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Amend Tax Return

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Amend Tax Return

Amend tax return 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. Amend tax return 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. Amend tax return However, you may be able to deduct expenses related to the business use of part of your home if you meet specific requirements. Amend tax return Even then, the deductible amount of these types of expenses may be limited. Amend tax return Use this section and Figure A, later, to decide if you can deduct expenses for the business use of your home. Amend tax return 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). Amend tax return Additional tests for employee use. Amend tax return   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. Amend tax return 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. Amend tax return If the use of the home office is merely appropriate and helpful, you cannot deduct expenses for the business use of your home. Amend tax return Exclusive Use To qualify under the exclusive use test, you must use a specific area of your home only for your trade or business. Amend tax return The area used for business can be a room or other separately identifiable space. Amend tax return The space does not need to be marked off by a permanent partition. Amend tax return 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. Amend tax return Example. Amend tax return You are an attorney and use a den in your home to write legal briefs and prepare clients' tax returns. Amend tax return Your family also uses the den for recreation. Amend tax return The den is not used exclusively in your trade or business, so you cannot claim a deduction for the business use of the den. Amend tax return Exceptions to Exclusive Use You do not have to meet the exclusive use test if either of the following applies. Amend tax return You use part of your home for the storage of inventory or product samples (discussed next). Amend tax return You use part of your home as a daycare facility, discussed later under Daycare Facility . Amend tax return Note. Amend tax return With the exception of these two uses, any portion of the home used for business purposes must meet the exclusive use test. Amend tax return Storage of inventory or product samples. Amend tax return    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. Amend tax return However, you must meet all the following tests. Amend tax return You sell products at wholesale or retail as your trade or business. Amend tax return You keep the inventory or product samples in your home for use in your trade or business. Amend tax return Your home is the only fixed location of your trade or business. Amend tax return You use the storage space on a regular basis. Amend tax return The space you use is a separately identifiable space suitable for storage. Amend tax return Example. Amend tax return Your home is the only fixed location of your business of selling mechanics' tools at retail. Amend tax return You regularly use half of your basement for storage of inventory and product samples. Amend tax return You sometimes use the area for personal purposes. Amend tax return The expenses for the storage space are deductible even though you do not use this part of your basement exclusively for business. Amend tax return Regular Use To qualify under the regular use test, you must use a specific area of your home for business on a regular basis. Amend tax return Incidental or occasional business use is not regular use. Amend tax return You must consider all facts and circumstances in determining whether your use is on a regular basis. Amend tax return 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. Amend tax return 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. Amend tax return Example. Amend tax return 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. Amend tax return You do not make investments as a broker or dealer. Amend tax return So, your activities are not part of a trade or business and you cannot take a deduction for the business use of your home. Amend tax return Principal Place of Business You can have more than one business location, including your home, for a single trade or business. Amend tax return 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. Amend tax return 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. Amend tax return Your home office will qualify as your principal place of business if you meet the following requirements. Amend tax return You use it exclusively and regularly for administrative or management activities of your trade or business. Amend tax return You have no other fixed location where you conduct substantial administrative or management activities of your trade or business. Amend tax return If, after considering your business locations, your home cannot be identified as your principal place of business, you cannot deduct home office expenses. Amend tax return 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. Amend tax return Administrative or management activities. Amend tax return   There are many activities that are administrative or managerial in nature. Amend tax return The following are a few examples. Amend tax return Billing customers, clients, or patients. Amend tax return Keeping books and records. Amend tax return Ordering supplies. Amend tax return Setting up appointments. Amend tax return Forwarding orders or writing reports. Amend tax return Administrative or management activities performed at other locations. Amend tax return   The following activities performed by you or others will not disqualify your home office from being your principal place of business. Amend tax return You have others conduct your administrative or management activities at locations other than your home. Amend tax return (For example, another company does your billing from its place of business. Amend tax return ) 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. Amend tax return You occasionally conduct minimal administrative or management activities at a fixed location outside your home. Amend tax return You conduct substantial nonadministrative or nonmanagement business activities at a fixed location outside your home. Amend tax return (For example, you meet with or provide services to customers, clients, or patients at a fixed location of the business outside your home. Amend tax return ) You have suitable space to conduct administrative or management activities outside your home, but choose to use your home office for those activities instead. Amend tax return Please click here for the text description of the image. Amend tax return Can you deduct business use of the home expenses? Example 1. Amend tax return John is a self-employed plumber. Amend tax return Most of John's time is spent at customers' homes and offices installing and repairing plumbing. Amend tax return 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. Amend tax return John writes up estimates and records of work completed at his customers' premises. Amend tax return He does not conduct any substantial administrative or management activities at any fixed location other than his home office. Amend tax return John does not do his own billing. Amend tax return He uses a local bookkeeping service to bill his customers. Amend tax return John's home office qualifies as his principal place of business for deducting expenses for its use. Amend tax return 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. Amend tax return His choice to have his billing done by another company does not disqualify his home office from being his principal place of business. Amend tax return 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. Amend tax return Example 2. Amend tax return Pamela is a self-employed sales representative for several different product lines. Amend tax return 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. Amend tax return She occasionally writes up orders and sets up appointments from her hotel room when she is away on business overnight. Amend tax return Pamela's business is selling products to customers at various locations throughout her territory. Amend tax return To make these sales, she regularly visits customers to explain the available products and take orders. Amend tax return Pamela's home office qualifies as her principal place of business for deducting expenses for its use. Amend tax return She conducts administrative or management activities there and she has no other fixed location where she conducts substantial administrative or management activities. Amend tax return 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. Amend tax return 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. Amend tax return Example 3. Amend tax return Paul is a self-employed anesthesiologist. Amend tax return He spends the majority of his time administering anesthesia and postoperative care in three local hospitals. Amend tax return One of the hospitals provides him with a small shared office where he could conduct administrative or management activities. Amend tax return Paul very rarely uses the office the hospital provides. Amend tax return He uses a room in his home that he has converted to an office. Amend tax return He uses this room exclusively and regularly to conduct all the following activities. Amend tax return Contacting patients, surgeons, and hospitals regarding scheduling. Amend tax return Preparing for treatments and presentations. Amend tax return Maintaining billing records and patient logs. Amend tax return Satisfying continuing medical education requirements. Amend tax return Reading medical journals and books. Amend tax return Paul's home office qualifies as his principal place of business for deducting expenses for its use. Amend tax return 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. Amend tax return 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. Amend tax return 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. Amend tax return 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. Amend tax return Example 4. Amend tax return Kathleen is employed as a teacher. Amend tax return She is required to teach and meet with students at the school and to grade papers and tests. Amend tax return 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. Amend tax return The school does not require her to work at home. Amend tax return Kathleen prefers to use the office she has set up in her home and does not use the one provided by the school. Amend tax return She uses