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Income Tax Form 1040

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Income Tax Form 1040

Income tax form 1040 8. Income tax form 1040   Dividends and Other Distributions Table of Contents Reminder Introduction Useful Items - You may want to see: General InformationDividends not reported on Form 1099-DIV. Income tax form 1040 Reporting tax withheld. Income tax form 1040 Nominees. Income tax form 1040 Ordinary DividendsQualified Dividends Dividends Used to Buy More Stock Money Market Funds Capital Gain DistributionsBasis adjustment. Income tax form 1040 Nondividend DistributionsLiquidating Distributions Distributions of Stock and Stock Rights Other DistributionsInformation reporting requirement. Income tax form 1040 Alternative minimum tax treatment. Income tax form 1040 How To Report Dividend IncomeInvestment interest deducted. Income tax form 1040 Reminder Foreign-source income. Income tax form 1040  If you are a U. Income tax form 1040 S. Income tax form 1040 citizen with dividend income from sources outside the United States (foreign-source income), you must report that income on your tax return unless it is exempt by U. Income tax form 1040 S. Income tax form 1040 law. Income tax form 1040 This is true whether you reside inside or outside the United States and whether or not you receive a Form 1099 from the foreign payer. Income tax form 1040 Introduction This chapter discusses the tax treatment of: Ordinary dividends, Capital gain distributions, Nondividend distributions, and Other distributions you may receive from a corporation or a mutual fund. Income tax form 1040 This chapter also explains how to report dividend income on your tax return. Income tax form 1040 Dividends are distributions of money, stock, or other property paid to you by a corporation or by a mutual fund. Income tax form 1040 You also may receive dividends through a partnership, an estate, a trust, or an association that is taxed as a corporation. Income tax form 1040 However, some amounts you receive that are called dividends are actually interest income. Income tax form 1040 (See Dividends that are actually interest under Taxable Interest in chapter 7. Income tax form 1040 ) Most distributions are paid in cash (or check). Income tax form 1040 However, distributions can consist of more stock, stock rights, other property, or services. Income tax form 1040 Useful Items - You may want to see: Publication 514 Foreign Tax Credit for Individuals 550 Investment Income and Expenses Form (and Instructions) Schedule B (Form 1040A or 1040) Interest and Ordinary Dividends General Information This section discusses general rules for dividend income. Income tax form 1040 Tax on unearned income of certain children. Income tax form 1040   Part of a child's 2013 unearned income may be taxed at the parent's tax rate. Income tax form 1040 If it is, Form 8615, Tax for Certain Children Who Have Unearned Income, must be completed and attached to the child's tax return. Income tax form 1040 If not, Form 8615 is not required and the child's income is taxed at his or her own tax rate. Income tax form 1040    Some parents can choose to include the child's interest and dividends on the parent's return if certain requirements are met. Income tax form 1040 Use Form 8814, Parents' Election To Report Child's Interest and Dividends, for this purpose. Income tax form 1040   For more information about the tax on unearned income of children and the parents' election, see chapter 31. Income tax form 1040 Beneficiary of an estate or trust. Income tax form 1040    Dividends and other distributions you receive as a beneficiary of an estate or trust are generally taxable income. Income tax form 1040 You should receive a Schedule K-1 (Form 1041), Beneficiary's Share of Income, Deductions, Credits, etc. Income tax form 1040 , from the fiduciary. Income tax form 1040 Your copy of Schedule K-1 (Form 1041) and its instructions will tell you where to report the income on your Form 1040. Income tax form 1040 Social security number (SSN) or individual taxpayer identification number (ITIN). Income tax form 1040    You must give your SSN or ITIN to any person required by federal tax law to make a return, statement, or other document that relates to you. Income tax form 1040 This includes payers of dividends. Income tax form 1040 If you do not give your SSN or ITIN to the payer of dividends, you may have to pay a penalty. Income tax form 1040 For more information on SSNs and ITINs, see Social Security Number (SSN) in chapter 1. Income tax form 1040 Backup withholding. Income tax form 1040   Your dividend income is generally not subject to regular withholding. Income tax form 1040 However, it may be subject to backup withholding to ensure that income tax is collected on the income. Income tax form 1040 Under backup withholding, the payer of