If you run a business from home, you may be able to claim a deduction for the business use of part of your home. The deduction is legitimate, but the qualification rules matter.
Who Can Qualify?
The home office deduction is available for qualifying business use of a home. It can apply to a house, apartment, condominium, mobile home, boat, or similar property, as well as certain separate structures on the property.
For many self-employed people, the most common path is using part of the home exclusively and regularly as the principal place of business.
Regular and Exclusive Use
You generally must use a specific area of the home regularly and only for your trade or business. It does not need to be a full room or be separated by a permanent wall, but mixed personal use usually fails the exclusive-use test.
There are exceptions for certain storage of inventory or product samples and for daycare facilities.
Principal Place of Business
Your home office can qualify as your principal place of business if you use it exclusively and regularly for administrative or management activities and have no other fixed location where you conduct substantial administrative or management activities.
There are also other ways to qualify, including:
- Using the space exclusively and regularly to meet patients, clients, or customers in the normal course of business
- Using a separate structure that is not attached to your home in connection with your business
Review the IRS rules for your facts rather than assuming that working from home automatically qualifies.
What About W-2 Employees?
Under current federal rules, employees generally cannot claim a home office deduction for working from home. This article focuses on self-employed people who report business activity on Schedule C.
State tax treatment can differ.
Two Ways to Calculate the Deduction
If you qualify, compare the simplified method with the actual-expense method. You can choose a method each tax year.
Option 1: Simplified Method
The simplified method generally uses:
- $5 per square foot
- Up to 300 square feet
- A maximum calculated amount of $1,500
The deduction is still limited by the gross income rules. You should keep records supporting your eligibility and the area used for business.
For a Schedule C filer, use the Simplified Method Worksheet in the Schedule C instructions. You do not depreciate the business portion of your home for a year in which you use this method.
Option 2: Actual-Expense Method
The actual-expense method allocates qualifying home costs between business and personal use. A common approach is:
business-use percentage = office square footage ÷ total home square footage
Indirect home expenses can include the allowable business share of:
- Rent
- Mortgage interest
- Real estate taxes
- Insurance
- Utilities
- Repairs and maintenance
- Depreciation if you own the home
Direct expenses for the business area, such as painting only the office, may be fully deductible. Personal expenses and costs unrelated to the business area are not deductible.
Schedule C filers generally calculate the actual-expense method on Form 8829.
Example
Suppose your qualifying home office is 200 square feet in a 2,000-square-foot rented home. Your business-use percentage is 10%.
Annual indirect costs:
- Rent:
$24,000 - Utilities:
$3,000 - Renters insurance:
$600 - Total:
$27,600
Comparison:
- Simplified method:
200 × $5 = $1,000 - Actual-expense method:
10% × $27,600 = $2,760
In this simplified example, the actual-expense method produces the larger amount. Your result can differ because of deduction limits, direct costs, part-year use, and other facts.
Where Does It Go on Schedule C?
Enter the allowable business-use-of-home deduction on Schedule C, Line 30.
- Use Form 8829 for the actual-expense method.
- Use the worksheet in the Schedule C instructions for the simplified method.
The deduction reduces your net profit, but it generally cannot exceed the gross income from the business use of your home after subtracting other business expenses.
Carryovers Are Different by Method
The methods do not handle unused amounts the same way:
- With the actual-expense method, some expenses disallowed by the deduction limit can carry forward.
- With the simplified method, an unused amount caused by the limit cannot carry forward.
If you have a prior-year carryover, review Publication 587 and the form instructions before switching methods.
Records to Keep
Maintain records that support:
- How you use the space
- The square footage of the business area and the home
- The dates the space was used for business
- Actual costs, if you use the actual-expense method
- Direct repairs and other claimed costs
Also avoid counting the same cost twice. For example, a utility amount included in your home office calculation should not also be deducted as a separate Schedule C utility expense.
Keep the Calculation Manageable
Good records make the home office deduction easier to calculate and explain. Simple-C helps organize business transactions throughout the year so you can review the costs behind your Schedule C breakdown.
For the rest of the expense lines, read Schedule C Expense Categories: The Complete List.
This article provides general information, not tax advice. Home office rules depend on your facts and can change. Review IRS Publication 587 and consult a qualified tax professional when needed.