Overview

The Home Office Deduction reduces taxable income by letting eligible taxpayers deduct expenses tied to a business space inside their homes. The deduction applies primarily to sole proprietors, independent contractors, freelancers, and certain owners of pass-through businesses who report business income on Schedule C or other business tax forms. The IRS explains qualifying rules and both calculation methods in Publication 587 and on the Home Office Deduction web page (IRS).

Key points at a glance:

  • Two ways to calculate: simplified and regular (actual expenses).
  • Space must be used regularly and exclusively for business.
  • The home office generally must be your principal place of business or a place used for meeting clients/customers.
  • Employees usually cannot claim this deduction for tax years 2018–2025 because miscellaneous itemized deductions were suspended by the Tax Cuts and Jobs Act; a few narrow exceptions exist.

(Authoritative details: IRS Home Office Deduction, IRS Pub. 587.)

Who qualifies?

Primary eligible taxpayers:

  • Self-employed individuals and sole proprietors (Schedule C filers).
  • Independent contractors and gig workers.
  • Partners and owners of pass-through businesses may have special reporting rules.

Employees: For tax years 2018–2025, most employees cannot claim an unreimbursed home office deduction because the deduction for employee business expenses was suspended by the Tax Cuts and Jobs Act. Very limited exceptions exist (for example, certain state or local government officials and qualified performing artists). See the IRS page for current guidance.

If your business operates in a leased space within your home (for example, a separate studio or storage area), you can still qualify if the use meets the IRS tests.

Interlink: Read more about common deductions and how they apply to self-employed taxpayers in our guide to common tax deductions for the self-employed: https://finhelp.io/glossary/common-tax-deductions-for-the-self-employed/

Also review recordkeeping best practices that many of my clients use: https://finhelp.io/glossary/recordkeeping-requirements-for-self-employed-individuals/

What are the qualification tests?

1) Exclusive use

The portion of the home claimed must be used exclusively for business on a regular basis. “Exclusive” is strict: a bedroom used as both a guest room and an office does not qualify. Small, clearly defined areas (a dedicated corner with solid separation may qualify) can qualify if used solely for business.

2) Regular use

You must use the space regularly for business—not just occasionally. Regular use means recurring and consistent business activity in the space.

3) Principal place of business or meeting clients

Your home must be your principal place of business (you conduct a significant portion of your administrative or management functions there), or you must use the space to meet or deal with patients, clients, or customers in the normal course of business.

Special uses: The IRS provides rules for storage of inventory or product samples and for daycare facilities that operate in the home. Those situations have additional criteria—see IRS Pub. 587.

How do you calculate the deduction?

You have two options each tax year: the simplified method or the regular (actual expense) method. You can choose either method in any year you’re eligible, but each has tradeoffs.

A. Simplified method

  • Rate: $5.00 per square foot of qualified space.
  • Maximum: 300 square feet (maximum deduction $1,500).
  • No depreciation deduction allowed for the portion of the home used for business under this method.
  • Easier recordkeeping—only need to document the area used and the business square footage.

Example: If your dedicated office is 200 sq ft, simplified deduction = 200 x $5 = $1,000.

B. Regular (actual expense) method

  • You calculate the business percentage of home-related expenses. Typical formula: (square feet of business space ÷ total finished square feet of home) = business percentage.
  • Direct expenses (costs only for the office area) are fully deductible: e.g., painting or repairs in the office.
  • Indirect expenses (costs for the whole home) are deductible in proportion to the business percentage: e.g., mortgage interest, property taxes, utilities, insurance, homeowners association dues, and depreciation.
  • Depreciation: If you use the regular method, you usually must take depreciation for the business portion of your home. Depreciation reduces your basis in the home and may create taxable gain (or recapture) when you sell.