this home office exclusively and regularly for the administrative duties of her teaching job. Amend tax return 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. Amend tax return 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. Amend tax return More Than One Trade or Business The same home office can be the principal place of business for two or more separate business activities. Amend tax return 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. Amend tax return You must use the home office exclusively and regularly for one or more of the following purposes. Amend tax return As the principal place of business for one or more of your trades or businesses. Amend tax return 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. Amend tax return If your home office is a separate structure, in connection with one or more of your trades or businesses. Amend tax return You can use your home office for more than one business activity, but you cannot use it for any nonbusiness (i. Amend tax return e. Amend tax return , personal) activities. Amend tax return If you are an employee, any use of the home office in connection with your employment must be for the convenience of your employer. Amend tax return See Rental to employer , later, if you rent part of your home to your employer. Amend tax return Example. Amend tax return Tracy White is employed as a teacher. Amend tax return Her principal place of work is the school, which provides her office space to do her school work. Amend tax return She also has a mail order jewelry business. Amend tax return All her work in the jewelry business is done in her home office and the office is used exclusively for that business. Amend tax return If she meets all the other tests, she can deduct expenses for the business use of her home for the jewelry business. Amend tax return 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. Amend tax return As an employee, Tracy must also meet the convenience-of-the-employer test to qualify for the deduction. Amend tax return 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. Amend tax return 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. Amend tax return You physically meet with patients, clients, or customers on your premises. Amend tax return Their use of your home is substantial and integral to the conduct of your business. Amend tax return Doctors, dentists, attorneys, and other professionals who maintain offices in their homes generally will meet this requirement. Amend tax return Using your home for occasional meetings and telephone calls will not qualify you to deduct expenses for the business use of your home. Amend tax return 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. Amend tax return Example. Amend tax return June Quill, a self-employed attorney, works 3 days a week in her city office. Amend tax return She works 2 days a week in her home office used only for business. Amend tax return She regularly meets clients there. Amend tax return Her home office qualifies for a business deduction because she meets clients there in the normal course of her business. Amend tax return 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. Amend tax return The structure does not have to be your principal place of business or a place where you meet patients, clients, or customers. Amend tax return Example. Amend tax return John Berry operates a floral shop in town. Amend tax return He grows the plants for his shop in a greenhouse behind his home. Amend tax return 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. Amend tax return 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. Amend tax return 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. Amend tax return Electing to use the simplified method. Amend tax return   The simplified method is an alternative to the calculation, allocation, and substantiation of actual expenses. Amend tax return You choose whether or not to figure your deduction using the simplified method each taxable year. Amend tax return See Using the Simplified Method , later. Amend tax return Rental to employer. Amend tax return   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. Amend tax return You can deduct mortgage interest, qualified mortgage insurance premiums, real estate taxes, and personal casualty losses for the rented part, subject to any limitations. Amend tax return 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. Amend tax return 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. Amend tax return You will also need to figure the percentage of your home used for business and the limit on the deduction. Amend tax return 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. Amend tax return 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. Amend tax return Part-year use. Amend tax return   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. Amend tax return 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. Amend tax return Expenses related to tax-exempt income. Amend tax return   Generally, you cannot deduct expenses that are related to tax-exempt allowances. Amend tax return 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. Amend tax return No deduction is allowed for other expenses related to the tax-exempt allowance. Amend tax return   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. Amend tax return Actual Expenses You must divide the expenses of operating your home between personal and business use. Amend tax return The part of a home operating expense you can use to figure your deduction depends on both of the following. Amend tax return Whether the expense is direct, indirect, or unrelated. Amend tax return The percentage of your home used for business. Amend tax return Table 1, next, describes the types of expenses you may have and the extent to which they are deductible. Amend tax return Table 1. Amend tax return Types of Expenses  Expense  Description  Deductibility Direct Expenses only for  the business part  of your home. Amend tax return Deductible in full. Amend tax return *   Examples:  Painting or repairs  only in the area  used for business. Amend tax return Exception: May be only partially  deductible in a daycare facility. Amend tax return See Daycare Facility , later. Amend tax return Indirect Expenses for  keeping up and running your  entire home. Amend tax return Deductible based on the percentage of your home used for business. Amend tax return *   Examples:  Insurance, utilities, and  general repairs. Amend tax return   Unrelated Expenses only for  the parts of your  home not used  for business. Amend tax return Not deductible. Amend tax return   Examples:  Lawn care or painting  a room not used  for business. Amend tax return   *Subject to the deduction limit, discussed later. Amend tax return Form 8829 and the Worksheet To Figure the Deduction for Business Use of Your Home have separate columns for direct and indirect expenses. Amend tax return Certain expenses are deductible whether or not you use your home for business. Amend tax return 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. Amend tax return These expenses include the following. Amend tax return Real estate taxes. Amend tax return Qualified mortgage insurance premiums. Amend tax return Deductible mortgage interest. Amend tax return Casualty losses. Amend tax return Other expenses are deductible only if you use your home for business. Amend tax return You can use the business percentage of these expenses to figure your total business use of the home deduction. Amend tax return These expenses generally include (but are not limited to) the following. Amend tax return Depreciation (covered under Depreciating Your Home , later). Amend tax return Insurance. Amend tax return Rent paid for the use of property you do not own but use in your trade or business. Amend tax return Repairs. Amend tax return Security system. Amend tax return Utilities and services. Amend tax return Real estate taxes. Amend tax return   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. Amend tax return   For more information on the deduction for real estate taxes, see Publication 530, Tax Information for Homeowners. Amend tax return Deductible mortgage interest. Amend tax return   To figure the business part of your deductible mortgage interest, multiply this interest by the percentage of your home used for business. Amend tax return You can include interest on a second mortgage in this computation. Amend tax return 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. Amend tax return For more information on what interest is deductible, see Publication 936, Home Mortgage Interest Deduction. Amend tax return Qualified mortgage insurance premiums. Amend tax return   To figure the business part of your qualified mortgage insurance premiums, multiply the premiums by the percentage of your home used for business. Amend tax return You can include premiums for insurance on a second mortgage in this computation. Amend tax return 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. Amend tax return For more information, see Publication 936, and Line 13 in the Instructions for Schedule A (Form 1040). Amend tax return Casualty losses. Amend tax return    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. Amend tax return A direct expense is the loss on the portion of the property you use only in your business. Amend tax return Use the entire loss to figure the business use of the home deduction. Amend tax return An indirect expense is the loss on property you use for both business and personal purposes. Amend tax return Use only the business portion to figure the deduction. Amend tax return An unrelated expense is the loss on property you do not use in your business. Amend tax return Do not use any of the loss to figure the deduction. Amend tax return Example. Amend tax return You meet the rules to take a deduction for an office in your home that is 10% of the total area of your house. Amend tax return A storm damages your roof. Amend tax return 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. Amend tax return You would complete Form 4684, Casualties and Thefts, to report your loss. Amend tax return 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. Amend tax return 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. Amend tax return 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. Amend tax return Forms and worksheets to use. Amend tax return   If you are filing Schedule C (Form 1040), get Form 8829 and follow the instructions for casualty losses. Amend tax return 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. Amend