Quick overview
This guide covers the deductions I most often see missed in my CPA/CFP practice, explains how to claim them, and offers practical recordkeeping and audit-preparation steps. It focuses on U.S. federal tax rules current through 2025 and cites IRS guidance where helpful. This is educational content, not individualized tax advice—consult your tax professional for your situation.
Why these deductions matter
Small missed items add up. For a sole proprietor working from home, correctly apportioning a 10–15% share of utilities, internet, depreciation, insurance, and supplies frequently reduces taxable income by thousands of dollars a year. But the IRS requires substantiation: clear records, a defensible allocation method, and adherence to the exclusive-use/principal-place-of-business tests for the home office deduction (IRS Publication 587; Home Office Deduction page).
Sources:
- IRS — Home Office Deduction (https://www.irs.gov/businesses/small-businesses-self-employed/home-office-deduction)
- IRS Publication 587, Business Use of Your Home (https://www.irs.gov/publications/p587)
The top frequently overlooked deductions (what they are and how to claim them)
1) Home office: simplified vs. actual method
- What’s often missed: business-only direct expenses and the difference between simplified and actual methods.
- How it works: choose either the simplified method ($5 per square foot up to 300 sq ft, max $1,500) or the actual expense method, which apportions mortgage interest, insurance, utilities, repairs, and depreciation between business and personal use.
- Tip I use in practice: run both methods in your tax software or spreadsheet for the same year; take the larger deduction but keep documentation for the actual method in case of audit.
- See our in-depth glossary post: Home Office Deduction (https://finhelp.io/glossary/home-office-deduction/).
2) Internet, phone and home network costs
- What’s often missed: partial business use of bundled services and home network equipment costs (routers, switches) that are deductible proportionally.
- How to claim: allocate business vs. personal use. For example, if business use of internet is 40% by time or activity, you can deduct 40% of the service cost and a prorated share of related equipment.
- Extra: separately billed second lines used only for business are fully deductible.
- Related glossary: Home Office Internet Expenses Deduction (https://finhelp.io/glossary/home-office-internet-expenses-deduction/).
3) Depreciation of the business portion of your home
- What’s often missed: owners fail to depreciate eligible portion of the home (usually the part used exclusively for business) when using the actual method.
- How it affects taxes: depreciation reduces current taxable income but creates potential depreciation recapture on sale of the property (reported as ordinary income up to accumulated depreciation). Plan for recapture when selling.
- Practical note: depreciation schedules are not optional if you elect the actual method and claim home-office depreciation—keep records of basis, improvements, and allocation method.
4) Repairs vs. improvements and maintenance allocation
- What’s often missed: classifying repairs that benefit the business portion of the home as 100% deductible (if they apply only to the office) or prorating general repairs across the home properly.
- How to treat them: repair costs that apply only to the business portion (e.g., repainting the office) are direct expenses; general house repairs (roof, HVAC) are prorated as indirect expenses.
- Avoid: incorrectly capitalizing small, clearly deductible repairs to save taxes.
5) Business equipment, software, and subscriptions
- What’s often missed: expensing smaller purchases under Section 179/bonus depreciation or the de minimis safe harbor, and prorating software/subscription costs that are used both personally and for business.
- Claiming: tangible equipment used solely for business is often fully deductible in year one under Section 179 (subject to limits and qualifications), or via bonus depreciation. Software subscriptions should be allocated on a business-use percentage.
6) Insurance, professional fees, and business-related home services
- What’s often missed: portions of homeowner or renter insurance attributable to business use, and business liability insurance purchased for the home operation.
- Additionally: fees for tax prep for the business, bookkeeping, business legal fees, and licensed professional subscriptions are deductible business expenses.
7) Self-employed health insurance and retirement plan contributions
- Health insurance: self-employed taxpayers may be able to deduct health insurance premiums above-the-line (subject to eligibility rules).
- Retirement: contributions to SEP-IRAs, SIMPLE IRAs, or solo 401(k)s reduce taxable income and are often overlooked for late-year planning.
