The home office deduction
If you run a business from home, part of what the home costs can be a business expense. Whether it qualifies comes down to how you use the space; how much it's worth comes down to which of two methods you use. Here's all of it, in plain terms.
The requirements
The space has to pass two tests, and a third if you're an employee:
- Regular and exclusive use. A room or a clearly separate area used only for the business, and used regularly. A kitchen table, or a guest room that doubles as an office, doesn't qualify.
- A qualifying use. It's your principal place of business — including where you do the administrative and management work, if there's no other fixed place you do it — or where you regularly meet clients or customers, or a separate structure not attached to your home.
- For an employee, the employer's convenience. The office has to be for the business's benefit, not just yours. This is the test that matters for S corporation owners.
Daycare providers and businesses that store inventory at home have separate rules that relax the exclusive-use test.
The two methods
| Simplified | Regular | |
|---|---|---|
| How it's figured | $5 × square feet, up to 300 | The office's share of actual costs, plus depreciation |
| Most it can be | $1,500 a year | No fixed limit |
| Depreciation | None | Over 39 years, land excluded |
| Mortgage interest and property tax | Stay personal — deduct them in full if you itemize | The office's share moves to the business |
| If it's more than the business earns | The excess is lost | The excess carries to next year |
| The form | A worksheet in the Schedule C instructions | Form 8829 |
| Records | The square footage | Every cost, and the allocation |
You can choose either method each year. The simplified method usually wins for a small office in an inexpensive home; the regular method for a larger office, a costly home, or one you own and can depreciate. Compare them for your home →
What counts as a cost
- Indirect costs keep up the whole home — rent or mortgage interest, property tax, insurance, utilities, general repairs. The office's percentage of each counts.
- Direct costs are only for the office — painting it, repairing it. They count in full.
- Unrelated costs — lawn care, a kitchen remodel — don't count at all.
The percentage is usually the office's floor area over the home's. If you rent, you deduct the office's share of the rent. If you own, the regular method also lets you depreciate the office's share of the building, not the land.
The income limit
The deduction can't be more than the business earns from the work done there. Under the regular method, anything over the limit carries forward to the next year; under the simplified method, it's lost.
If you sell the home
Depreciation you took, or could have taken, on a home office in a home you own is taxed when you sell — the home-sale exclusion doesn't cover it. It's usually still worth claiming, but it's a cost to know about. The simplified method avoids it, because it has no depreciation.
Employees and S corporation owners
Employees can't deduct a home office on their own return. That includes you if you own an S corporation and work in it: you're its employee. Instead, the corporation reimburses the office's share of the actual costs under an accountable plan — tax-free to you, deductible to the corporation. The simplified method is only for your own return. The accountable plan templateshows the allocation in a filled-in example. More on the home office for S corporation owners →
When it doesn't fit
- The space isn't used only for the business — a shared room, a dining table, a spare bedroom guests use.
- Your main work happens at an office elsewhere, and you don't regularly meet clients at home.
- You're a W-2 employee of someone else's company. There's no deduction on your own return, even if you work from home every day.
Whether your space qualifies is a question for your CPA or tax attorney before you claim it.
Sources
- IRC §280A — the qualifying uses, the employee test, the daycare and storage rules, and the income limit
- IRS Publication 587 — direct and indirect costs, renters, both methods, depreciation, carryovers, Form 8829, and selling the home
- IRS simplified option and Rev. Proc. 2013-13
- IRC §121(d)(6) — depreciation isn't covered by the home-sale exclusion
- IRC §67(h) — no deduction for most unreimbursed employee expenses
General information, not advice for your situation. Whether a strategy fits depends on your facts — talk to your CPA or tax attorney about whether you qualify before you put it in place. Your accountant remains responsible for your return.
Know where yours stands, all year.
OpenYear reads your books, shows which strategies fit your business and why, and keeps the records each one needs — ready for your accountant. It's built for owner-operated S corporations.