tax return You will also need to get Form 4684. Amend tax return More information. Amend tax return   For more information on casualty losses, see Publication 547, Casualties, Disasters, and Thefts. Amend tax return Insurance. Amend tax return   You can deduct the cost of insurance that covers the business part of your home. Amend tax return 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. Amend tax return You can deduct the business percentage of the part that applies to the following year in that year. Amend tax return Rent. Amend tax return   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. Amend tax return To figure your deduction, multiply your rent payments by the percentage of your home used for business. Amend tax return   If you own your home, you cannot deduct the fair rental value of your home. Amend tax return However, see Depreciating Your Home , later. Amend tax return Repairs. Amend tax return   The cost of repairs that relate to your business, including labor (other than your own labor), is a deductible expense. Amend tax return For example, a furnace repair benefits the entire home. Amend tax return If you use 10% of your home for business, you can deduct 10% of the cost of the furnace repair. Amend tax return   Repairs keep your home in good working order over its useful life. Amend tax return Examples of common repairs are patching walls and floors, painting, wallpapering, repairing roofs and gutters, and mending leaks. Amend tax return However, repairs are sometimes treated as a permanent improvement and are not deductible. Amend tax return See Permanent improvements , later, under Depreciating Your Home. Amend tax return Security system. Amend tax return   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. Amend tax return 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. Amend tax return Utilities and services. Amend tax return   Expenses for utilities and services, such as electricity, gas, trash removal, and cleaning services, are primarily personal expenses. Amend tax return However, if you use part of your home for business, you can deduct the business part of these expenses. Amend tax return Generally, the business percentage for utilities is the same as the percentage of your home used for business. Amend tax return Telephone. Amend tax return   The basic local telephone service charge, including taxes, for the first telephone line into your home (i. Amend tax return e. Amend tax return , landline) is a nondeductible personal expense. Amend tax return 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. Amend tax return Do not include these expenses as a cost of using your home for business. Amend tax return Deduct these charges separately on the appropriate form or schedule. Amend tax return 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). Amend tax return Depreciating Your Home If you own your home and qualify to deduct expenses for its business use, you can claim a deduction for depreciation. Amend tax return Depreciation is an allowance for the wear and tear on the part of your home used for business. Amend tax return You cannot depreciate the cost or value of the land. Amend tax return You recover its cost when you sell or otherwise dispose of the property. Amend tax return Before you figure your depreciation deduction, you need to know the following information. Amend tax return The month and year you started using your home for business. Amend tax return The adjusted basis and fair market value of your home (excluding land) at the time you began using it for business. Amend tax return The cost of any improvements before and after you began using the property for business. Amend tax return The percentage of your home used for business. Amend tax return See Business Percentage , later. Amend tax return Adjusted basis defined. Amend tax return   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. Amend tax return For a discussion of adjusted basis, see Publication 551. Amend tax return Permanent improvements. Amend tax return   A permanent improvement increases the value of property, adds to its life, or gives it a new or different use. Amend tax return Examples of improvements are replacing electric wiring or plumbing, adding a new roof or addition, paneling, or remodeling. Amend tax return    You must carefully distinguish between repairs and improvements. Amend tax return See Repairs , earlier, under Actual Expenses. Amend tax return You also must keep accurate records of these expenses. Amend tax return These records will help you decide whether an expense is a deductible or a capital (added to the basis) expense. Amend tax return However, if you make repairs as part of an extensive remodeling or restoration of your home, the entire job is an improvement. Amend tax return Example. Amend tax return You buy an older home and fix up two rooms as a beauty salon. Amend tax return 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. Amend tax return Normally, the patching, painting, and floor work are repairs and the other expenses are permanent improvements. Amend tax return 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. Amend tax return You cannot deduct any portion of it as a repair expense. Amend tax return Adjusting for depreciation deducted in earlier years. Amend tax return   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. Amend tax return 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. Amend tax return If you did not deduct any depreciation, decrease the basis by the amount you could have deducted. Amend tax return   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. Amend tax return   If you deducted the incorrect amount of depreciation, see Publication 946. Amend tax return Fair market value defined. Amend tax return   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. Amend tax return 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. Amend tax return Figuring the depreciation deduction for the current year. Amend tax return   If you began using your home for business before 2013, continue to use the same depreciation method you used in past tax years. Amend tax return   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). Amend tax return Under MACRS, nonresidential real property is depreciated using the straight line method over 39 years. Amend tax return For more information on MACRS and other methods of depreciation, see Publication 946. Amend tax return   To figure the depreciation deduction, you must first figure the part of the cost of your home that can be depreciated (depreciable basis). Amend tax return The depreciable basis is figured by multiplying the percentage of your home used for business by the smaller of the following. Amend tax return The adjusted basis of your home (excluding land) on the date you began using your home for business. Amend tax return The fair market value of your home (excluding land) on the date you began using your home for business. Amend tax return Depreciation table. Amend tax return   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. Amend tax return Table 2. Amend tax return MACRS Percentage Table for 39-Year Nonresidential Real Property Month First Used for Business Percentage To Use 1 2. Amend tax return 461% 2 2. Amend tax return 247% 3 2. Amend tax return 033% 4 1. Amend tax return 819% 5 1. Amend tax return 605% 6 1. Amend tax return 391% 7 1. Amend tax return 177% 8 0. Amend tax return 963% 9 0. Amend tax return 749% 10 0. Amend tax return 535% 11 0. Amend tax return 321% 12 0. Amend tax return 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. Amend tax return See Publication 946 for the percentages for the remaining tax years of the recovery period. Amend tax return Example. Amend tax return In May, George Miller began to use one room in his home exclusively and regularly to meet clients. Amend tax return This room is 8% of the square footage of his home. Amend tax return He bought the home in 2003 for $125,000. Amend tax return He determined from his property tax records that his adjusted basis in the house (exclusive of land) is $115,000. Amend tax return In May, the house had a fair market value of $165,000. Amend tax return He multiplies his adjusted basis of $115,000 (which is less than the fair market value) by 8%. Amend tax return The result is $9,200, his depreciable basis for the business part of the house. Amend tax return George files his return based on the calendar year. Amend tax return May is the 5th month of his tax year. Amend tax return He multiplies his depreciable basis of $9,200 by 1. Amend tax return 605% (. Amend tax return 01605), the percentage from the table for the 5th month. Amend tax return His depreciation deduction is $147. Amend tax return 66. Amend tax return Depreciating permanent improvements. Amend tax return   Add the costs of permanent improvements made before you began using your home for business to the basis of your property. Amend tax return Depreciate these costs as part of the cost of your home as explained earlier. Amend tax return 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. Amend tax return 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. Amend tax return For improvements made this year, the recovery period is 39 years. Amend tax return For the percentage to use for the first year, see Table 2, earlier. Amend tax return For more information on recovery periods, see Publication 946. Amend tax return 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. Amend tax return Use the resulting percentage to figure the business part of the expenses for operating your entire home. Amend tax return You can use any reasonable method to determine the business percentage. Amend tax return The following are two commonly used methods for figuring the percentage. Amend tax return Divide the area (length multiplied by the width) used for business by the total area of your home. Amend tax return 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. Amend tax return Example 1. Amend tax return Your office is 240 square feet (12 feet × 20 feet). Amend tax return Your home is 1,200 square feet. Amend tax return Your office is 20% (240 ÷ 1,200) of the total area of your home. Amend tax return Your business percentage is 20%. Amend tax return Example 2. Amend tax return You use one room in your home for business. Amend tax return Your home has 10 rooms, all about equal size. Amend tax return Your office is 10% (1 ÷ 10) of the total area of your home. Amend tax return Your business percentage is 10%. Amend tax return 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. Amend