Working from home has become common for small business owners, freelancers, independent contractors, and self-employed professionals. If you regularly use part of your home for business, you may be able to claim a home office deduction on your federal tax return.
The rules are more specific than simply having a desk at home. The IRS generally requires the space to meet particular requirements, and the amount you can deduct depends on the size of the qualifying space and the expenses associated with your home.
For eligible taxpayers, the home office tax deduction can reduce taxable business income and can be an important small business tax write-off.
What Is the Home Office Deduction?
The home office deduction allows qualifying taxpayers to deduct certain expenses associated with the business use of their home.
It can apply to:
- A house
- Apartment
- Condominium
- Mobile home
- Separate structure on your property
- Other qualifying residence
The deduction is generally based on the portion of the home used for business.
For example, if a qualifying home office occupies 150 square feet of a 1,500-square-foot home, the business-use percentage is:
150 ÷ 1,500 = 10%
Depending on the deduction method and expense, approximately 10% of certain eligible home expenses may potentially be deductible.
The Most Important Home Office Rule: Regular and Exclusive Use
The IRS generally requires the area to be used regularly and exclusively for business to qualify under the home office rules.
This is where many home office deductions go wrong.
A desk in the corner of a bedroom that is also regularly used for personal activities may not qualify as an exclusive business area.
A separate room used only as a business office is much easier to document.
The space does not necessarily have to be an entire room. A clearly identifiable portion of a room can potentially qualify if it meets the exclusive-use requirement.
The key is how the area is actually used, not what it is called.
What Does “Exclusive Use” Mean?
Exclusive use generally means the qualifying portion of the home is used only for business.
For example, suppose you have a spare bedroom containing:
- Business computer
- Printer
- Filing cabinets
- Business records
- Office furniture
If the room is used exclusively as your office, it may qualify.
If the same room is regularly used as a guest bedroom, television room, or personal storage area, the exclusive-use requirement can become a problem.
A business owner should not simply designate a room as an office on paper while continuing to use it substantially for personal purposes.
What Does “Regular Use” Mean?
The business use also generally must be regular rather than occasional.
Working from home once every few months does not necessarily establish regular business use.
The IRS looks at the facts and circumstances, including how frequently and consistently the space is used for business.
Someone who operates their business from a home office several days each week has a very different situation from someone who occasionally answers business emails from the kitchen table.
Your Home Office Must Generally Be Connected to Your Business
The home office deduction is generally associated with business use of the home.
It can be relevant to:
- Sole proprietors
- Self-employed individuals
- Independent contractors
- Freelancers
- Certain partners
- Certain business owners
Employees generally cannot claim the federal home office deduction for unreimbursed employee expenses under current federal rules, subject to limited exceptions.
Simply working remotely for an employer does not automatically create a federal home office deduction.
The Principal Place of Business Rule
Another important concept is the principal place of business.
A home office can potentially qualify when it is used regularly and exclusively as the principal place where the taxpayer conducts the business.
A home office may also qualify when it is used regularly and exclusively to meet or deal with patients, clients, or customers in the normal course of business.
There are additional rules for certain business activities and situations.
For someone who operates a business from home and has no other fixed location for administrative or management activities, the home office can be particularly important.
Home Office Deduction for Small Business Owners
For a small business owner, the home office can be part of the overall business expense calculation.
Potential expenses may include a qualifying business portion of:
- Rent
- Mortgage interest
- Property taxes
- Homeowners insurance
- Renters insurance
- Utilities
- Electricity
- Water
- Internet
- Repairs
- Maintenance
- Depreciation
Not every expense is treated identically, and some costs are deductible only under particular circumstances.
Personal expenses cannot simply be converted into business expenses because the taxpayer works from home.
Direct vs. Indirect Home Office Expenses
One useful way to understand the deduction is to separate direct expenses from indirect expenses.
Direct Expenses
A direct expense benefits only the business portion of the home.
For example, if the walls in a dedicated home office need to be repainted and the work is limited to that office, the expense may be treated differently from painting the entire house.
Indirect Expenses
An indirect expense benefits the entire home.
Examples can include:
- Electricity
- Heating
- Air conditioning
- Homeowners insurance
- Rent
- Mortgage interest
- Property taxes
A qualifying business percentage may be applied to certain indirect expenses.
The Simplified Home Office Deduction
The IRS provides a simplified option for calculating the home office deduction.
Instead of tracking every qualifying home expense and calculating the appropriate percentage, eligible taxpayers can generally use a prescribed rate based on the size of the qualifying business-use area, subject to the applicable maximum square footage.
The simplified method can make recordkeeping considerably easier.
However, the simplified method does not necessarily produce the largest deduction in every situation.
Taxpayers should compare the simplified method with the regular method when appropriate.
The Regular Home Office Deduction Method
Under the regular method, the taxpayer calculates actual qualifying expenses and determines the business portion.
For example, imagine:
Home size: 2,000 square feet
Qualifying office: 200 square feet
Business-use percentage: 10%
If qualifying indirect home expenses total $20,000 for the year, the business portion could potentially be:
$20,000 × 10% = $2,000
This is only an illustration. Actual deductions depend on the type of expense, the taxpayer’s circumstances, applicable limitations, and whether the expense qualifies under IRS rules.
