Schedule C Example(p21)

The filled-in forms for John Stephens that follow show how to report deductions for the business use of your home if you file Schedule C (Form 1040).

Based on the following facts, John completes Form 4562 as follows:

John began using his home for business in January of this year. He purchased a new computer and filing cabinet to use in his business. The computer, used 100% for business, cost $3,200. The filing cabinet cost $600. John elects to claim the section 179 deduction for both items.

John completes Part I of Form 4562. He enters the cost of both the computer and filing cabinet, $3,800, on line 2 and completes lines 4 and 5. On line 6, he enters a description of each item, its cost, and the cost he elects to expense. Line 11 is the smaller of line 5 ($250,000) or the taxable income from all trades and businesses without regard to the section 179 deduction. Since he has no other business income, he adds line 31 of Schedule C and the amount of the section 179 deduction ($3,800) for a total business income of $27,871. This amount goes on line 11 since it is smaller than $250,000. He enters $3,800 on line 12.

John converted to business use a desk and chair (furniture) he had purchased in 2003 for personal purposes. In 2003, he paid $1,500 for them. The total fair market value in 2010 is $550. The fair market value is less than the cost, so his depreciable basis is $550.

Because the furniture is 7-year property under MACRS, John enters $550 in Part III, line 19c, column (c) of Form 4562. He completes columns (d) through (f). He uses Table 4 in this publication or Table A-1 in Publication 946 to find the rate of 14.29% for property placed in service during the first month of the year. He multiplies $550 by 14.29% (.1429) and enters $79 on column (g).

This is the first year John used his home for business, so he must figure the depreciation on line 19i. On line 19i, column (c), he enters $11,000, the depreciable basis of the business part of his home. He began using his home for business in January of 2010. (For a discussion on how he figures his depreciation deduction, see Step 3 under Form 8829, Part II, later.) He enters $271 on line 19i, column (g).

John totals the amounts on line 12 and line 19 in column (g) and enters the total on line 22. He enters both the section 179 deduction ($3,800) and the depreciation on the furniture ($79) on line 13 of Schedule C (Form 1040). He enters the depreciation on his home ($271) on Form 8829, line 29.

John completes Schedule C as follows:

As discussed previously, John enters the amount from line 13, Form 4562, for his section 179 deduction ($3,800) and the depreciation deduction for his office furniture ($79) for a total of $3,879.

This amount is the interest on installment payments for the business assets John uses in his home office.

John had a separate telephone line in his home office that he used only for business. He can deduct $347 for the line.

On line 28, he totals all his expenses other than those for the business use of his home, and then subtracts that total from his gross income. He uses the result on line 29 to figure the deduction limit on his expenses for the business use of his home. He enters that amount on Form 8829, line 8, and then completes the form. He enters the amount of his home office deduction from Form 8829, line 35, on Schedule C, line 30.

John uses one room of his home exclusively and regularly to meet clients. In Part I of Form 8829 he shows that, based on the square footage, the room is 10% of the total area of his home.

John uses Part II of Form 8829 to figure his allowable home office deduction.

First, he figures the business part of expenses that would be deductible even if he did not use part of his home for business. These expenses ($4,500 deductible mortgage interest and $1,000 real estate taxes) relate to his entire home, so he enters them in column (b) on lines 10 and 11. He then subtracts the $550 business part of these expenses (line 14) from his tentative business profit (line 8). The result, $25,002 on line 15, is the most he can deduct for his other home office expenses.

Next, he figures his deduction for operating expenses. He paid $300 to have his office repainted. He enters this amount on line 19, column (a) because it is a direct expense. All his other expenses ($400 homeowner's insurance, $1,400 roof repairs, and $1,800 gas and electric) relate to his entire home. Therefore, he enters them in column (b) on the appropriate lines as indirect expenses. He adds the $300 direct expenses (line 22, column (a)) to the $360 total for indirect expenses (line 23) and enters the total, $660, on line 25. This amount is less than his deduction limit, so he can deduct it in full. The $24,342 balance of his deduction limit (line 27) is the most he can deduct for depreciation.