Example (regular method):

  • Home size: 2,000 sq ft; office: 150 sq ft → business percentage = 150/2000 = 7.5%.
  • Annual utilities = $2,400 → deductible portion = $2,400 x 7.5% = $180.
  • Direct repairs to office = $500 → deductible = $500.
  • Depreciation and other prorated costs are computed according to IRS rules and reported on Form 8829 with Schedule C (for sole proprietors). See IRS instructions for Form 8829 and Pub. 587.

Form and reporting: Sole proprietors normally report home office expenses on Form 8829 and file it with Schedule C (Form 1040). If you are an S-corp owner, partner, or employee of a corporation, there are different rules and possible employer-accountable plans that can reimburse you—consult a tax advisor or payroll specialist.

Which method is better?

  • Simplified is easy and low-risk when your office is small (<300 sq ft) and you don’t have large mortgage interest, depreciation, or significant indirect expenses. It eliminates the depreciation calculation and simplifies recordkeeping.
  • Regular method often yields a larger deduction when your business portion of home costs and depreciation are high. It’s worth calculating both methods in your records the first year to compare.

You can switch methods from year to year, but be mindful of depreciation and basis adjustments if you previously used the regular method. If you claimed depreciation under the regular method, that depreciation still affects your basis when you sell the home; the simplified method cannot retroactively create or remove earlier depreciation claims.

Recordkeeping: what to keep

Good records lower audit risk and make it easier to choose the best method:

  • Date-stamped floor plan or measurement showing total and business square footage.
  • Receipts and invoices for direct office expenses (repairs, furniture, painting).
  • Monthly or annual bills for utilities, insurance, mortgage interest, property tax statements.
  • Business logs showing regular use (if your use might be questioned).
  • Copies of Form 8829 (if used) and Schedule C entries.

See our guide on recordkeeping for self-employed taxpayers for practical templates and checklists: https://finhelp.io/glossary/recordkeeping-requirements-for-self-employed-individuals/

Audit risk and common red flags

Claiming a home office deduction can attract IRS attention, but legitimate claims supported by clear, consistent records are generally safe. Common red flags include:

  • Claiming a very large business percentage for a small office relative to the home.
  • Using rooms that clearly serve dual personal purposes (guest rooms, family rooms).
  • Missing receipts, vague invoices, or inconsistent square-footage claims across years.
  • Switching between methods in ways that appear intended to manipulate basis without consistent documentation.

To reduce risk, document exclusive use, keep dated measurements, and retain receipts and utility statements. If audited, be prepared to show how you calculated the business percentage and prove exclusive and regular use.

Practical planning tips (from practice)

  • Measure and document square footage the first time you claim the deduction. I advise clients to take photos and save a dated floor plan.
  • Run both methods in your records the first year to see which is larger; keep backup calculations.
  • Consider employer reimbursements under an accountable plan if you’re a corporate employee or S-corp owner—this can be a cleaner path than the employee deduction route.
  • Remember depreciation: if you plan to sell your home within a few years, factor depreciation recapture into your planning.

Examples

1) Simplified method example: 120 sq ft office x $5 = $600 deduction.

2) Regular method example: 2,400 sq ft home; 240 sq ft office = 10% business use. Annual mortgage interest $10,000, property tax $4,000, utilities $3,000, homeowner’s insurance $1,200, direct office repairs $600. Deductible portion of indirect expenses = (10% of $18,200) = $1,820; add direct $600 = $2,420 (plus allowable depreciation calculated per IRS rules).

Sources and further reading

Additional resources: Small Business Administration (sba.gov) and tax research services like Tax Policy Center for policy background.

Disclaimer: This article is educational and not individualized tax advice. Tax rules change and can have complex interactions with your specific situation. Consult a qualified tax professional before making elections or if you have questions about depreciation, sale of a home, or business structure.

Author note: In my 15 years advising clients, careful measurement and consistent documentation are the difference between a smooth claim and an audit headache. Small mistakes—like using a dual-purpose room—can disqualify a claim altogether, so when in doubt, document or consult.