Mortgage Interest and Property Taxes
Homeowners may have mortgage interest and property taxes that relate to their residence.
When the home office deduction applies, the business-use portion of certain home expenses can receive specific tax treatment.
These expenses should not simply be deducted twice.
For example, a taxpayer needs to consider how the business portion is treated under the home office rules and how the remaining personal portion is handled elsewhere on the tax return.
This is one reason detailed records matter.
Renters Can Claim a Home Office Deduction
You do not necessarily have to own your home to claim a home office deduction.
A qualifying renter may potentially deduct the business portion of eligible rent and other qualifying expenses.
For example, someone renting a $2,000-per-month apartment who has a qualifying office occupying 10% of the home may have a business-use portion of certain expenses that can potentially be included in the home office calculation.
The same regular and exclusive-use rules still apply.
Internet and Phone Expenses
Internet and telephone expenses require particular attention when they have both business and personal use.
If an internet connection is used for both personal and business purposes, the taxpayer should have a reasonable method of determining the business portion.
A separate business line used exclusively for business is easier to identify.
A personal cell phone does not automatically become a fully deductible business expense simply because the owner uses it to make business calls.
The same principle applies to other mixed-use expenses.
Home Office Equipment Is Not the Same as the Home Office Deduction
Computers, printers, desks, monitors, office chairs, cameras, and other equipment used for business may qualify for separate business deductions.
These expenses should not automatically be included as part of the home’s square-footage calculation.
Depending on the item and circumstances, equipment may be treated as a business expense, depreciated, or potentially qualify for another applicable tax provision.
Keeping equipment purchases separately documented makes tax preparation much easier.
Repairs and Improvements
Repairs and improvements should also be distinguished.
A repair generally restores property to its normal condition.
An improvement may increase the value of property, adapt it to a new use, or extend its useful life.
For example, replacing a broken component may be a repair, while adding a substantial permanent improvement to a home may require different tax treatment.
The distinction can affect whether an expense is currently deductible or must be capitalized.
Home Office Deduction for an LLC
Having an LLC does not automatically mean the business owner can claim a home office deduction.
The tax treatment depends on how the LLC is classified for federal tax purposes.
A single-member LLC may generally be treated as a disregarded entity for federal income tax purposes unless an election is made otherwise. An LLC may also be taxed as a partnership, S corporation, or C corporation.
Because the home office deduction interacts with the taxpayer’s tax structure, the correct treatment can differ significantly between business owners.
Home Office Deduction for S Corporation Owners
S corporation owners need additional care.
An S corporation is a separate tax entity, and the rules for reimbursing an owner for business expenses can differ from the rules applicable to a sole proprietor filing Schedule C.
An S corporation shareholder should not simply assume that the Schedule C home office deduction rules apply directly to the shareholder’s individual return.
Proper documentation and an appropriate reimbursement arrangement may be necessary.
Records to Keep for a Home Office Deduction
Good documentation is essential.
Keep records of:
- Home square footage
- Office square footage
- Rent or mortgage statements
- Property tax records
- Utility bills
- Insurance payments
- Repair invoices
- Maintenance expenses
- Internet bills
- Equipment purchases
- Dates the office was used for business
- Business purpose of expenses
It is also useful to keep a simple diagram or floor plan showing the size and location of the office.
The IRS expects taxpayers to maintain records supporting deductions claimed on a tax return.
Common Home Office Deduction Mistakes
Several mistakes appear repeatedly when people calculate their home office tax deduction.
Claiming a Room Used for Personal Activities
A room used as both a guest bedroom and office may not satisfy the exclusive-use requirement.
Deducting 100% of Household Expenses
A taxpayer generally cannot deduct the entire electric bill, rent, mortgage, or insurance simply because they work from home.
The business portion must be determined under the applicable rules.
Mixing Personal and Business Expenses
Personal purchases should not be entered as business expenses.
Ignoring Business Structure
The correct treatment for a sole proprietor may not be the same as the treatment for an S corporation shareholder.
Taking the Same Expense Twice
Expenses should be tracked carefully to avoid claiming the same cost under multiple deduction categories.
Home Office Tax Deduction Checklist
Before preparing your return, collect:
- Total home square footage
- Home office square footage
- Rent or mortgage information
- Property taxes
- Insurance
- Utilities
- Internet expenses
- Repairs and maintenance
- Office equipment
- Business-use percentage
- Receipts and invoices
- Records showing regular business use
Then determine whether the simplified home office deduction or regular home office deduction method applies and which method is appropriate for your circumstances.
The home office deduction can be a valuable tax deduction for qualifying self-employed individuals and small business owners, but it is not simply a write-off for having a desk at home.
The most important concepts are regular and exclusive business use, principal place of business, business-use percentage, qualifying home expenses, recordkeeping, and the taxpayer’s business structure.
For some taxpayers, the simplified method makes the deduction easy to calculate. For others, the regular method based on actual expenses may require more recordkeeping but can produce a different result.
The key is to calculate the deduction using the rules that actually apply to your business rather than treating every household expense as a business write-off.