dividends must withhold, as income tax, on the amount you are paid, applying the appropriate withholding rate. Income tax form 1040   Backup withholding may also be required if the IRS has determined that you underreported your interest or dividend income. Income tax form 1040 For more information, see Backup Withholding in chapter 4. Income tax form 1040 Stock certificate in two or more names. Income tax form 1040   If two or more persons hold stock as joint tenants, tenants by the entirety, or tenants in common, each person's share of any dividends from the stock is determined by local law. Income tax form 1040 Form 1099-DIV. Income tax form 1040   Most corporations and mutual funds use Form 1099-DIV, Dividends and Distributions, to show you the distributions you received from them during the year. Income tax form 1040 Keep this form with your records. Income tax form 1040 You do not have to attach it to your tax return. Income tax form 1040 Dividends not reported on Form 1099-DIV. Income tax form 1040   Even if you do not receive Form 1099-DIV, you must still report all your taxable dividend income. Income tax form 1040 For example, you may receive distributive shares of dividends from partnerships or S corporations. Income tax form 1040 These dividends are reported to you on Schedule K-1 (Form 1065), Partner's Share of Income, Deductions, Credits, etc. Income tax form 1040 , and Schedule K-1 (Form 1120S), Shareholder's Share of Income, Deductions, Credits, etc. Income tax form 1040 Reporting tax withheld. Income tax form 1040   If tax is withheld from your dividend income, the payer must give you a Form 1099-DIV that indicates the amount withheld. Income tax form 1040 Nominees. Income tax form 1040   If someone receives distributions as a nominee for you, that person should give you a Form 1099-DIV, which will show distributions received on your behalf. Income tax form 1040 Form 1099-MISC. Income tax form 1040   Certain substitute payments in lieu of dividends or tax-exempt interest received by a broker on your behalf must be reported to you on Form 1099-MISC, Miscellaneous Income, or a similar statement. Income tax form 1040 See Reporting Substitute Payments under Short Sales in chapter 4 of Publication 550 for more information about reporting these payments. Income tax form 1040 Incorrect amount shown on a Form 1099. Income tax form 1040   If you receive a Form 1099 that shows an incorrect amount (or other incorrect information), you should ask the issuer for a corrected form. Income tax form 1040 The new Form 1099 you receive will be marked “Corrected. Income tax form 1040 ” Dividends on stock sold. Income tax form 1040   If stock is sold, exchanged, or otherwise disposed of after a dividend is declared but before it is paid, the owner of record (usually the payee shown on the dividend check) must include the dividend in income. Income tax form 1040 Dividends received in January. Income tax form 1040   If a mutual fund (or other regulated investment company) or real estate investment trust (REIT) declares a dividend (including any exempt-interest dividend or capital gain distribution) in October, November, or December, payable to shareholders of record on a date in one of those months but actually pays the dividend during January of the next calendar year, you are considered to have received the dividend on December 31. Income tax form 1040 You report the dividend in the year it was declared. Income tax form 1040 Ordinary Dividends Ordinary (taxable) dividends are the most common type of distribution from a corporation or a mutual fund. Income tax form 1040 They are paid out of earnings and profits and are ordinary income to you. Income tax form 1040 This means they are not capital gains. Income tax form 1040 You can assume that any dividend you receive on common or preferred stock is an ordinary dividend unless the paying corporation or mutual fund tells you otherwise. Income tax form 1040 Ordinary dividends will be shown in box 1a of the Form 1099-DIV you receive. Income tax form 1040 Qualified Dividends Qualified dividends are the ordinary dividends subject to the same 0%, 15%, or 20% maximum tax rate that applies to net capital gain. Income tax form 1040 They should be shown in box 1b of the Form 1099-DIV you receive. Income tax form 1040 The maximum rate of tax on qualified dividends is: 0% on any amount that otherwise would be taxed at a 10% or 15% rate. Income tax form 1040 15% on any amount that otherwise would be taxed at rates greater than 15% but less than 39. Income tax form 1040 6%. Income tax form 1040 20% on any amount that otherwise would be taxed at a 39. Income tax form 1040 6% rate. Income tax form 1040 To qualify for the maximum rate, all of the following requirements must be met. Income tax form 1040 The dividends must have been paid by a U. Income tax form 1040 S. Income tax form 1040 corporation