tax return 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. Amend tax return 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. Amend tax return 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. Amend tax return 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)). Amend tax return These expenses are discussed in detail under Actual Expenses , earlier. Amend tax return 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. Amend tax return If you are self-employed, do not include in (2) above your deduction for one-half of your self-employment tax. Amend tax return Carryover of unallowed expenses. Amend tax return   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. Amend tax return They are subject to the deduction limit for that year, whether or not you live in the same home during that year. Amend tax return Figuring the deduction limit and carryover. Amend tax return   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. Amend tax return If you file Schedule C (Form 1040), figure your deduction limit and carryover on Form 8829. Amend tax return Example. Amend tax return You meet the requirements for deducting expenses for the business use of your home. Amend tax return You use 20% of your home for business. Amend tax return 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. Amend tax return    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). Amend tax return You also can deduct all of your business expenses not related to the use of your home ($2,000). Amend tax return 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. Amend tax return Your deduction for depreciation for the business use of your home is limited to $200 ($1,000 minus $800) because of the deduction limit. Amend tax return You can carry over the $1,400 balance and add it to your depreciation for 2014, subject to your deduction limit in 2014. Amend tax return More than one place of business. Amend tax return   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. Amend tax return 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. Amend tax return 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. Amend tax return For more information on transportation costs, see Publication 463, Travel, Entertainment, Gift, and Car Expenses. Amend tax return Using the Simplified Method The simplified method is an alternative to the calculation, allocation, and substantiation of actual expenses. Amend tax return 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. Amend tax return The area you use to figure your deduction is limited to 300 square feet. Amend tax return See Simplified Amount , later, for information about figuring the amount of the deduction. Amend tax return For more information about the simplified method, see Revenue Procedure 2013-13, 2013-06 I. Amend tax return R. Amend tax return B. Amend tax return 478, available at www. Amend tax return irs. Amend tax return gov/irb/2013-06_IRB/ar09. Amend tax return html. Amend tax return Actual expenses and depreciation of your home. Amend tax return   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. Amend tax return 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. Amend tax return The depreciation deduction allowable for that portion of the home is deemed to be zero for a year you use the simplified method. Amend tax return 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. Amend tax return More information. Amend tax return   For more information about claiming depreciation in a subsequent year, see Revenue Procedure 2013-13, 2013-06 I. Amend tax return R. Amend tax return B. Amend tax return 478, available at www. Amend tax return irs. Amend tax return gov/irb/2013-06_IRB/ar09. Amend tax return html. Amend tax return 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). Amend tax return Expenses deductible without regard to business use. Amend tax return   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. Amend tax return These expenses include mortgage interest, real estate taxes, and casualty losses, subject to any limitations. Amend tax return See Where To Deduct , later. Amend tax return 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). Amend tax return No deduction of carryover of actual expenses. Amend tax return   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. Amend tax return Instead, you will continue to carry over the disallowed amount to the next year that you use actual expenses to figure your deduction. Amend tax return Electing the Simplified Method You choose whether or not to figure your deduction using the simplified method each taxable year. Amend tax return 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. Amend tax return An election for a taxable year, once made, is irrevocable. Amend tax return 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. Amend tax return Shared use. Amend tax return   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. Amend tax return More than one qualified business use. Amend tax return   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. Amend tax return More than one home. Amend tax return   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. Amend tax return You must figure the deduction for any other home using actual expenses. Amend tax return 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. Amend tax return 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. Amend tax return The allowable area of your home used in conducting the business. Amend tax return 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. Amend tax return The gross income from the business use of your home. Amend tax return The amount of the business expenses that are not related to the use of your home. Amend tax return 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. Amend tax return To figure the amount you can deduct for qualified business use of your home using the simplified method, follow these 3 steps. Amend tax return 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). Amend tax return See Allowable area and Space used regularly for daycare , later. Amend tax return 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. Amend tax return 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. Amend tax return See Gross income limitation , later. Amend tax return Take the smaller of the amounts from (1) and (2). Amend tax return This is the amount you can deduct for this qualified business use of your home using the simplified method. Amend tax return 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. Amend tax return 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. Amend tax return Allowable area. Amend tax return   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. Amend tax return 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. Amend tax return 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. Amend tax return Area used by a qualified joint venture. Amend tax return   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. Amend tax return Split the actual area used in conducting business between you and your spouse in the same manner you split your other tax attributes. Amend tax return Then, each spouse will figure the allowable area separately. Amend tax return For more information about qualified joint ventures, see Qualified Joint Venture in the Instructions for Schedule C. Amend tax return Shared use. Amend tax return   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. Amend tax return You must allocate the shared space between you and the other person in a reasonable manner. Amend tax return Example. Amend tax return Kristin and Lindsey are roommates. Amend tax return Kristin uses 300 square feet of their home for a qualified business use. Amend tax return Lindsey uses 200 square feet of their home for a separate qualified business use. Amend tax return The qualified business uses share 100 square feet. Amend tax return 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. Amend tax return If divided evenly, Kristin could claim 250 square feet using the simplified method and Lindsey could claim 150 square feet. Amend tax return More than one qualified business use. Amend tax return   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. Amend tax return Allocate the actual square footage used (up to the maximum of 300 square feet) among your qualified business uses in a reasonable manner. Amend tax return However, do not allocate more square feet to a qualified business use than you actually use for that business. Amend tax return Rental use. Amend tax return   The simplified method does not apply to rental use. Amend tax return A rental use that qualifies for the deduction must be figured using actual expenses. Amend tax return 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. Amend tax return 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. Amend tax return Part-year use or area changes. Amend tax return   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. Amend tax return 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. Amend tax return When determining the average monthly allowable square footage, you cannot take more than 300 square feet into account for any one month. Amend tax return Additionally, if your qualified business use was less than 15 days in a month, you must use -0- for that month. Amend tax return Example 1. Amend tax return Andy files his federal income tax return on a calendar year basis. Amend tax return On July 20, he began using 420 square feet of his home for a qualified business use. Amend tax return He continued to use the 420 square feet until the end of the year. Amend tax return 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). Amend tax return Example 2. Amend tax return Amy files her federal income tax return on a calendar year basis. Amend tax return On April 20, she began using 100 square feet of her home for a qualified business use. Amend tax return On August 5, she expanded the area of her qualified use to 330 square feet. Amend tax return Amy continued to use the 330 square feet until the end of the year. Amend tax return 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). Amend tax return Gross income limitation. Amend tax return   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. Amend tax return 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. Amend tax return Business expenses not related to use of the home. Amend tax return   These expenses relate to the business activity in the home, but not to the use of the home itself. Amend tax return You can still deduct business expenses that are unrelated to