in 2011 and $9,500 in 2012. Filing state tax returns He meets the test for being self-employed on a regular basis. Filing state tax returns He has used the nonfarm optional method less than 5 years. Filing state tax returns His gross income and net profit in 2013 are as follows: Gross nonfarm income $12,000 Net nonfarm profit $1,200 John's actual net earnings for 2013 are $1,108 ($1,200 × . Filing state tax returns 9235). Filing state tax returns Because his net profit is less than $5,024 and less than 72. Filing state tax returns 189% of his gross income, he can use the nonfarm optional method to figure net earnings of $4,640. Filing state tax returns Because these net earnings are higher than his actual net earnings, he can report net earnings of $4,640 for 2013. Filing state tax returns Example 2. Filing state tax returns Net nonfarm profit not less than $5,024. Filing state tax returns Assume that in Example 1 John's net profit is $5,400. Filing state tax returns He must use the regular method. Filing state tax returns He cannot use the nonfarm optional method because his net nonfarm profit is not less than $5,024. Filing state tax returns Example 3. Filing state tax returns Net loss from a nonfarm business. Filing state tax returns Assume that in Example 1 John has a net loss of $700. Filing state tax returns He can use the nonfarm optional method and report $4,640 as his net earnings from self-employment. Filing state tax returns Farm Optional Method Use the farm optional method only for earnings from a farming business. Filing state tax returns See Publication 225 for information about this method. Filing state tax returns Using Both Optional Methods If you have both farm and nonfarm earnings, you may be able to use both optional methods to determine your net earnings from self-employment. Filing state tax returns To figure your net earnings using both optional methods, you must: Figure your farm and nonfarm net earnings separately under each method. Filing state tax returns Do not combine farm earnings with nonfarm earnings to figure your net earnings under either method. Filing state tax returns Add the net earnings figured under each method to arrive at your total net earnings from self-employment. Filing state tax returns You can report less than your total actual farm and nonfarm net earnings but not less than actual nonfarm net earnings. Filing state tax returns If you use both optional methods, you can report no more than $4,640 as your combined net earnings from self-employment. Filing state tax returns Example. Filing state tax returns You are a self-employed farmer. Filing state tax returns You also operate a retail grocery store. Filing state tax returns Your gross income, actual net earnings from self-employment, and optional farm and optional nonfarm net earnings from self-employment are shown in Table 10-2. Filing state tax returns Table 10-2. Filing state tax returns Example—Farm and Nonfarm Earnings Income and Earnings Farm Nonfarm Gross income $3,000 $6,000 Actual net earnings $900 $500 Optional net earnings (2/3 of gross income) $2,000 $4,000 Table 10-3 shows four methods or combinations of methods you can use to figure net earnings from self-employment using the farm and nonfarm gross income and actual net earnings shown in Table 10-2. Filing state tax returns Method 1. Filing state tax returns Using the regular method for both farm and nonfarm income. Filing state tax returns Method 2. Filing state tax returns Using the optional method for farm income and the regular method for nonfarm income. Filing state tax returns Method 3. Filing state tax returns Using the regular method for farm income and the optional method for nonfarm income. Filing state tax returns Method 4. Filing state tax returns Using the optional method for both farm and nonfarm income. Filing state tax returns Note. Filing state tax returns Actual net earnings is the same as net earnings figured using the regular method. Filing state tax returns Table 10-3. Filing state tax returns Example—Net Earnings Net Earnings 1 2 3 4 Actual  farm $ 900   $ 900   Optional  farm   $ 2,000   $ 2,000 Actual nonfarm $ 500 $ 500     Optional nonfarm     $4,000 $4,000 Amount you can report: $1,400 $2,500 $4,900 $4,640* *Limited to $4,640 because you used both optional methods. Filing state tax returns Fiscal Year Filer If you use a tax year other than the calendar year, you must use the tax rate and maximum earnings limit in effect at the beginning of your tax year. Filing state tax returns Even if the tax rate or maximum earnings limit changes during your tax year, continue to use the same rate and limit throughout your tax year. Filing state tax returns Reporting Self-Employment Tax Use Schedule SE (Form 1040) to figure and report your SE tax. Filing state tax returns Then enter the SE tax on line 56 of Form 1040 and attach Schedule SE to Form 1040. Filing state tax returns Most taxpayers can use Section A—Short Schedule SE to figure their SE tax. Filing state tax returns However, certain taxpayers must use Section B—Long Schedule SE. Filing state tax returns If you have to pay SE tax, you must file Form 1040 (with Schedule SE attached) even if you do not otherwise have to file a federal income tax return. Filing state tax returns Joint return. Filing state tax returns   Even if you file a joint return, you cannot file a joint Schedule SE. Filing state tax returns This is true whether one spouse or both spouses have earnings subject to SE tax. Filing state tax returns If both of you have earnings subject to SE tax, each of you must complete a separate Schedule SE. Filing state tax returns However, if one spouse uses the Short Schedule SE and the other spouse has to use the Long Schedule SE, both can use the same form. Filing state tax returns Attach both schedules to the joint return. Filing state tax returns More than one business. Filing state tax returns   If you have more than one trade or business, you must combine the net profit (or loss) from each business to figure your SE tax. Filing state tax returns A loss from one business will reduce your profit from another business. Filing state tax returns File one Schedule SE showing the earnings from self-employment, but file a separate Schedule C, C-EZ, or F for each business. Filing state tax returns Example. Filing state tax returns You are the sole proprietor of two separate businesses. Filing state tax returns You operate a restaurant that made a net profit of $25,000. Filing state tax returns You also have a cabinetmaking business that had a net loss of $500. Filing state tax returns You must file a Schedule C for the restaurant showing your net profit of $25,000 and another Schedule C for the cabinetmaking business showing your net loss of $500. Filing state tax returns You file Schedule SE showing total earnings subject to SE tax of $24,500. Filing state tax returns Prev  Up  Next   Home   More Online Publications