or a qualified foreign corporation. Income tax form 1040 (See Qualified foreign corporation , later. Income tax form 1040 ) The dividends are not of the type listed later under Dividends that are not qualified dividends . Income tax form 1040 You meet the holding period (discussed next). Income tax form 1040 Holding period. Income tax form 1040   You must have held the stock for more than 60 days during the 121-day period that begins 60 days before the ex-dividend date. Income tax form 1040 The ex-dividend date is the first date following the declaration of a dividend on which the buyer of a stock is not entitled to receive the next dividend payment. Income tax form 1040 Instead, the seller will get the dividend. Income tax form 1040   When counting the number of days you held the stock, include the day you disposed of the stock, but not the day you acquired it. Income tax form 1040 See the examples later. Income tax form 1040 Exception for preferred stock. Income tax form 1040   In the case of preferred stock, you must have held the stock more than 90 days during the 181-day period that begins 90 days before the ex-dividend date if the dividends are due to periods totaling more than 366 days. Income tax form 1040 If the preferred dividends are due to periods totaling less than 367 days, the holding period in the previous paragraph applies. Income tax form 1040 Example 1. Income tax form 1040 You bought 5,000 shares of XYZ Corp. Income tax form 1040 common stock on July 9, 2013. Income tax form 1040 XYZ Corp. Income tax form 1040 paid a cash dividend of 10 cents per share. Income tax form 1040 The ex-dividend date was July 16, 2013. Income tax form 1040 Your Form 1099-DIV from XYZ Corp. Income tax form 1040 shows $500 in box 1a (ordinary dividends) and in box 1b (qualified dividends). Income tax form 1040 However, you sold the 5,000 shares on August 12, 2013. Income tax form 1040 You held your shares of XYZ Corp. Income tax form 1040 for only 34 days of the 121-day period (from July 10, 2013, through August 12, 2013). Income tax form 1040 The 121-day period began on May 17, 2013 (60 days before the ex-dividend date), and ended on September 14, 2013. Income tax form 1040 You have no qualified dividends from XYZ Corp. Income tax form 1040 because you held the XYZ stock for less than 61 days. Income tax form 1040 Example 2. Income tax form 1040 Assume the same facts as in Example 1 except that you bought the stock on July 15, 2013 (the day before the ex-dividend date), and you sold the stock on September 16, 2013. Income tax form 1040 You held the stock for 63 days (from July 16, 2013, through September 16, 2013). Income tax form 1040 The $500 of qualified dividends shown in box 1b of your Form 1099-DIV are all qualified dividends because you held the stock for 61 days of the 121-day period (from July 16, 2013, through September 14, 2013). Income tax form 1040 Example 3. Income tax form 1040 You bought 10,000 shares of ABC Mutual Fund common stock on July 9, 2013. Income tax form 1040 ABC Mutual Fund paid a cash dividend of 10 cents a share. Income tax form 1040 The ex-dividend date was July 16, 2013. Income tax form 1040 The ABC Mutual Fund advises you that the portion of the dividend eligible to be treated as qualified dividends equals 2 cents per share. Income tax form 1040 Your Form 1099-DIV from ABC Mutual Fund shows total ordinary dividends of $1,000 and qualified dividends of $200. Income tax form 1040 However, you sold the 10,000 shares on August 12, 2013. Income tax form 1040 You have no qualified dividends from ABC Mutual Fund because you held the ABC Mutual Fund stock for less than 61 days. Income tax form 1040 Holding period reduced where risk of loss is diminished. Income tax form 1040   When determining whether you met the minimum holding period discussed earlier, you cannot count any day during which you meet any of the following conditions. Income tax form 1040 You had an option to sell, were under a contractual obligation to sell, or had made (and not closed) a short sale of substantially identical stock or securities. Income tax form 1040 You were grantor (writer) of an option to buy substantially identical stock or securities. Income tax form 1040 Your risk of loss is diminished by holding one or more other positions in substantially similar or related property. Income tax form 1040   For information about how to apply condition (3), see Regulations section 1. Income tax form 1040 246-5. Income tax form 1040 Qualified foreign corporation. Income tax form 1040   A foreign corporation is a qualified foreign corporation if it meets any of the following conditions. Income tax form 1040 The corporation is incorporated in a U. Income tax form 1040 S. Income tax form 1040 possession. Income tax form 1040 The corporation is eligible for the benefits of a comprehensive income tax treaty with the United States that