the use of the home. Amend tax return See Where To Deduct , later. Amend tax return Examples of business expenses that are unrelated to the use of the home are advertising, wages, supplies, dues, and depreciation for equipment. Amend tax return Space used regularly for daycare. Amend tax return   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. Amend tax return The reduced rate will equal the prescribed rate times a fraction. Amend tax return 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. Amend tax return You can use the Daycare Facility Worksheet (for simplified method), near the end of this publication, to help you figure the reduced rate. Amend tax return    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. Amend tax return 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. Amend tax return To qualify for this exception to the exclusive use rule, you must meet both of the following requirements. Amend tax return 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. Amend tax return 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. Amend tax return You do not meet this requirement if your application was rejected or your license or other authorization was revoked. Amend tax return Figuring the deduction. Amend tax return   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. Amend tax return    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. Amend tax return If you also use that part exclusively for daycare, deduct all the allocable expenses, subject to the deduction limit, as explained earlier. Amend tax return   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. Amend tax return 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. Amend tax return You do not have to keep records to show the specific hours the area was used for business. Amend tax return You can use the area occasionally for personal reasons. Amend tax return However, a room you use only occasionally for business does not qualify for the deduction. Amend tax return 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. Amend tax return You can compare the hours of business use in a week with the number of hours in a week (168). Amend tax return Or you can compare the hours of business use for the year with the number of hours in the year (8,760 in 2013). Amend tax return 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. Amend tax return Example 1. Amend tax return Mary Lake used her basement to operate a daycare business for children. Amend tax return She figures the business percentage of the basement as follows. Amend tax return 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. Amend tax return During the other 12 hours a day, the family could use the basement. Amend tax return She figures the percentage of time the basement was used for daycare as follows. Amend tax return 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. Amend tax return 25%           Mary can deduct 34. Amend tax return 25% of any direct expenses for the basement. Amend tax return However, because her indirect expenses are for the entire house, she can deduct only 17. Amend tax return 13% of the indirect expenses. Amend tax return She figures the percentage for her indirect expenses as follows. Amend tax return Business percentage of the basement 50% Multiplied by: Percentage of time used for daycare × 34. Amend tax return 25% Percentage for indirect expenses 17. Amend tax return 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. Amend tax return In Part II, Mary figures her deductible expenses. Amend tax return She uses the following information to complete Part II. Amend tax return 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. Amend tax return (This figure is the same as the amount on line 29 of her Schedule C (Form 1040). Amend tax return ) The expenses she paid for rent and utilities relate to her entire home. Amend tax return Therefore, she enters the amount paid for rent on line 18, column (b), and the amount paid for utilities on line 20, column (b). Amend tax return She shows the total of these expenses on line 22, column (b). Amend tax return For line 23, she multiplies the amount on line 22, column (b) by the percentage on line 7 and enters the result, $1,585. Amend tax return Mary paid $500 to have the basement painted. Amend tax return The painting is a direct expense. Amend tax return 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. Amend tax return 25% – line 6). Amend tax return She enters $171 (34. Amend tax return 25% × $500) on line 19, column (a). Amend tax return She adds line 22, column (a), and line 23 and enters $1,756 ($171 + $1,585) on line 25. Amend tax return This is less than her deduction limit (line 15), so she can deduct the entire amount. Amend tax return She follows the instructions to complete the rest of Part II and enters $1,756 on lines 33 and 35. Amend tax return She then carries the $1,756 to line 30 of her Schedule C (Form 1040). Amend tax return Example 2. Amend tax return 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. Amend tax return 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. Amend tax return 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. Amend tax return The basement and room are 60% of the total area of her home. Amend tax return In figuring her expenses, 34. Amend tax return 25% of any direct expenses for the basement and room are deductible. Amend tax return In addition, 20. Amend tax return 55% (34. Amend tax return 25% × 60%) of her indirect expenses are deductible. Amend tax return Example 3. Amend tax return Assume the same facts as in Example 1 except that Mary stopped using her home for a daycare facility on June 24, 2013. Amend tax return 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. Amend tax return During the other 12 hours a day, the family could still use the basement. Amend tax return She figures the percentage of time the basement was used for business as follows. Amend tax return 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. Amend tax return 71%           Mary can deduct 35. Amend tax return 71% of any direct expenses for the basement. Amend tax return However, because her indirect expenses are for the entire house, she can deduct only 17. Amend tax return 86% of the indirect expenses. Amend tax return She figures the percentage for her indirect expenses as follows. Amend tax return Business percentage of the basement 50% Multiplied by: Percentage of time used for daycare × 35. Amend tax return 71% Percentage for indirect expenses 17. Amend tax return 86% Meals. Amend tax return   If you provide food for your daycare recipients, do not include the expense as a cost of using your home for business. Amend tax return Claim it as a separate deduction on your Schedule C (Form 1040). Amend tax return You can never deduct the cost of food consumed by you or your family. Amend tax return 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. Amend tax return 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. Amend tax return 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. Amend tax return   If you deduct the actual cost of food for your daycare business, keep a separate record (with receipts) of your family's food costs. Amend tax return   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. Amend tax return If your reimbursements are more than your expenses for food, show the difference as income in Part I of Schedule C (Form 1040). Amend tax return If your food expenses are greater than the reimbursements, show the difference as an expense in Part V of Schedule C (Form 1040). Amend tax return Do not include payments or expenses for your own children if they are eligible for the program. Amend tax return Follow this procedure even if you receive a Form 1099-MISC, Miscellaneous Income, reporting a payment from the sponsor. Amend tax return Standard meal and snack rates. Amend tax return   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. Amend tax return For these purposes: A family daycare provider is a person engaged in the business of providing family daycare. Amend tax return Family daycare is childcare provided to eligible children in the home of the family daycare provider. Amend tax return The care must be non-medical, not involve a transfer of legal custody, and generally last less than 24 hours each day. Amend tax return Eligible children are minor children receiving family daycare in the home of the family daycare provider. Amend tax return 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. Amend tax return Eligible children do not include children who receive daycare services for personal reasons of the provider. Amend tax return For example, if a provider provides daycare services for a relative as a favor to that relative, that child is not an eligible child. Amend tax return   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. Amend tax return 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. Amend tax return 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. Amend tax return   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. Amend tax return 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. Amend tax return 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. Amend tax return   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. Amend tax return 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. Amend tax return This information can be recorded in a log similar to the one shown in Exhibit A, near the end of this publication. Amend tax return   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. Amend tax return These expenses can be claimed as a separate deduction on your Schedule C (Form 1040). Amend tax return     Table 3. Amend tax return Standard Meal and Snack Rates1 Location of Family Daycare Provider Breakfast Lunch Dinner Snack States other than Alaska an
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LT 16 (Letter 2050) Frequently Asked Questions (FAQs)

What is the notice telling me?

Enforcement action may be taken to collect taxes you owe because you have not responded to previous notices sent to you on this matter.

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Contact us to resolve your account. The letter includes a number of options available to you.

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If you do not agree with this notice, call us immediately at the number printed at the top of the notice. We will do our best to help you. If you called us about this matter before, but we did not correct the problem, you may want to contact the Office of the Taxpayer Advocate.

