Introduction
The pandemic accelerated remote work, but tax rules around home office deductions did not expand broadly for employees. If you run a business from home (sole proprietor, S‑corp owner who reports business income, partner, or gig worker), you can generally claim part of your housing costs and related expenses. However, for W‑2 employees, the federal deduction for unreimbursed employee business expenses was largely suspended under the Tax Cuts and Jobs Act (TCJA) for 2018–2025 — meaning most employees cannot deduct home office costs on their federal return. (See IRS, “For the Home Office Deduction” and Publication 587.)
Who can actually claim a home office deduction?
- Self‑employed taxpayers (Schedule C filers) can claim a home office deduction if part of the home is used regularly and exclusively for business and it is the principal place of business for the trade or business. The rules are set out in IRS Publication 587 and the “For the Home Office Deduction” guidance (irs.gov).
- Employees: Generally not deductible on federal returns through tax year 2025 because miscellaneous itemized deductions subject to the 2% floor are suspended (TCJA). A few narrow exceptions exist for certain categories (e.g., some state or local government officials, qualifying performing artists, and reservists) — check Publication 529 and Pub. 587 for specifics.
- S‑Corp owners and partners: If you receive W‑2 wages from an S‑Corp, the corporation may reimburse you under an accountable plan; those reimbursements are excluded from your income and the corporation deducts them. Accountable vs. nonaccountable plans matter for tax treatment.
Key IRS references
- For the Home Office Deduction — IRS: https://www.irs.gov/businesses/small-businesses-self-employed/for-the-home-office-deduction
- Publication 587, Business Use of Your Home (offers detailed examples and depreciation rules): https://www.irs.gov/publications/p587
- About Form 8829 (used with Schedule C for regular method): https://www.irs.gov/forms-pubs/about-form-8829
Two methods to claim a home office deduction
1) Simplified method
- Deduction of $5.00 per square foot of space used for business, up to a maximum of 300 square feet (maximum $1,500). This method reduces recordkeeping burden and removes depreciation from the calculation. (IRS guidance)
- Best for smaller spaces or when detailed expense tracking is not practical.
2) Regular method (actual expense method)
- Calculate the business‑use percentage of your home (business square footage ÷ total finished square footage). Apply that percentage to indirect expenses (mortgage interest, rent, utilities, homeowner’s insurance, repairs that affect entire home). Direct expenses for the office (painting the room, repairs only in the workspace) are fully deductible.
- Use Form 8829 (for sole proprietors filing Schedule C) to compute the deduction and depreciation. Depreciation reduces your adjusted basis in the home and may trigger gain recapture when you sell — Publication 587 explains depreciation and recapture rules.
Real‑world examples
Example 1 — Simplified method
- 150 sq ft dedicated home office x $5 = $750 deduction.
- Minimal paperwork: record the square footage and keep a brief note showing regular, exclusive use.
Example 2 — Regular method
- Home: 1,200 sq ft; home office: 150 sq ft = 12.5% business use.
- Annual mortgage interest and property taxes: $8,000; utilities: $3,000; homeowner’s insurance: $1,200; repairs: $600.
- Indirect expenses subject to business percentage: ($8,000 + $3,000 + $1,200) x 12.5% = $1,650. Direct office repairs ($200) are fully deductible. Depreciation may add additional deduction; total could exceed the simplified amount for larger or higher‑cost homes.
Recordkeeping: what to keep and why
- Floor plan, measurements, or a photo showing the dedicated space.
- Receipts and invoices for utilities, repairs, office furniture, and supplies.
- Mortgage interest statements (Form 1098), property tax bills, rent receipts.
- A log or calendar showing regular business use, especially if part‑time or shared spaces are involved.
Good records reduce audit risk. See FinHelp’s guide “What the IRS Looks for in Small‑Scale Home Office Audits” for common red flags and documentation tips.
How employer reimbursements affect the deduction
- Reimbursements under an accountable plan: Employer reimburses actual expenses with receipts and returns any excess; these reimbursements are excluded from your income and you cannot deduct the reimbursed amount.
- Nonaccountable plan or employer‑provided allowances: Often taxable wages. If you receive taxable reimbursements for home office items, you cannot double‑claim the same expenses.
State tax differences
Some states have not conformed completely to federal law and may allow employee business expense deductions or treat employer reimbursements differently. Check your state tax authority or consult a tax professional for details — state rules vary widely.
Common mistakes and audit triggers
- Claiming space that is not used exclusively for business (a den or family room used for other purposes disqualifies the space).
- Mixing personal and business expenses without a clear allocation method.
- Overstating business square footage or failing to document how you calculated percentages.
- Claiming unreimbursed employee expenses when federal law disallows them (for most W‑2 employees).
Tips for choosing the best method
- Run the numbers both ways. For many taxpayers with a modest office area and low home expenses, the simplified method is easiest and often competitive. For higher home costs (high rent or mortgage interest) or larger business percentages, the regular method may produce a larger deduction.
- Consider depreciation: while depreciation in the regular method increases current deductions, it also reduces your basis and can create taxable gain when you sell the home.
- Revisit each tax year: a different method may be better depending on changing expenses.
Practical checklist before you file
- Confirm whether you are eligible (self‑employed vs. employee classification). If you are an employee, verify whether your employer offered an accountable reimbursement plan.
- Measure and document the workspace.
- Collect receipts, bills, and Form 1098 (mortgage interest) or rent records.
- Complete Form 8829 if using the regular method with Schedule C; otherwise apply the simplified calculation directly on Schedule C.
- Consult a tax professional if you have questions about depreciation recapture or state income tax differences.
Internal resources from FinHelp
- See our detailed entry on the general “Home Office Deduction” for walkthroughs and examples: “Home Office Deduction” (https://finhelp.io/glossary/home-office-deduction/).
- If your question centers on internet or connectivity costs, read “Home Office Internet Expenses Deduction” (https://finhelp.io/glossary/home-office-internet-expenses-deduction/).
- Worried about documentation and audits? Our practical guide: “What the IRS Looks for in Small-Scale Home Office Audits” (https://finhelp.io/glossary/what-the-irs-looks-for-in-small-scale-home-office-audits/).
Professional perspective
In my practice as a CPA and CFP®, I often see self‑employed clients leave money on the table because they under‑allocate indirect expenses or fail to account for depreciation when it makes sense. Conversely, W‑2 employees sometimes attempt to claim federal deductions that are disallowed under current law. Document regular and exclusive use clearly, and when in doubt — run the simplified and regular calculations; the numbers usually show the better path.
Final notes and disclaimer
This article summarizes federal rules current through 2025 and authoritative IRS guidance (Publication 587 and the “For the Home Office Deduction” resource). It is educational and not a substitute for personalized tax advice. Tax situations can turn on small facts; consult a qualified tax professional for guidance tailored to your specific circumstances.
Sources
- IRS: For the Home Office Deduction (irs.gov)
- IRS Publication 587, Business Use of Your Home (irs.gov)
- IRS Form 8829 information (irs.gov)
