To determine the area on lines 1 and 2, you can use square feet or any other reasonable method if it accurately figures your business percentage on line 7.

Do not include on line 1 the area of your home you used to figure any expenses allocable to inventory costs. The business percentage of these expenses should have been taken into account in Schedule C, Part III.

Enter the total number of hours the facility was used for daycare during the year.

If you started or stopped using your home for daycare in 2006, you must prorate the number of hours based on the number of days the home was available for daycare. Cross out the preprinted entry on line 5. Multiply 24 hours by the number of days available and enter the result.

If all the gross income from your trade or business is from the business use of your home, enter on line 8 the amount from Schedule C, line 29, plus any net gain or (loss) derived from the business use of your home and shown on Schedule D or Form 4797. If you file more than one Form 8829, include only the income earned and the deductions attributable to that income during the period you owned the home for which Part I was completed.

If some of the income is from a place of business other than your home, you must first determine the part of your gross income (Schedule C, line 7, and gains from Schedule D and Form 4797) from the business use of your home. In making this determination, consider the amount of time you spend at each location as well as other facts. After determining the part of your gross income from the business use of your home, subtract from that amount the total expenses shown on Schedule C, line 28, plus any losses from your business shown on Schedule D or Form 4797. Enter the result on Form 8829, line 8.

Direct expenses benefit only the business part of your home. They include painting or repairs made to the specific area or rooms used for business. Enter 100% of your direct expenses on the appropriate line in
column (a).

Indirect expenses are for keeping up and running your entire home. They benefit both the business and personal parts of your home. Generally, enter 100% of your indirect expenses on the appropriate line in
column (b).

Enter only the amounts that would be deductible whether or not you used your home for business (that is, amounts allowable as itemized deductions on Schedule A (Form 1040)).

Treat casualty losses as personal expenses for this step. Figure the amount to enter on line 9 by completing Form 4684, Section A. When figuring Form 4684, line 19, enter 10% of your adjusted gross income excluding the gross income from business use of your home and the deductions attributable to that income. If your loss occurred after August 24, 2005, and was the result of Hurricane Katrina, enter zero on line 19 of Form 4684. Include on Form 8829, line 9, the amount from Form 4684, line 21. See Line 28 on page 3 to deduct part of the casualty losses not allowed because of the limits on Form 4684.

Do not file or use that Form 4684 to figure the amount of casualty losses to deduct on Schedule A. Instead, complete a separate Form 4684 to deduct the personal portion of your casualty losses.

On line 10, include only mortgage interest that would be deductible on Schedule A and that qualifies as a direct or indirect expense. Do not include interest on a mortgage loan that did not benefit your home (for example, a home equity loan used to pay off credit card bills, to buy a car, or to pay tuition costs).

If you itemize your deductions, be sure to claim only the personal portion of your deductible mortgage interest and real estate taxes on Schedule A. For example, if your business percentage on line 7 is 30%, you can claim 70% of your deductible mortgage interest and real estate taxes on Schedule A.

If the amount of home mortgage interest you deduct on Schedule A is limited, enter the part of the excess mortgage interest that qualifies as a direct or indirect expense. Do not include mortgage interest on a loan that did not benefit your home (explained earlier).

If you rent rather than own your home, include the rent you paid on line 18, column (b). 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.

Include on this line any 2006 operating expenses not included on lines 9 through 20.

Multiply your casualty losses in excess of the amount on line 9 by the business percentage of those losses and enter the result.

If your home was used in more than one business, allocate the amount shown on line 35 to each business using any method that is reasonable under the circumstances. For each business, enter on Schedule C, line 30, only the amount allocated to that business.

Enter on line 36 the cost or other basis of your home (including land), or, if less, the fair market value of your home on the date you first used the home for business. Do not adjust this amount for depreciation claimed or changes in fair market value after the year you first used your home for business.

Enter on line 37 the cost or other basis of the land on which your home sits, or, if less, the fair market value of the land on the date you first used the home for business. Do not adjust this amount for changes in fair market value after the year you first used your home for business.

Attach your own schedule showing the cost or other basis of additions and improvements, used at least partially for business, that were placed in service after you began to use your home for business. Do not include any amounts on lines 36 through 39 for these expenditures. Instead, see the instructions for line 41.

At the time these instructions went to print, Congress was considering legislation that would reinstate the special tax treatment for qualified Indian reservation property (which expired for property placed in service after 2005). If this tax treatment is reinstated and your home is qualified Indian reservation property and you first used your home for business after May 12, 1993, and before 2006, then you must see Pub. 946, How To Depreciate Property, to figure the depreciation. To find out if this legislation was enacted, and for more details, go to www.irs.gov, click on More Forms and Publications , and then on What's Hot in forms and publications , or see Pub. 553, Highlights of 2006 Tax Changes.

If no additions and improvements were placed in service after you began using your home for business, multiply line 39 by the percentage on line 40. Enter the result on lines 41 and 29.

At the time these instructions went to print, Congress was considering legislation that would reinstate the special tax treatment for qualified Indian reservation property (which expired for property placed in service after 2005). If this tax treatment is reinstated and your home is qualified Indian reservation property and your additions and improvements were placed in service after May 12, 1993, and before 2006, then you must see Pub. 946, How To Depreciate Property, to figure the depreciation. To find out if this legislation was enacted, and for more details, go to www.irs.gov, click on More Forms and Publications , and then on What's Hot in forms and publications , or see Pub. 553, Highlights of 2006 Tax Changes.

Attach a schedule showing your computation and include the amount you figured in the total for line 41. Enter “See attached” below the entry space.

Complete and attach Form 4562, Depreciation and Amortization, only if:

If you first used your home for business in 2006, enter the amounts from Form 8829, lines 39 and 41, in columns (c) and (g) of line 19i, Form 4562. In column (b) of line 19i, enter the month and year you first used your home for business. Do not include the amount from Form 8829, line 41, on Schedule C, line 13.

If you are depreciating additions and improvements placed in service in 2006, enter in column (b) of line 19i on Form 4562 the month and year the additions or improvements were placed in service. Enter the business basis of the additions or improvements in column (c) and the depreciation allowable on the additions or improvements in column (g). Do not include the amount entered in column (g) on Schedule C, line 13.

Figure the amount of operating expenses you can carry over to 2007 by subtracting line 26 from line 25. If the result is zero or less, you have no amount to carry over.

Figure the amount of excess casualty losses and depreciation you can carry over to 2007 by subtracting line 32 from line 31. If the result is zero or less, you have no amount to carry over.

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