the Treasury Department determines is satisfactory for this purpose and that includes an exchange of information program. Income tax form 1040 For a list of those treaties, see Table 8-1. Income tax form 1040 The corporation does not meet (1) or (2) above, but the stock for which the dividend is paid is readily tradable on an established securities market in the United States. Income tax form 1040 See Readily tradable stock , later. Income tax form 1040 Exception. Income tax form 1040   A corporation is not a qualified foreign corporation if it is a passive foreign investment company during its tax year in which the dividends are paid or during its previous tax year. Income tax form 1040 Readily tradable stock. Income tax form 1040   Any stock (such as common, ordinary, or preferred) or an American depositary receipt in respect of that stock is considered to satisfy requirement (3) under Qualified foreign corporation , if it is listed on a national securities exchange that is registered under section 6 of the Securities Exchange Act of 1934 or on the Nasdaq Stock Market. Income tax form 1040 For a list of the exchanges that meet these requirements, see www. Income tax form 1040 sec. Income tax form 1040 gov/divisions/marketreg/mrexchanges. Income tax form 1040 shtml. Income tax form 1040 Dividends that are not qualified dividends. Income tax form 1040   The following dividends are not qualified dividends. Income tax form 1040 They are not qualified dividends even if they are shown in box 1b of Form 1099-DIV. Income tax form 1040 Capital gain distributions. Income tax form 1040 Dividends paid on deposits with mutual savings banks, cooperative banks, credit unions, U. Income tax form 1040 S. Income tax form 1040 building and loan associations, U. Income tax form 1040 S. Income tax form 1040 savings and loan associations, federal savings and loan associations, and similar financial institutions. Income tax form 1040 (Report these amounts as interest income. Income tax form 1040 ) Dividends from a corporation that is a tax-exempt organization or farmer's cooperative during the corporation's tax year in which the dividends were paid or during the corporation's previous tax year. Income tax form 1040 Dividends paid by a corporation on employer securities held on the date of record by an employee stock ownership plan (ESOP) maintained by that corporation. Income tax form 1040 Dividends on any share of stock to the extent you are obligated (whether under a short sale or otherwise) to make related payments for positions in substantially similar or related property. Income tax form 1040 Payments in lieu of dividends, but only if you know or have reason to know the payments are not qualified dividends. Income tax form 1040 Payments shown in Form 1099-DIV, box 1b, from a foreign corporation to the extent you know or have reason to know the payments are not qualified dividends. Income tax form 1040 Table 8-1. Income tax form 1040 Income Tax Treaties Income tax treaties the United States has with the following countries satisfy requirement (2) under Qualified foreign corporation. Income tax form 1040 Australia Indonesia Romania Austria Ireland Russian Bangladesh Israel Federation Barbados Italy Slovak Belgium Jamaica Republic Bulgaria Japan Slovenia Canada Kazakhstan South Africa China Korea Spain Cyprus Latvia Sri Lanka Czech Lithuania Sweden Republic Luxembourg Switzerland Denmark Malta Thailand Egypt Mexico Trinidad and Estonia Morocco Tobago Finland Netherlands Tunisia France New Zealand Turkey Germany Norway Ukraine Greece Pakistan United Hungary Philippines Kingdom Iceland Poland Venezuela India Portugal     Dividends Used to Buy More Stock The corporation in which you own stock may have a dividend reinvestment plan. Income tax form 1040 This plan lets you choose to use your dividends to buy (through an agent) more shares of stock in the corporation instead of receiving the dividends in cash. Income tax form 1040 Most mutual funds also permit shareholders to automatically reinvest distributions in more shares in the fund, instead of receiving cash. Income tax form 1040 If you use your dividends to buy more stock at a price equal to its fair market value, you still must report the dividends as income. Income tax form 1040 If you are a member of a dividend reinvestment plan that lets you buy more stock at a price less than its fair market value, you must report as dividend income the fair market value of the additional stock on the dividend payment date. Income tax form 1040 You also must report as dividend income any service charge subtracted from your cash dividends before the dividends are used to buy the additional stock. Income tax form 1040 But you may be able to deduct the service charge. Income tax form 1040 See chapter 28 for more information about deducting expenses of producing income. Income tax form 1040 In some dividend