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Can you use the home office deduction?

If you run your own small business, you know every penny counts. Which means many small business owners operate their businesses out of their homes, rather than adding another expense to ledger. In addition to saving costs of renting office space and time spent commuting to and from another location, you can obtain a tax deduction for your home office location.

But, and with tax law there always seems to be a "but," the home office deduction came with its own special cost, that of tax complexity. You had to file Form 8829, which entailed filling out a 43-line form to calculate your allowable deduction. 

The IRS notes that this form often requires, "complex calculations of allocated expenses, depreciation and carryovers of unused deductions." The home office deduction also can be somewhat confusing when determining if your use qualifies.

You need to use your home office for "exclusively and regularly for administrative or management activities of your trade or business." This means using your kitchen table to read emails may not qualify, unless you never eat or cook there. You want a room set aside that you use exclusively, so an unused bedroom or room in your basement is a better choice.

"Regularly" does not mean you have to spend eight hours a day there. If you are a farmer, electrician or perform a job where much of your work takes place elsewhere, you can still claim the deduction if you use the room for administrative tasks like billing clients, bookkeeping and writing reports.

And if you don't want to use Form 8829, you can a simplified home office deduction, which was introduced in 2012. It has some limitations and is capped at $1,500 per year, so you may want to compare the outcome of Form 8829 with the simplified method to determine which is worth more.

Irs.gov, "Tax Time Guide: Many Home-Based Businesses Can Use Simplified Method for Claiming Home Office Deduction; Taxpayers May Deduct up to $1,500 a Year," IR-2015-47, March 12, 2015

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