How to Deduct Your Home Office Expenses
Understand the process for turning your home expenses into a tax deduction. Learn the key IRS requirements to ensure your claim is accurate and legitimate.
The home office deduction allows self-employed individuals and business owners to lower their taxable income by accounting for the business use of their homes. This tax benefit allows for deducting a portion of home expenses against business income. The deduction is not available to W-2 employees who work from home for a company, a rule in place through 2025 due to the Tax Cuts and Jobs Act.
Determining Your Eligibility
To qualify for the home office deduction as a self-employed individual, you must meet two primary tests from the Internal Revenue Service (IRS).
The first is the “exclusive and regular use” test. Exclusive use means a specific area of your home is used only for your trade or business, with no personal activities taking place in that space. For example, a spare room used solely as an office qualifies, but a desk in a family room does not. Regular use implies that the space is used for business on a consistent basis.
The second requirement is that your home must be your “principal place of business.” Your home office qualifies if it is the primary location where you conduct administrative or management activities and have no other fixed location for these duties. It also qualifies if you meet with clients in your home office or use a separate free-standing structure, like a studio or garage, exclusively for your business.
Calculation Methods for the Deduction
You have two options for calculating your deduction: the simplified method and the actual expense method.
The simplified method allows you to deduct a standard amount based on the size of your home office. The IRS sets a prescribed rate per square foot, which you apply to the area of your home used for business, up to a maximum of 300 square feet.
The actual expense method can result in a larger deduction but requires more detailed calculations. This method involves determining the percentage of your home used for business by dividing the office’s square footage by the home’s total square footage. This business-use percentage is then applied to your home expenses.
Expenses are categorized as either indirect or direct. Indirect expenses benefit the entire home, and you can deduct a portion of them, including mortgage interest, insurance, utilities, and property taxes. Direct expenses, like painting the office, apply only to your office space and are 100% deductible. A portion of your home’s depreciation can also be deducted.
When using the actual expense method, consider depreciation recapture. If you sell your home, you may be required to pay taxes on the depreciation you claimed in previous years, which is taxed as ordinary income.
Required Information and Recordkeeping
Proper recordkeeping is required to substantiate your home office deduction. For either calculation method, you must have a record of the total square footage of your home and the specific square footage of the area you use exclusively for business.
If you use the actual expense method, your recordkeeping requirements are more extensive. You must keep detailed records and receipts for all expenses. These documents include:
- Mortgage interest statements and property tax payment records
- Homeowners’ insurance statements and all utility bills
- Receipts for direct expenses, like repairs within the office space
- Records of your home’s original purchase price and the cost of any significant improvements for calculating depreciation
Claiming the Deduction on Your Tax Return
The home office deduction is reported on Schedule C (Form 1040), Profit or Loss from Business, which is filed with your annual income tax return.
If you use the simplified method, you calculate the deduction and enter the amount directly on the designated line of your Schedule C. No additional form is needed to detail the expenses.
If you choose the actual expense method, you must first complete Form 8829, Expenses for Business Use of Your Home. On this form, you will detail your calculations, including your home’s size, your office’s size, and a breakdown of your actual expenses. The final deduction amount from Form 8829 is then transferred to your Schedule C.