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Chapter 20  Schedule C: Expenses, Page 3

Line 30 – Expenses for business use of your home: You may be able to deduct certain expenses for business use of your home, subject to certain limitations. To claim a deduction for business use of your home, you can use Form 8829, Expenses for Business Use of Your Home, to determine your actual expense deduction amount or you can elect to calculate the amount of the deduction using a simplified method.

For additional information about claiming this deduction, see Publication 587, Business Use of Your Home (Including Use by Daycare Providers).

NOTE: If you are not using the simplified method to determine the amount of expenses you may deduct for business use of a home, do not complete the additional entry spaces on line 30 for total square footage of your home and of the part of the home used for business. Just include the amount from line 35 of your Form 8829 on line 30.

Simplified method: The simplified method is an alternative to the calculation, allocation, and substantiation of actual expenses. In most cases, you will figure your deduction by multiplying the area (measured in square feet) used regularly and exclusively for business, regularly for daycare, or regularly for storage of inventory or product samples, by $5. The area you use to figure your deduction cannot exceed 300 square feet. You cannot use the simplified method to figure a deduction for rental use of your home.

Electing to use the simplified method: You choose whether or not to use the simplified method each tax year. Make the election by using the simplified method to figure the deduction for the qualified business use of a home on a timely-filed, original federal income tax return for that year.

NOTE: Once you make the election to use the simplified method for a year, the election is irrevocable.  However, a change from using the simplified method in one year to actual expenses in a succeeding year, or vice versa, is not a change in method of accounting and does not require the consent of the IRS.

Housemates both making the election: If you share your home with someone else who uses the home for a separate business that qualifies for this deduction, each of you may make your own election, but not for the same portion of the home.

More than one business in single home: 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 your home. You are limited to a maximum of 300 square feet for all of the businesses you conduct in your home that qualify for this deduction. Allocate the actual square footage used (up to the maximum 300 square feet) among your qualified business uses in any reasonable manner you choose, but you may not allocate more square feet to a qualified business use than you actually use in that business.

NOTE: If you used your home for more than one business, you will need to file a separate Schedule C for each business. Do not combine your deductions for each business use on a single Schedule C.

Business use of more than one home: You may have used more than one home in your business. If you used more than one home for the same business during the year, you may elect to use the simplified method for only one home; you must file a Form 8829 to claim a business use of the home deduction for any additional home. If one or more of the homes was not used for the entire year (for example, you moved during the year), see the instructions for Form 8829.

Other requirements must still be met: You must still meet all the use requirements to claim a deduction for business use of the home. The simplified method is only an alternative to the calculation, allocation, and substantiation of actual expenses. The simplified method is not an alternative to the exclusivity and other tests that must be met in order to qualify for this deduction. For more information about qualifying business uses, see Qualifying for a Deduction in Publication 587.

Gross income limitation: The amount of you can deduct is still limited to:

If this limitation reduces the amount of your deduction, you cannot carryover the difference to another tax year.

Carryover of actual expenses from Form 8829 when using simplified method: If you used Form 8829 in a prior year, and you had actual expenses that you could carryover to the next year, you cannot claim those expenses if you are using the simplified method. Instead, the actual expenses from Form 8829 that were not allowed will be carried over to the next year that you file Form 8829 for that business use of that home.

Depreciation of home: If you use the simplified method, you cannot deduct any depreciation (including any additional first-year bonus depreciation) or Section 179 expense for the portion of your home that is used in a qualified business use. The depreciation deduction allowable for that portion of the home for that year is deemed to be zero.

NOTE: Although you cannot deduct any depreciation or Section 179 expense for the portion of your home that is a qualified business use because you elect to use the simplified method, you may still claim depreciation or the Section 179 expense deduction on other assets (for example, furniture and equipment) used in the qualified business use of your home.

Calculating your allowable expenses for business use of the home: You will calculate the deduction using Form 8829 or the simplified method worksheet, or both.

NOTE: You only use both the form and the worksheet if you use two homes for business. You may not use the simplified method and also file Form 8829 for the same qualified business use of the same home.

Using Form 8829: Use Form 8829 to calculate and claim a deduction for a home if you are not or cannot use the simplified method for that home. For information about claiming this deduction using Form 8829, see the Instructions for Form 8829 and Publication 587.

Using the simplified method: Use the Simplified Method Worksheet to calculate your deduction for a qualified business use of your home if you are electing to use the simplified method for that home.

Shared use (for simplified method only): If you share your home with someone else who uses the home for a separate business that also qualifies for this deduction, you may not include the same square feet to figure your deduction as the other person. You must allocate the shared space between you and the other person in a reasonable manner.