reinvestment plans, you can invest more cash to buy shares of stock at a price less than fair market value. Income tax form 1040 If you choose to do this, you must report as dividend income the difference between the cash you invest and the fair market value of the stock you buy. Income tax form 1040 When figuring this amount, use the fair market value of the stock on the dividend payment date. Income tax form 1040 Money Market Funds Report amounts you receive from money market funds as dividend income. Income tax form 1040 Money market funds are a type of mutual fund and should not be confused with bank money market accounts that pay interest. Income tax form 1040 Capital Gain Distributions Capital gain distributions (also called capital gain dividends) are paid to you or credited to your account by mutual funds (or other regulated investment companies) and real estate investment trusts (REITs). Income tax form 1040 They will be shown in box 2a of the Form 1099-DIV you receive from the mutual fund or REIT. Income tax form 1040 Report capital gain distributions as long-term capital gains, regardless of how long you owned your shares in the mutual fund or REIT. Income tax form 1040 Undistributed capital gains of mutual funds and REITs. Income tax form 1040    Some mutual funds and REITs keep their long-term capital gains and pay tax on them. Income tax form 1040 You must treat your share of these gains as distributions, even though you did not actually receive them. Income tax form 1040 However, they are not included on Form 1099-DIV. Income tax form 1040 Instead, they are reported to you in box 1a of Form 2439. Income tax form 1040   Report undistributed capital gains (box 1a of Form 2439) as long-term capital gains on Schedule D (Form 1040), column (h), line 11. Income tax form 1040   The tax paid on these gains by the mutual fund or REIT is shown in box 2 of Form 2439. Income tax form 1040 You take credit for this tax by including it on Form 1040, line 71, and checking box a on that line. Income tax form 1040 Attach Copy B of Form 2439 to your return, and keep Copy C for your records. Income tax form 1040 Basis adjustment. Income tax form 1040   Increase your basis in your mutual fund, or your interest in a REIT, by the difference between the gain you report and the credit you claim for the tax paid. Income tax form 1040 Additional information. Income tax form 1040   For more information on the treatment of distributions from mutual funds, see Publication 550. Income tax form 1040 Nondividend Distributions A nondividend distribution is a distribution that is not paid out of the earnings and profits of a corporation or a mutual fund. Income tax form 1040 You should receive a Form 1099-DIV or other statement showing the nondividend distribution. Income tax form 1040 On Form 1099-DIV, a nondividend distribution will be shown in box 3. Income tax form 1040 If you do not receive such a statement, you report the distribution as an ordinary dividend. Income tax form 1040 Basis adjustment. Income tax form 1040   A nondividend distribution reduces the basis of your stock. Income tax form 1040 It is not taxed until your basis in the stock is fully recovered. Income tax form 1040 This nontaxable portion is also called a return of capital; it is a return of your investment in the stock of the company. Income tax form 1040 If you buy stock in a corporation in different lots at different times, and you cannot definitely identify the shares subject to the nondividend distribution, reduce the basis of your earliest purchases first. Income tax form 1040   When the basis of your stock has been reduced to zero, report any additional nondividend distribution you receive as a capital gain. Income tax form 1040 Whether you report it as a long-term or short-term capital gain depends on how long you have held the stock. Income tax form 1040 See Holding Period in chapter 14. Income tax form 1040 Example. Income tax form 1040 You bought stock in 2000 for $100. Income tax form 1040 In 2003, you received a nondividend distribution of $80. Income tax form 1040 You did not include this amount in your income, but you reduced the basis of your stock to $20. Income tax form 1040 You received a nondividend distribution of $30 in 2013. Income tax form 1040 The first $20 of this amount reduced your basis to zero. Income tax form 1040 You report the other $10 as a long-term capital gain for 2013. Income tax form 1040 You must report as a long-term capital gain any nondividend distribution you receive on this stock in later years. Income tax form 1040 Liquidating Distributions Liquidating distributions, sometimes called liquidating dividends, are distributions you receive during a partial or complete liquidation of a corporation. Income tax form 1040 These distributions are, at least in part, one form of a return of capital. Income tax form 1040 They may be paid