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Page Last Reviewed or Updated: 30-Jan-2014

The Amend Tax Return

Amend tax return 2. Amend tax return   Accounting Methods Table of Contents Introduction Topics - This chapter discusses: Useful Items - You may want to see: Accounting MethodsCash Method Accrual Method Farm Inventory Cash Versus Accrual Method Special Methods of Accounting Combination Method Changes in Methods of Accounting Introduction You must use an accounting method that clearly shows your income and expenses. Amend tax return You must also figure your taxable income and file an income tax return for an annual accounting period called a tax year. Amend tax return This chapter discusses accounting methods. Amend tax return For information on accounting periods, see Publication 538, Accounting Periods and Methods, and the Instructions for Form 1128, Application To Adopt, Change, or Retain a Tax Year. Amend tax return Topics - This chapter discusses: Cash method Accrual method Farm inventory Special methods of accounting Changes in methods of accounting Useful Items - You may want to see: Publication 538 Accounting Periods and Methods 535 Business Expenses Form (and Instructions) 1128 Application To Adopt, Change, or Retain a Tax Year 3115 Application for Change in Accounting Method See chapter 16 for information about getting publications and forms. Amend tax return Accounting Methods An accounting method is a set of rules used to determine when and how your income and expenses are reported on your tax return. Amend tax return Your accounting method includes not only your overall method of accounting, but also the accounting treatment you use for any material item. Amend tax return A material item is one that affects the proper time for inclusion of income or allowance of a deduction. Amend tax return An item considered material for financial statement purposes is generally also considered material for income tax purposes. Amend tax return See Publication 538 for more information. Amend tax return You generally choose an accounting method for your farm business when you file your first income tax return that includes a Schedule F (Form 1040), Profit or Loss From Farming. Amend tax return If you later want to change your accounting method, you generally must get IRS approval. Amend tax return How to obtain IRS approval is discussed later under Changes in Methods of Accounting . Amend tax return Types of accounting methods. Amend tax return   Generally, you can use any of the following accounting methods. Amend tax return Each method is discussed in detail below. Amend tax return Cash method. Amend tax return Accrual method. Amend tax return Special methods of accounting for certain items of income and expenses. Amend tax return Combination (hybrid) method using elements of two or more of the above. Amend tax return Business and other items. Amend tax return   You can account for business and personal items using different accounting methods. Amend tax return For example, you can figure your business income under an accrual method, even if you use the cash method to figure personal items. Amend tax return Two or more businesses. Amend tax return   If you operate two or more separate and distinct businesses, you can use a different accounting method for each business. Amend tax return Generally, no business is separate and distinct unless a complete and separate set of books and records is maintained for each business. Amend tax return Cash Method Most farmers use the cash method because they find it easier to keep records using the cash method. Amend tax return However, certain farm corporations and partnerships and all tax shelters must use an accrual method of accounting. Amend tax return See Accrual Method Required , later. Amend tax return Income Under the cash method, include in your gross income all items of income you actually or constructively received during the tax year. Amend tax return Items of income include money received as well as property or services received. Amend tax return If you receive property or services, you must include the fair market value (FMV) of the property or services in income. Amend tax return See chapter 3 for information on how to report farm income on your income tax return. Amend tax return Constructive receipt. Amend tax return   Income is constructively received when an amount is credited to your account or made available to you without restriction. Amend tax return You do not need to have possession of the income for it to be treated as income for the tax year. Amend tax return If you authorize someone to be your agent and receive income for you, you are considered to have received the income when your agent receives it. Amend tax return Income is not constructively received if your receipt of the income is subject to substantial restrictions or limitations. Amend tax return Direct payments and counter-cyclical payments. Amend tax return   If you received direct payments or counter-cyclical payments under Subtitle A or C of the Farm Security and Rural Investment Act of 2002, you will not be considered to have constructively received a payment merely because you had the option to receive it in the year before it is required to be paid. Amend tax return Delaying receipt of income. Amend tax return   You cannot hold checks or postpone taking possession of similar property from one tax year to another to avoid paying tax on the income. Amend tax return You must report the income in the year the money or property is received or made available to you without restriction. Amend tax return Example. Amend tax return Frances Jones, a farmer, was entitled to receive a $10,000 payment on a grain contract in December 2013. Amend tax return She was told in December that her payment was available. Amend tax return She requested not to be paid until January 2014. Amend tax return However, she must still include this payment in her 2013 income because it was made available to her in 2013. Amend tax return Debts paid by another person or canceled. Amend tax return   If your debts are paid by another person or are canceled by your creditors, you may have to report part or all of this debt relief as income. Amend tax return If you receive income in this way, you constructively receive the income when the debt is canceled or paid. Amend tax return See Cancellation of Debt in chapter 3. Amend tax return Deferred payment contract. Amend tax return   If you sell an item under a deferred payment contract that calls for payment in a future year, there is no constructive receipt in the year of sale. Amend tax return However, if the sales contract states that you have the right to the proceeds of the sale from the buyer at any time after delivery of the item, then you must include the sales price in income in the year of the sale, regardless of when you actually receive payment. Amend tax return Example. Amend tax return You are a farmer who uses the cash method and a calendar tax year. Amend tax return You sell grain in December 2013 under a bona fide arm's-length contract that calls for payment in 2014. Amend tax return You include the proceeds from the sale in your 2014 gross income since that is the year payment is received. Amend tax return However, if the contract states that you have the right to the proceeds from the buyer at any time after the grain is delivered, you must include the sales price in your 2013 income, regardless of when you actually receive payment. Amend tax return Repayment of income. Amend tax return   If you include an amount in income and in a later year you have to repay all or part of it, then you can usually deduct the repayment in the year repaid. Amend tax return If the repayment is more than $3,000, a special rule applies. Amend tax return For details, see Repayments in chapter 11 of Publication 535, Business Expenses. Amend tax return Expenses Under the cash method, generally you deduct expenses in the tax year you pay them. Amend tax return This includes business expenses for which you contest liability. Amend tax return However, you may not be able to deduct an expense paid in advance or you may be required to capitalize certain costs, as explained under Uniform Capitalization Rules in chapter 6. Amend tax return See chapter 4 for information on how to deduct farm business expenses on your income tax return. Amend tax return Prepayment. Amend tax return   Generally, you cannot deduct expenses paid in advance. Amend tax return This rule applies to any expense paid far enough in advance to, in effect, create an asset with a useful life extending substantially beyond the end of the current tax year. Amend tax return Example. Amend tax return On November 1, 2013, you signed and paid $3,600 for a 3-year (36-month) insurance contract for equipment. Amend tax return In 2013, you are allowed to deduct only $200 (2/36 x $3,600) of the cost of the policy that is attributable to 2013. Amend tax return In 2014, you'll be able to deduct $1,200 (12/36 x $3,600); in 2015, you'll be able to deduct $1,200 (12/36 x $3,600); and in 2016 you'll be able to deduct the remaining balance of $1,000. Amend tax return An exception applies if the expense qualifies for the 12-month rule. Amend tax return See Publication 538 for more information and examples. Amend tax return See chapter 4 for special rules for prepaid farm supplies and