Next, he figures his allowable depreciation deduction for the business use of his home in Part III of Form 8829. The adjusted basis of his home is $130,000, which is less than the fair market value of $160,000. He figures the value of the land to be $20,000. He subtracts the land value from the adjusted basis. He multiplies the result ($110,000) by the percentage on line 7 to get the depreciable basis of the business part of his home ($11,000).

He began using the office in January, so he uses Table 2 in this publication or Table A-7a in Appendix A of Publication 946. The depreciation percentage for the first year of the recovery period for assets placed in service in the first month is 2.461%. His depreciation deduction for 2010 (line 41) is $271 (.02461 × $11,000). He enters that amount in Part II on lines 29 and 31. This is less than the available balance of his deduction limit (line 27), so he can deduct the full amount as depreciation. John also must complete Form 4562 for 2010, so he enters $271 on line 19i, column (g) of Form 4562. See Form 4562, earlier.

Finally, he figures his total deduction for his home office by adding together his otherwise deductible expenses (line 14), his operating expenses (line 26), and depreciation (line 32). He enters the result, $1,481, on lines 33 and 35, and on Schedule C, line 30.

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Worksheet To Figure the Deduction for Business Use of Your Home Use this worksheet if you file Schedule F (Form 1040) or you are an employee or a partner. PART 1—Part of Your Home Used for Business:     1) Area of home used for business 1)   2) Total area of home 2)   3) Percentage of home used for business (divide line 1 by line 2 and show result as percentage) 3) % PART 2—Figure Your Allowable Deduction       4) Gross income from business (see instructions) 4)         (a) Direct Expenses   (b) Indirect Expenses       5) Casualty losses 5)         6) Deductible mortgage interest and qualified mortgage insurance premiums 6)         7) Real estate taxes 7)         8) Total of lines 5 through 7 8)         9) Multiply line 8, column (b), by line 3 9)       10) Add line 8, column (a), and line 9 10)       11) Business expenses not from business use of home (see instructions) 11)       12) Add lines 10 and 11 12)   13) Deduction limit. Subtract line 12 from line 4 13)   14) Excess mortgage interest and qualified mortgage insurance premiums 14)         15) Insurance 15)         16) Rent 16)         17) Repairs and maintenance 17)         18) Utilities 18)         19) Other expenses 19)         20) Add lines 14 through 19 20)         21) Multiply line 20, column (b) by line 3 21)       22) Carryover of operating expenses from prior year (see instructions) 22)       23) Add line 20, column (a), line 21, and line 22 23)   24) Allowable operating expenses. Enter the smaller of line 13 or line 23 24)   25) Limit on excess casualty losses and depreciation. Subtract line 24 from line 13 25)   26) Excess casualty losses (see instructions) 26)       27) Depreciation of your home from line 39 below 27)       28) Carryover of excess casualty losses and depreciation from prior year (see instructions) 28)       29) Add lines 26 through 28 29)   30) Allowable excess casualty losses and depreciation. Enter the smaller of line 25 or line 29 30)   31) Add lines 10, 24, and 30 31)   32) Casualty losses included on lines 10 and 30 (see instructions) 32)   33) Allowable expenses for business use of your home. (Subtract line 32 from line 31.) See instructions for where to enter on your return 33)   PART 3—Depreciation of Your Home   34) Smaller of adjusted basis or fair market value of home (see instructions) 34)   35) Basis of land 35)   36) Basis of building (subtract line 35 from line 34) 36)   37) Business basis of building (multiply line 36 by line 3) 37)   38) Depreciation percentage (from applicable table or method) 38) % 39) Depreciation allowable (multiply line 37 by line 38) 39)   PART 4—Carryover of Unallowed Expenses to Next Year   40) Operating expenses. Subtract line 24 from line 23. If less than zero, enter -0- 40)   41) Excess casualty losses and depreciation. Subtract line 30 from line 29. If less than zero, enter -0- 41)