in one or more installments. Income tax form 1040 You will receive Form 1099-DIV from the corporation showing you the amount of the liquidating distribution in box 8 or 9. Income tax form 1040 For more information on liquidating distributions, see chapter 1 of Publication 550. Income tax form 1040 Distributions of Stock and Stock Rights Distributions by a corporation of its own stock are commonly known as stock dividends. Income tax form 1040 Stock rights (also known as “stock options”) are distributions by a corporation of rights to acquire the corporation's stock. Income tax form 1040 Generally, stock dividends and stock rights are not taxable to you, and you do not report them on your return. Income tax form 1040 Taxable stock dividends and stock rights. Income tax form 1040   Distributions of stock dividends and stock rights are taxable to you if any of the following apply. Income tax form 1040 You or any other shareholder have the choice to receive cash or other property instead of stock or stock rights. Income tax form 1040 The distribution gives cash or other property to some shareholders and an increase in the percentage interest in the corporation's assets or earnings and profits to other shareholders. Income tax form 1040 The distribution is in convertible preferred stock and has the same result as in (2). Income tax form 1040 The distribution gives preferred stock to some common stock shareholders and common stock to other common stock shareholders. Income tax form 1040 The distribution is on preferred stock. Income tax form 1040 (The distribution, however, is not taxable if it is an increase in the conversion ratio of convertible preferred stock made solely to take into account a stock dividend, stock split, or similar event that would otherwise result in reducing the conversion right. Income tax form 1040 )   The term “stock” includes rights to acquire stock, and the term “shareholder” includes a holder of rights or of convertible securities. Income tax form 1040 If you receive taxable stock dividends or stock rights, include their fair market value at the time of distribution in your income. Income tax form 1040 Preferred stock redeemable at a premium. Income tax form 1040   If you hold preferred stock having a redemption price higher than its issue price, the difference (the redemption premium) generally is taxable as a constructive distribution of additional stock on the preferred stock. Income tax form 1040 For more information, see chapter 1 of Publication 550. Income tax form 1040 Basis. Income tax form 1040   Your basis in stock or stock rights received in a taxable distribution is their fair market value when distributed. Income tax form 1040 If you receive stock or stock rights that are not taxable to you, see Stocks and Bonds under Basis of Investment Property in chapter 4 of Publication 550 for information on how to figure their basis. Income tax form 1040 Fractional shares. Income tax form 1040    You may not own enough stock in a corporation to receive a full share of stock if the corporation declares a stock dividend. Income tax form 1040 However, with the approval of the shareholders, the corporation may set up a plan in which fractional shares are not issued but instead are sold, and the cash proceeds are given to the shareholders. Income tax form 1040 Any cash you receive for fractional shares under such a plan is treated as an amount realized on the sale of the fractional shares. Income tax form 1040 Report this transaction on Form 8949, Sales and Other Dispositions of Capital Assets. Income tax form 1040 Enter your gain or loss, the difference between the cash you receive and the basis of the fractional shares sold, in column (h) of Schedule D (Form 1040) in Part I or Part II, whichever is appropriate. Income tax form 1040    Report these transactions on Form 8949 with the correct box checked. Income tax form 1040   For more information on Form 8949 and Schedule D (Form 1040), see chapter 4 of Publication 550. Income tax form 1040 Also see the Instructions for Form 8949 and the Instructions for Schedule D (Form 1040). Income tax form 1040 Example. Income tax form 1040 You own one share of common stock that you bought on January 3, 2004, for $100. Income tax form 1040 The corporation declared a common stock dividend of 5% on June 29, 2013. Income tax form 1040 The fair market value of the stock at the time the stock dividend was declared was $200. Income tax form 1040 You were paid $10 for the fractional-share stock dividend under a plan described in the discussion above. Income tax form 1040 You figure your gain or loss as follows: Fair market value of old stock $200. Income tax form 1040 00 Fair market value of stock dividend (cash received) +10. Income tax form 1040 00 Fair market value of old stock and stock dividend $210. Income tax form 1040 00 Basis (cost) of old stock after the stock