prepaid livestock feed. Amend tax return Accrual Method Under an accrual method of accounting, you generally report income in the year earned and deduct or capitalize expenses in the year incurred. Amend tax return The purpose of an accrual method of accounting is to correctly match income and expenses. Amend tax return Certain businesses engaged in farming must use an accrual method of accounting for its farm business and for sales and purchases of inventory items. Amend tax return See Accrual Method Required and Farm Inventory , later. Amend tax return Income Generally, you include an amount in income for the tax year in which all events that fix your right to receive the income have occurred, and you can determine the amount with reasonable accuracy. Amend tax return Under this rule, include an amount in income on the earliest of the following dates. Amend tax return When you receive payment. Amend tax return When the income amount is due to you. Amend tax return When you earn the income. Amend tax return When title passes. Amend tax return If you use an accrual method of accounting, complete Part III of Schedule F (Form 1040) to report your income. Amend tax return Inventory. Amend tax return   If you keep an inventory, generally you must use an accrual method of accounting to determine your gross income. Amend tax return An inventory is necessary to clearly show income when the production, purchase, or sale of merchandise is an income-producing factor. Amend tax return See Publication 538 for more information. Amend tax return Also see Farm Inventory , later, for more information on items that must be included in inventory by farmers and inventory valuation methods for farmers. Amend tax return Expenses Under an accrual method of accounting, you generally deduct or capitalize a business expense when both of the following apply. Amend tax return The all-events test has been met. Amend tax return This test is met when: All events have occurred that fix the fact that you have a liability, and The amount of the liability can be determined with reasonable accuracy. Amend tax return Economic performance has occurred. Amend tax return Economic performance. Amend tax return   Generally, you cannot deduct or capitalize a business expense until economic performance occurs. Amend tax return If your expense is for property or services provided to you, or for your use of property, economic performance occurs as the property or services are provided or as the property is used. Amend tax return If your expense is for property or services you provide to others, economic performance occurs as you provide the property or services. Amend tax return Example. Amend tax return Jane, who is a farmer, uses a calendar tax year and an accrual method of accounting. Amend tax return She entered into a contract with ABC Farm Consulting in 2012. Amend tax return The contract stated that Jane pay ABC Farm Consulting $2,000 in December 2012. Amend tax return It further stipulates that ABC Farm Consulting will develop a plan for integrating her farm with a larger farm operation based in a neighboring state by March 1, 2013. Amend tax return Jane paid ABC Farm Consulting $2,000 in December 2012. Amend tax return Integration of operations according to the plan began in May 2013 and they completed the integration in December 2013. Amend tax return Economic performance for Jane's liability in the contract occurs as the services are provided. Amend tax return Jane incurs the $2,000 cost in 2013. Amend tax return An exception to the economic performance rule allows certain recurring items to be treated as incurred during a tax year even though economic performance has not occurred. Amend tax return For more information, see Economic Performance in Publication 538. Amend tax return Special rule for related persons. Amend tax return   Business expenses and interest owed to a related person who uses the cash method of accounting are not deductible until you make the payment and the corresponding amount is includible in the related person's gross income. Amend tax return Determine the relationship for this rule as of the end of the tax year for which the expense or interest would otherwise be deductible. Amend tax return For more information, see Internal Revenue Code section 267. Amend tax return Accrual Method Required Generally, the following businesses, if engaged in farming, must use an accrual method of accounting. Amend tax return A corporation (other than a family corporation) that had gross receipts of more than $1,000,000 for any tax year beginning after 1975. Amend tax return A family corporation that had gross receipts of more than $25,000,000 for any tax year beginning after 1985. Amend tax return A partnership with a corporation as a partner, if that corporation meets the requirements of (1) or (2) above. Amend tax return A tax shelter. Amend tax return Note. Amend tax return Items (1), (2), and (3) above do not apply to an S corporation or a business operating a nursery or sod farm, or the raising or harvesting of trees (other than fruit and nut trees). Amend tax return Family corporation. Amend tax return   A family corporation is generally a corporation that meets one of the following ownership requirements. Amend tax return Members of the same family own at least 50% of the total combined voting power of all classes of stock entitled to vote and at least 50% of the total shares of all other classes of stock of the corporation. Amend tax return Members of two families have owned, directly or indirectly, since October 4, 1976, at least 65% of the total combined voting power of all classes of voting stock and at least 65% of the total shares of all other classes of the corporation's stock. Amend tax return Members of three families have owned, directly or indirectly, since October 4, 1976, at least 50% of the total combined voting power of all classes of voting stock and at least 50% of the total shares of all other classes of the corporation's stock. Amend tax return For more information on family corporations, see Internal Revenue Code section 447. Amend tax return Tax shelter. Amend tax return   A tax shelter is a partnership, noncorporate enterprise, or S corporation that meets either of the following tests. Amend tax return Its principal purpose is the avoidance or evasion of federal income tax. Amend tax return It is a farming syndicate. Amend tax return A farming syndicate is an entity that meets either of the following tests. Amend tax return Interests in the activity have been offered for sale in an offering required to be registered with a federal or state agency with the authority to regulate the offering of securities for sale. Amend tax return More than 35% of the losses during the tax year are allocable to limited partners or limited entrepreneurs. Amend tax return   A “limited partner” is one whose personal liability for partnership debts is limited to the money or other property the partner contributed or is required to contribute to the partnership. Amend tax return   A “limited entrepreneur” is one who has an interest in an enterprise other than as a limited partner and does not actively participate in the management of the enterprise. Amend tax return Farm Inventory If you are required to keep an inventory, you should keep a complete record of your inventory as part of your farm records. Amend tax return This record should show the actual count or measurement of the inventory. Amend tax return It should also show all factors that enter into its valuation, including quality and weight, if applicable. Amend tax return Hatchery business. Amend tax return   If you are in the hatchery business, and use an accrual method of accounting, you must include in inventory eggs in the process of incubation. Amend tax return Products held for sale. Amend tax return   All harvested and purchased farm products held for sale or for feed or seed, such as grain, hay, silage, concentrates, cotton, tobacco, etc. Amend tax return , must be included in inventory. Amend tax return Supplies. Amend tax return   Supplies acquired for sale or that become a physical part of items held for sale must be included in inventory. Amend tax return Deduct the cost of supplies in the year used or consumed in operations. Amend tax return Do not include incidental supplies in inventory as these are deductible in the year of purchase. Amend tax return Livestock. Amend tax return   Livestock held primarily for sale must be included in inventory. Amend tax return Livestock held for draft, breeding, or dairy purposes can either be depreciated or included in inventory. Amend tax return See also Unit-livestock-price method , later. Amend tax return If you are in the business of breeding and raising chinchillas, mink, foxes, or other fur-bearing animals, these animals are livestock for inventory purposes. Amend tax return Growing crops. Amend tax return   Generally, growing crops are not required to be included in inventory. Amend tax return However, if the crop has a preproductive period of more than 2 years, you may have to capitalize (or include in inventory) costs associated with the crop. Amend tax return See Uniform capitalization rules below. Amend tax return Also see Uniform Capitalization Rules in  chapter 6. Amend tax return Items to include in inventory. Amend tax return   Your inventory should include all items held for