Example: Cal and Mike are roommates. Cal uses 300 square feet of their home for a qualified business use. Mike uses 200 square feet of their home for a separate qualified business use. The qualified business uses share 100 square feet. In addition to the portion that they do not share, Cal and Mike can both claim 50 of the 100 square feet or divide the 100 square feet between them in any reasonable manner. If divided evenly, Cal could claim 250 square feet using the simplified method and Mike could claim 150 square feet.

Part-year use or area changes (for simplified method only): If your qualified business use was for a portion of the tax year (for example, a seasonal business, a business that begins during the year, or you moved during the year) or you changed the square footage of your qualified business use, your deduction is limited to the average monthly allowable square footage. 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.

When determining the average monthly allowable square footage, you cannot take more than 300 square feet into account for any one month. Additionally, if your qualified business use was less than 15 days in a month, the allowable square footage is zero for that month.

Example: Zane files his federal income tax return on a calendar year basis. On July 20, he began using 400 square feet of his home for a qualified business use. He continued to use the 400 square feet until the end of the year. Zane’s average monthly allowable square footage is 125 square feet (300 square feet for August through December divided by the number of months in the year ((0 + 0 + 0 + 0 + 0 + 0 + 0 + 300 + 300 + 300 + 300 + 300)/12)).

Example: Frank files his federal income tax return on a calendar year basis. On April 20, he began using 100 square feet of his home for a qualified business use. On August 5, he expanded the area of his qualified business use to 350 square feet. Frank continued to use the 350 square feet until the end of the year. Frank's average monthly allowable square footage is 150 square feet (100 square feet for May through July and 300 square feet for August through December divided by the number of months in the year ((0 + 0 + 0 + 0 + 100 + 100 +100 + 300 + 300 + 300 + 300 + 300)/12)).

Example: Ann files her federal income tax return on a calendar year basis. From January 1 through July 16 she used 300 square feet of her home for a qualified business use. On July 17, Ann moved to a new home and immediately began using 200 square feet of the new home for the same qualified business use. While preparing her tax return, Ann used the simplified method to deduct expenses for the qualified business use of her old home. Ann's average monthly allowable square footage is 175 square feet (300 square feet for January through July divided by the number of months in the year ((300 +300 +300 + 300 + 300 + 300 + 300 + 0 + 0 + 0 + 0 + 0)/12)). Ann also prepared Form 8829 to deduct the actual expenses associated with the qualified business use of her new home.

Once you have determined your allowable square footage, enter the result on line 2 of the Simplified Method Worksheet.

NOTE: If you moved during the year, your average allowable square footage will generally be less than 300.

You can use the Area Adjustment Worksheet to help you determine the allowable square footage to enter on line 2 of the Simplified Method Worksheet.

Reporting your expenses for business use of the home: If you did not use the simplified method, include the amount from line 35 of Form 8829 on line 30 of the Schedule C you are filing for that business.

If you used the simplified method: If you elect to use the simplified method for the business use of a home, complete the additional entry spaces on line 30 for that home only. Include the amount from line 5 of the Simplified Method Worksheet on line 30.

If you itemize your deductions on Schedule A, you may deduct your mortgage interest, real estate taxes, and casualty losses on Schedule A as if you did not use your home for business. You cannot deduct any excess mortgage interest or excess casualty losses on Schedule C for this home.

Use Part II of Schedule C to deduct business expenses that are unrelated to the qualified business use of the home (for example, expenses for advertising, wages, or supplies, or depreciation of equipment or furniture).

Deduction figured on multiple forms: If you used more than one home for a business during the year, you may use a Form 8829 for each home or you may use the simplified method for one home and Form 8829 for any other home. Combine the amount you calculated using the simplified method and the amounts you figured on your Forms 8829, and then enter the total on line 30 of the Schedule C you are filing for that business.

Line 31 – Net profit (or loss): If your expenses (including the expenses you report on line 30) are more than your gross income, do not enter your loss on line 31 until you have applied:

To apply these rules, follow the instructions in Line 32, Excess farm loss rules, below and the Instructions for Form 8582, Passive Activity Loss Rules. After applying those rules, the amount on line 31 will be your allowable loss, and it may be smaller than the amount you figured by subtracting line 30 from line 29.

If your gross income is more than your expenses (including the expenses you report on line 30), and you do not have prior year unallowed passive activity losses, subtract line 30 from line 29. The result is your net profit.

If your gross income is more than your expenses (including the expenses you report on line 30), and you have prior year unallowed passive activity losses, do not enter your net profit on line 31 until you have calculated the amount of prior year unallowed passive activity losses you may claim this year for this activity. Use Form 8582 to figure the amount of prior year unallowed passive activity losses you may include on line 31. Make sure to indicate that you are including prior year passive activity losses by entering "PAL" to the left of the entry space.