dividend (($200 ÷ $210) × $100) $95. Income tax form 1040 24 Basis (cost) of stock dividend (($10 ÷ $210) × $100) + 4. Income tax form 1040 76 Total $100. Income tax form 1040 00 Cash received $10. Income tax form 1040 00 Basis (cost) of stock dividend − 4. Income tax form 1040 76 Gain $5. Income tax form 1040 24 Because you had held the share of stock for more than 1 year at the time the stock dividend was declared, your gain on the stock dividend is a long-term capital gain. Income tax form 1040 Scrip dividends. Income tax form 1040   A corporation that declares a stock dividend may issue you a scrip certificate that entitles you to a fractional share. Income tax form 1040 The certificate is generally nontaxable when you receive it. Income tax form 1040 If you choose to have the corporation sell the certificate for you and give you the proceeds, your gain or loss is the difference between the proceeds and the portion of your basis in the corporation's stock allocated to the certificate. Income tax form 1040   However, if you receive a scrip certificate that you can choose to redeem for cash instead of stock, the certificate is taxable when you receive it. Income tax form 1040 You must include its fair market value in income on the date you receive it. Income tax form 1040 Other Distributions You may receive any of the following distributions during the year. Income tax form 1040 Exempt-interest dividends. Income tax form 1040   Exempt-interest dividends you receive from a mutual fund or other regulated investment company, including those received from a qualified fund of funds in any tax year beginning after December 22, 2010, are not included in your taxable income. Income tax form 1040 Exempt-interest dividends should be shown in box 10 of Form 1099-DIV. Income tax form 1040 Information reporting requirement. Income tax form 1040   Although exempt-interest dividends are not taxable, you must show them on your tax return if you have to file a return. Income tax form 1040 This is an information reporting requirement and does not change the exempt-interest dividends to taxable income. Income tax form 1040 Alternative minimum tax treatment. Income tax form 1040   Exempt-interest dividends paid from specified private activity bonds may be subject to the alternative minimum tax. Income tax form 1040 See Alternative Minimum Tax (AMT) in chapter 30 for more information. Income tax form 1040 Dividends on insurance policies. Income tax form 1040    Insurance policy dividends the insurer keeps and uses to pay your premiums are not taxable. Income tax form 1040 However, you must report as taxable interest income the interest that is paid or credited on dividends left with the insurance company. Income tax form 1040    If dividends on an insurance contract (other than a modified endowment contract) are distributed to you, they are a partial return of the premiums you paid. Income tax form 1040 Do not include them in your gross income until they are more than the total of all net premiums you paid for the contract. Income tax form 1040 Report any taxable distributions on insurance policies on Form 1040, line 21. Income tax form 1040 Dividends on veterans' insurance. Income tax form 1040   Dividends you receive on veterans' insurance policies are not taxable. Income tax form 1040 In addition, interest on dividends left with the Department of Veterans Affairs is not taxable. Income tax form 1040 Patronage dividends. Income tax form 1040   Generally, patronage dividends you receive in money from a cooperative organization are included in your income. Income tax form 1040   Do not include in your income patronage dividends you receive on: Property bought for your personal use, or Capital assets or depreciable property bought for use in your business. Income tax form 1040 But you must reduce the basis (cost) of the items bought. Income tax form 1040 If the dividend is more than the adjusted basis of the assets, you must report the excess as income. Income tax form 1040   These rules are the same whether the cooperative paying the dividend is a taxable or tax-exempt cooperative. Income tax form 1040 Alaska Permanent Fund dividends. Income tax form 1040    Do not report these amounts as dividends. Income tax form 1040 Instead, report these amounts on Form 1040, line 21; Form 1040A, line 13; or Form 1040EZ, line 3. Income tax form 1040 How To Report Dividend Income Generally, you can use either Form 1040 or Form 1040A to report your dividend income. Income tax form 1040 Report the total of your ordinary dividends on line 9a of Form 1040 or Form 1040A. Income tax form 1040 Report qualified dividends on line 9b of Form 1040 or Form 1040A. Income tax form 1040 If you receive capital gain distributions, you may be able to use Form 1040A or you may have to use Form 1040. Income tax form 1040 See Exceptions to filing Form 8949 and Schedule D (Form 