sale, or for use as feed, seed, etc. Amend tax return , whether raised or purchased, that are unsold at the end of the year. Amend tax return Uniform capitalization rules. Amend tax return   The following applies if you are required to use an accrual method of accounting. Amend tax return The uniform capitalization rules apply to all costs of raising a plant, even if the preproductive period of raising a plant is 2 years or less. Amend tax return The costs of animals are subject to the uniform capitalization rules. Amend tax return Inventory valuation methods. Amend tax return   The following methods, described below, are those generally available for valuing inventory. Amend tax return The method you use must conform to generally accepted accounting principles for similar businesses and must clearly reflect income. Amend tax return Cost. Amend tax return Lower of cost or market. Amend tax return Farm-price method. Amend tax return Unit-livestock-price method. Amend tax return Cost and lower of cost or market methods. Amend tax return   See Publication 538 for information on these valuation methods. Amend tax return If you value your livestock inventory at cost or the lower of cost or market, you do not need IRS approval to change to the unit-livestock-price method. Amend tax return However, if you value your livestock inventory using the farm-price method, then you must obtain permission from the IRS to change to the unit-livestock-price method. Amend tax return Farm-price method. Amend tax return   Under this method, each item, whether raised or purchased, is valued at its market price less the direct cost of disposition. Amend tax return Market price is the current price at the nearest market in the quantities you usually sell. Amend tax return Cost of disposition includes broker's commissions, freight, hauling to market, and other marketing costs. Amend tax return If you use this method, you must use it for your entire inventory, except that livestock can be inventoried under the unit-livestock-price method. Amend tax return Unit-livestock-price method. Amend tax return   This method recognizes the difficulty of establishing the exact costs of producing and raising each animal. Amend tax return You group or classify livestock according to type and age and use a standard unit price for each animal within a class or group. Amend tax return The unit price you assign should reasonably approximate the normal costs incurred in producing the animals in such classes. Amend tax return Unit prices and classifications are subject to approval by the IRS on examination of your return. Amend tax return You must annually reevaluate your unit livestock prices and adjust the prices upward or downward to reflect increases or decreases in the costs of raising livestock. Amend tax return IRS approval is not required for these adjustments. Amend tax return Any other changes in unit prices or classifications do require IRS approval. Amend tax return   If you use this method, include all raised livestock in inventory, regardless of whether they are held for sale or for draft, breeding, sport, or dairy purposes. Amend tax return This method accounts only for the increase in cost of raising an animal to maturity. Amend tax return It does not provide for any decrease in the animal's market value after it reaches maturity. Amend tax return Also, if you raise cattle, you are not required to inventory hay you grow to feed your herd. Amend tax return   Do not include sold or lost animals in the year-end inventory. Amend tax return If your records do not show which animals were sold or lost, treat the first animals acquired as sold or lost. Amend tax return The animals on hand at the end of the year are considered those most recently acquired. Amend tax return   You must include in inventory all livestock purchased primarily for sale. Amend tax return You can choose either to include in inventory or depreciate livestock purchased for draft, breeding, sport or dairy purposes. Amend tax return However, you must be consistent from year to year, regardless of the method you have chosen. Amend tax return You cannot change your method without obtaining approval from the IRS. Amend tax return   You must include in inventory animals purchased after maturity or capitalize them at their purchase price. Amend tax return If the animals are not mature at purchase, increase the cost at the end of each tax year according to the established unit price. Amend tax return However, in the year of purchase, do not increase the cost of any animal purchased during the last 6 months of the year. Amend tax return This “no increase” rule does not apply to tax shelters which must make an adjustment for any animal purchased during the year. Amend tax return It also does not apply to taxpayers that must make an adjustment to reasonably reflect the particular period in the year in which animals are purchased, if necessary to avoid significant distortions in income. Amend tax return Uniform capitalization rules. Amend tax return   A farmer can determine costs required to be allocated under the uniform capitalization rules by using the farm-price or unit-livestock-price inventory method. Amend tax return This applies to any plant or animal, even if the farmer does not hold or treat the plant or animal as inventory property. Amend tax return Cash Versus Accrual Method The following examples compare the cash and accrual methods of accounting. Amend tax return Example 1. Amend tax return You are a farmer who uses an accrual method of accounting. Amend tax return You keep your books on the calendar year basis. Amend tax return You sell grain in December 2013 but you are not paid until January 2014. Amend tax return Because the accrual method was used and 2013 was the tax year in which the grain was sold, you must both include the sales proceeds and deduct the costs incurred in producing the grain on your 2013 tax return. Amend tax return Example 2. Amend tax return Assume the same facts as in Example 1 except that you use the cash method and there was no constructive receipt of the sales proceeds in 2013. Amend tax return Under this method, you include the sales proceeds in income for 2014, the year you receive payment. Amend tax return Deduct the costs of producing the grain in the year you pay for them. Amend tax return Special Methods of Accounting There are special methods of accounting for certain items of income and expense. Amend tax return Crop method. Amend tax return   If you do not harvest and dispose of your crop in the same tax year that you plant it, you can, with IRS approval, use the crop method of accounting. Amend tax return You cannot use the crop method for any tax return, including your first tax return, unless you receive approval from the IRS. Amend tax return Under this method, you deduct the entire cost of producing the crop, including the expense of seed or young plants, in the year you realize income from the crop. Amend tax return    See chapter 4 for details on deducting the costs of operating a farm. Amend tax return Also see Regulations section 1. Amend tax return 162-12. Amend tax return Other special methods. Amend tax return   Other special methods of accounting apply to the following items. Amend tax return Amortization, see chapter 7. Amend tax return Casualties, see chapter 11. Amend tax return Condemnations, see chapter 11. Amend tax return Depletion, see chapter 7. Amend tax return Depreciation, see chapter 7. Amend tax return Farm business expenses, see chapter 4. Amend tax return Farm income, see chapter 3. Amend tax return Installment sales, see chapter 10. Amend tax return Soil and water conservation expenses, see chapter 5. Amend tax return Thefts, see chapter 11. Amend tax return Combination Method Generally, you can use any combination of cash, accrual, and special methods of accounting if the combination clearly shows your income and expenses and you use it consistently. Amend tax return However, the following restrictions apply. Amend tax return If you use the cash method for figuring your income, you must use the cash method for reporting your expenses. Amend tax return If you use an accrual method for reporting your expenses, you must use an accrual method for figuring your income. Amend tax return Changes in Methods of Accounting A change in your method of accounting includes a change in: Your overall method, such as from the cash method to an accrual method, and Your treatment of any material item, such as a change in your method of valuing inventory (for example, a change from the farm-price method to the unit-livestock-price method, discussed earlier). Amend tax return Generally, once you have set up your accounting method, you must receive approval from the IRS before you can change to another method of accounting. Amend tax return You may also have to pay a fee. Amend tax return To obtain approval, you must generally file Form 3115. Amend tax return There are instances when you can obtain automatic consent to change certain methods of accounting. Amend tax return See the List of Automatic Accounting Method Changes located in the Instructions for Form 3115. Amend tax return For more information on changes in methods of accounting, see Form 3115 and the Instructions for Form 3115. Amend tax return Also see Publication 538. Amend tax return Prev  Up  Next   Home   More Online Publications