Home Office Deduction for Small Business Owners: What Counts, What Doesn’t

Written by Business Tax Relief          
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Overview

For millions of self-employed Americans and small business owners, working from home isn’t just a convenience; it’s part of daily business operations. The home office deduction can offer meaningful tax savings, helping offset the cost of using part of your home exclusively for work. But while this deduction can be valuable, it’s also commonly misunderstood, and frequently flagged by the IRS. Many taxpayers mistakenly claim it without meeting the requirements, which can lead to questions, adjustments, or audits. Knowing who qualifies and which expenses count is essential before adding this deduction to your tax return.

Key Takeaways

  • Eligibility is strict: You must use part of your home regularly and exclusively for business, and it must be your principal place of business.

  • Two calculation options: You can use either the IRS simplified method or the actual expense method, depending on what yields a better deduction.

  • Not just for homeowners: Renters can claim the deduction too; what matters is meeting the business-use criteria.

Who Can Claim the Home Office Deduction?

The IRS applies two main requirements to qualify:

1. Regular and Exclusive Use

A portion of your home must be used:

  • Regularly for business activity
  • Exclusively for that business activity

This space does not need to be an entire room. It can be part of a room, but it cannot be used for anything personal.

Examples that qualify:

  • A spare bedroom used solely as a photography studio
  • A sectioned-off corner of a living room used only for bookkeeping tasks

Examples that do NOT qualify:

  • Working on your laptop at the kitchen table
  • A guest room that doubles as a home office

2. Your Home Must Be Your Principal Place of Business

The home office must be:

  • Where you conduct most of your business, OR
  • A place where you regularly meet clients, OR
  • A separate structure on your property used solely for business.

Even if you do some work outside the home, such as visiting clients, you may still qualify if your home office is where all administrative or management activities occur.

home office deduction flowchart

What Expenses Qualify Under the Home Office Deduction?

If you qualify, certain home-related expenses may be deductible. These fall into two categories:

1. Direct Expenses

Costs only for the office area. These are typically 100% deductible.

Examples:

  • Painting or repairing the home office
  • Installing shelves in the office
  • Office-specific utilities or security systems

2. Indirect Expenses

Costs for your entire home that are partially allocated to business use.

Examples:

  • Rent or mortgage interest
  • Property taxes
  • Homeowners or renters’ insurance
  • Utilities (electricity, water, gas, trash)
  • Cleaning services
  • General repairs and maintenance

These are deductible based on the percentage of your home used for business.

3. Non-Deductible Expenses

In general, these cannot be claimed under the home office deduction:

  • Lawn care/landscaping
  • Pool maintenance
  • General home improvements that don’t affect the office

How Much Is the Deduction Worth?

The IRS offers two methods:

1. The Simplified Method

  • Deduction amount = $5 per square foot
  • Maximum area allowed = 300 square feet
  • Maximum deduction allowed = $1,500

Best for:

  • Smaller workspaces
  • People who don’t want the complexity of calculating actual expenses

No receipts are required, but you should still document the square footage.

2. The Actual Expense Method

This method can yield a larger deduction but requires detailed tracking.

You calculate:

(Total eligible indirect expenses x business-use percentage) + direct expenses = deduction

Example:

Let’s say you have $18,000 in allowable indirect expenses. Your home is 2,000 square feet, with a home office space of 200 square feet. The business use percentage in this scenario is 10%. In addition to the indirect expenses, you have $300 in direct expenses. So, your total deduction would be $2,100.

  • $18,000 (indirect expenses) x 10% = $1,800
  • $1,800 + $300 = $2,100

Unlike the simplified method, there is no cap on the deduction amount under the actual method. The amount claimed, however, cannot exceed your gross business income from the use of your home office.

Where to Claim the Deduction on Your Return

  • Self-employed individuals claim it on Form 8829 and Schedule C.
  • Side-business owners also use Schedule C.
  • This deduction is not available to W-2 employees, even if they work from home.

You are not required to itemize deductions to claim the home office deduction.

Home Office Deduction FAQs

Final Thoughts

The home office deduction can be a powerful tax benefit for small business owners, but only if you qualify and document everything properly. Make sure you:

  • Review the eligibility rules before claiming the deduction
  • Track home-related expenses accurately and consistently
  • Maintain clear separation between business and personal activities
  • Consult a tax professional if the rules or calculations begin to feel overwhelming

Understanding the requirements now can save you money and help you avoid IRS scrutiny later.