If you checked the "No" box on line G, see the Instructions for Form 8582; you may need to include information from this schedule on that form, even if you have a net profit.

Rental real estate activity: Unless you are a qualifying real estate professional, a rental real estate activity is a passive activity, even if you materially participated in the activity. If you have a loss, you may need to file Form 8582 to figure your allowable loss. See the Real Estate Professional and Rental Activities pages for more information.

Excess farm loss rules: If your Schedule C activity includes processing a farm commodity as part of your farming business, your deductible loss from that activity may be limited if you received certain subsidies. See the Instructions for Schedule F, Profit or Loss From Farming, for details on any applicable subsidy. Use one of the worksheets in the Schedule F instructions to determine if you have an excess farm loss.  

You must figure and apply your excess farm loss before figuring any limitations to your loss due to the at-risk rules or the passive activity loss rules. Reduce your loss by your excess farm loss before applying the at-risk rules and passive activity loss rules.

Reporting your net profit or allowable loss: Once you have figured your net profit or allowable loss, report it as follows.

Individuals - Enter your net profit or allowable loss on line 31 and include it on Form 1040, line 12. Also, include your net profit or allowable loss on Schedule SE, Self-Employment Tax, line 2. However, if you are a statutory employee or notary public, see Statutory employees or Notary public, below.

Nonresident aliens - Enter your net profit or allowable loss on line 31 and include it on Form 1040NR, line 13. You should also include this amount on Schedule SE, line 2 if you are covered under the U.S. social security system due to an international social security agreement currently in effect. See the Instructions for Schedule SE for information on international social security agreements. However, if you are a statutory employee or notary public, see Statutory employees or Notary public, below.

Trusts and estates - Enter the net profit or allowable loss on line 31 and include it on Form 1041, line 3.

Statutory employees - Enter your net profit or allowable loss on line 31 and include it on Form 1040, line 12, or on Form 1040NR, line 13. However, do not report this amount on Schedule SE, line 2. If you were a statutory employee and you are required to file Schedule SE because of other self-employment income, see the Instructions for Schedule SE.

Notary public - Do not enter your net profit from line 31 on Schedule SE, line 2, unless you are required to file Schedule SE because you have other self-employment income. See the Instructions for Schedule SE.

Community income - If you and your spouse had community income and are filing separate returns, see the Instructions for Schedule SE before figuring self-employment tax.

Earned income credit - If you have a net profit on line 31, this amount is earned income and may qualify you for the earned income credit (EIC).   

Line 32 – At-risk limitation:

NOTE: You do not need to complete line 32 if line 7 is more than the total of lines 28 and 30.

In most cases, if you have a business loss and amounts invested in the business for which you are not at risk, you must complete Form 6198, At-Risk Limitations, to figure your allowable loss. The at-risk rules generally limit the amount of loss (including loss on the disposition of assets) you can claim to the amount you could actually lose in the business.

Check box 32b if you have amounts invested in this business for which you are not at risk, such as the following:

Calculating your allowable loss: Before determining your allowable loss, you must check box 32a or 32b to determine if the loss from your business activity is limited by the at-risk rules. Follow the instructions, next, that apply to your box 32 activity.

All investment is at risk: If all amounts are at risk in this business, check box 32a. If you answered “Yes” on line G, your remaining loss (after applying the excess farm loss rules) is your allowable loss. The at-risk rules and the passive activity loss rules do not apply. See Line 31, earlier, for how to report your allowable loss.

But if you answered “No” on line G, you may need to complete Form 8582 to figure your allowable loss to enter on line 31. See the Instructions for Form 8582 for details.

Some investment is not at risk: If some investment is not at risk, check box 32b; the at-risk rules apply to your loss. Be sure to attach Form 6198 to your return.

If you answered "Yes" on line G, complete Form 6198 to figure the allowable loss to enter on line 31. The passive activity loss rules do not apply. See Line 31, earlier, for how to report your allowable loss.

But if you answered "No" on line G, the passive activity loss rules may apply. First complete Form 6198 to figure the amount of your profit or (loss) for the at-risk activity, which may include amounts reported on other forms and schedules, and the at-risk amount for the activity. Follow the Instructions for Form 6198 to determine how much of your Schedule C loss will be allowed. After you figure the amount of your loss that is allowed under the at-risk rules, you may need to complete Form 8582 to figure the allowable loss to enter on line 31. See the Instructions for Form 8582 for details.  

NOTE: If you checked box 32b because some investment is not at risk and you do not attach Form 6198, the processing of your return may be delayed.

At-risk loss deduction: Any loss from this business not allowed for 2016 only because of the at-risk rules is treated as a deduction allocable to the business in 2017.

More information: See the At-Risk Limits page.