1040) in chapter 16. Income tax form 1040 If you receive nondividend distributions required to be reported as capital gains, you must use Form 1040. Income tax form 1040 You cannot use Form 1040EZ if you receive any dividend income. Income tax form 1040 Form 1099-DIV. Income tax form 1040   If you owned stock on which you received $10 or more in dividends and other distributions, you should receive a Form 1099-DIV. Income tax form 1040 Even if you do not receive Form 1099-DIV, you must report all your dividend income. Income tax form 1040   See Form 1099-DIV for more information on how to report dividend income. Income tax form 1040 Form 1040A or 1040. Income tax form 1040    You must complete Schedule B (Form 1040A or 1040), Part II, and attach it to your Form 1040A or 1040, if: Your ordinary dividends (Form 1099-DIV, box 1a) are more than $1,500, or You received, as a nominee, dividends that actually belong to someone else. Income tax form 1040 If your ordinary dividends are more than $1,500, you must also complete Schedule B (Form 1040A or 1040), Part III. Income tax form 1040   List on Schedule B (Form 1040A or 1040), Part II, line 5, each payer's name and the ordinary dividends you received. Income tax form 1040 If your securities are held by a brokerage firm (in “street name”), list the name of the brokerage firm shown on Form 1099-DIV as the payer. Income tax form 1040 If your stock is held by a nominee who is the owner of record, and the nominee credited or paid you dividends on the stock, show the name of the nominee and the dividends you received or for which you were credited. Income tax form 1040   Enter on line 6 the total of the amounts listed on line 5. Income tax form 1040 Also enter this total on line 9a of Form 1040A or 1040. Income tax form 1040 Qualified dividends. Income tax form 1040   Report qualified dividends (Form 1099-DIV, box 1b) on line 9b of Form 1040 or Form 1040A. Income tax form 1040 The amount in box 1b is already included in box 1a. Income tax form 1040 Do not add the amount in box 1b to, or substract it from, the amount in box 1a. Income tax form 1040   Do not include any of the following on line 9b. Income tax form 1040 Qualified dividends you received as a nominee. Income tax form 1040 See Nominees under How to Report Dividend Income in chapter 1 of Publication 550. Income tax form 1040 Dividends on stock for which you did not meet the holding period. Income tax form 1040 See Holding period , earlier under Qualified Dividends. Income tax form 1040 Dividends on any share of stock to the extent you are obligated (whether under a short sale or otherwise) to make related payments for positions in substantially similar or related property. Income tax form 1040 Payments in lieu of dividends, but only if you know or have reason to know the payments are not qualified dividends. Income tax form 1040 Payments shown in Form 1099-DIV, box 1b, from a foreign corporation to the extent you know or have reason to know the payments are not qualified dividends. Income tax form 1040   If you have qualified dividends, you must figure your tax by completing the Qualified Dividends and Capital Gain Tax Worksheet in the Form 1040 or 1040A instructions or the Schedule D Tax Worksheet in the Schedule D (Form 1040) instructions, whichever applies. Income tax form 1040 Enter qualified dividends on line 2 of the worksheet. Income tax form 1040 Investment interest deducted. Income tax form 1040   If you claim a deduction for investment interest, you may have to reduce the amount of your qualified dividends that are eligible for the 0%, 15%, or 20% tax rate. Income tax form 1040 Reduce it by the qualified dividends you choose to include in investment income when figuring the limit on your investment interest deduction. Income tax form 1040 This is done on the Qualified Dividends and Capital Gain Tax Worksheet or the Schedule D Tax Worksheet. Income tax form 1040 For more information about the limit on investment interest, see Investment expenses in chapter 23. Income tax form 1040 Expenses related to dividend income. Income tax form 1040   You may be able to deduct expenses related to dividend income if you itemize your deductions on Schedule A (Form 1040). Income tax form 1040 See chapter 28 for general information about deducting expenses of producing income. Income tax form 1040 More information. Income tax form 1040    For more information about how to report dividend income, see chapter 1 of Publication 550 or the instructions for the form you must file. Income tax form 1040 Prev  Up  Next   Home   More Online Publications
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Record of Account

Record of Account Transcripts combine the information from tax account and tax return transcripts.

Page Last Reviewed or Updated: 10-Jan-2014

The Income Tax Form 1040

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