8) Vehicle and travel expenses tied to the business
- What’s often missed: travel from your home office to a client’s site (if your home is your tax ‘home’) can be deductible; commuting to your regular workplace is generally not.
- How to claim: choose either actual expenses or the standard mileage rate for business trips, track time, miles, and purpose (date, miles, destination, business purpose).
9) Start-up and organizational costs
- What’s often missed: new business owners sometimes fail to elect to amortize start-up costs and organizational costs. Up to $5,000 of start-up costs may be deductible in year one (phase-outs apply), with the remainder amortized over 15 years—confirm current thresholds and elections with your preparer.
10) State and local licenses, small business taxes, and bank fees
- What’s often missed: licensing fees, local business taxes, merchant fees (credit card processor fees), and bank fees tied to business accounts are ordinary and necessary business expenses.
Common eligibility rules and traps to avoid
- Exclusive-use and principal-place tests: to claim the home office deduction under the actual method, the space must be used exclusively and regularly for business or be your principal place of business (IRS Publication 587).
- Employee vs. self-employed: since the Tax Cuts and Jobs Act (TCJA) 2018 suspension, unreimbursed employee business expenses are generally not deductible for W-2 employees; most home office deductions are only available to self-employed taxpayers.
- Allocation method: be consistent year-to-year in your allocation approach unless a clear change in use occurs.
Recordkeeping checklist (what I ask clients to keep)
- Floor plan showing square footage and calculation of business percentage.
- Receipts and invoices for utilities, repairs, improvements, insurance, equipment, subscriptions, and internet bills.
- Logs for mileage and business use of phone/internet if prorating.
- Depreciation worksheet (dates, cost basis, improvements, allocation percentages).
- Contracts and client meeting records showing that your home is your principal place of business.
Real-world example (typical case study)
A freelance web developer uses a 12-ft x 10-ft spare bedroom (120 sq ft) in a 1,200 sq ft home as an exclusive office (10% of home). Using the actual expense method that year, they prorated 10% of utilities ($2,400 annual utilities × 10% = $240), 10% of homeowners insurance, claimed full deduction for a new business-only monitor ($300), and took allowable depreciation for the office portion of the home improvement they made. Combined with software subscriptions and business insurance, the properly documented deductions reduced net self-employment income significantly and lowered both income and self-employment tax.
Audit risk and how to prepare
- Home office deductions are a common audit trigger. Prepare by keeping a clear floor plan, business appointment logs, and contemporaneous receipts.
- If audited, you will need to substantiate exclusive use and business necessity. See our guide on preparing for audits: Preparing for an Office Audit (https://finhelp.io/glossary/preparing-for-an-office-audit/).
Action steps (practical next moves)
- Run both simplified and actual home office calculations and keep the backup documentation for the actual method.
- Segregate business bank accounts and credit cards to simplify tracking.
- Start or maintain a mileage log or use an app that timestamps trips.
- Save receipts and maintain a digital folder by year and category.
- Review retirement and health-insurance deductibility for tax planning before year end.
Common questions (short answers)
- Does occasional business use qualify? No—occasional or incidental use does not meet the exclusive-use requirement for the home office deduction.
- Can I deduct the whole internet bill? No—only the portion used for business is deductible unless you have a separately billed business service.
- What about depreciation recapture? Yes—when you sell the home, accumulated depreciation allocable to the business part may be recaptured as ordinary income.
Closing notes and professional disclaimer
In my 15+ years advising small-business owners and self-employed taxpayers, meticulous recordkeeping and an early-year review of deductions yield the best outcomes. Tax rules change—always confirm planning decisions with a licensed tax professional or your CPA.
This article is educational and does not replace professional tax advice. For your situation, consult a qualified tax advisor.
Authoritative resources
- IRS — Home Office Deduction: https://www.irs.gov/businesses/small-businesses-self-employed/home-office-deduction
- IRS Publication 587, Business Use of Your Home: https://www.irs.gov/publications/p587
- IRS — Business Expenses: https://www.irs.gov/businesses/small-businesses-self-employed/business-expenses