For cash-strapped startups, working from home allows small business owners to launch their entrepreneurial venture without requiring the upfront capital needed for office space and overhead costs.
While this path can pose challenges, there are financial incentives, including the opportunity to qualify for benefits like the home office tax deduction. Our guide breaks down the ins and outs of the home office tax deduction, including who is eligible and how to calculate your home-based business tax break.
[Read more: 2025 Tax Cliff and Implications for Main Street Businesses: Calculate Your Potential Taxes]
What is the home office tax deduction, and who qualifies?
The home office deduction offers tax breaks to eligible workers with a dedicated home office space used solely for business. This deduction helps self-employed workers offset entrepreneurial costs; however, they must prove their space is used exclusively for work — any personal use disqualifies eligibility.
What qualifies as an eligible home office?
Workers can qualify for the home office tax deduction regardless of what their office space looks like, as long as it meets one of these two requirements:
- The space is regularly and exclusively used for business. Regular and exclusive use means you’ve dedicated an area in your home for running your business.
- The space functions as your principal place of business. To claim your home office as a primary place of business, you must show that you use your home to conduct the majority of your business.
It’s important to note that you must be a registered business owner or independent contractor to take the home office deduction. You cannot take the home office deduction if you work from home as a W-2 employee of a business.
The ‘exclusive use’ test
To prove that a portion of your home is your principal place of business and that this space is regularly and exclusively used for conducting business, the IRS relies on the “exclusive use” test to determine eligibility.
For instance, a spare room in your home that is only used as your business office can be claimed for the home office deduction. However, a bedroom or living room where you work on business tasks cannot be claimed, because you use those spaces for other personal purposes.
There are exceptions to the exclusive use test, including businesses that store inventory or product samples or use their home as a daycare facility.
[Read more: How to Start a Small Business at Home]
What can I deduct from my taxes as a home-based business?
The following list contains the most common deductions home-based business owners claim on their tax returns.
Home-related expenses
Home office-related deductions are based on the percentage of your home that you use for business.
If you meet IRS guidelines, you can deduct the following home-related expenses:
- Homeowners insurance.
- Homeowners’ association fees.
- Cleaning services or cleaning supplies used in your business space.
- Mortgage insurance and interest.
- Utilities, including electricity, heat, phone, and internet service.
Repairs and maintenance
If you make home repairs or upgrades related directly to your business space, you may also deduct these expenses from your taxes. The amount you can write off depends on whether the expense is direct (it only benefits your home office) or indirect (it benefits your entire home).
- Direct: If you spend $100 to fix a window in your home office, you can deduct the full $100 on your taxes.
- Indirect: If you pay $1,000 to repair a leak in your roof, you may only deduct a percentage of that expense equivalent to the percentage of your home used for business.
Office tools and supplies
So long as they are used regularly and exclusively for business, long-term purchases like tech and furniture can be deducted as business expenses on your Schedule C tax form. Some examples include:
- Printers, scanners, and additional computer monitors.
- Office furniture, such as desks, chairs, and storage solutions.
- Video call accessories, including ring lights, headsets/microphones, and laptop stands.
Keep track of all of your business expenses and receipts to ensure you can prove your purchases in case you’re audited.
Other business expenses
To qualify as a deductible, a business expense must be considered both ordinary and necessary, meaning the expense is common and helpful for your trade or industry. Costs such as employee salaries, business taxes, travel expenses, business insurance, professional services, marketing and advertising, and other similar expenses can be deducted on any home-based business tax return, regardless of whether you are eligible for the home office deduction. The IRS provides a detailed explanation of these types of expenses and what is eligible for deduction.
[Read more: What to Know About Taxes When You’re Running a Family Business]
What expenses does the IRS disallow?
The IRS has strict guidelines as to what expenses are — and aren’t — deductible under the home office deduction. Some of those restrictions include:
- Initial telephone lines within the home: While in-home telephone lines have largely declined over the years, with less than 30% of adult Americans still using their landlines, the IRS does not allow a deduction for the first telephone line in one’s home, except in instances of long-distance business phone calls. Additional lines used exclusively for business may be covered.
- Lawn care and landscaping for nonbusiness purposes: Unless your business specifically involves outdoor maintenance (such as landscaping services), you cannot deduct the cost of lawn care or landscaping under the home office tax deduction, even if the improvements are intended to enhance the experience for your clients.
- Home repairs and maintenance outside of the home office space. Only home improvement projects that directly benefit your home office space can be claimed in full.
The simplified option will likely work best for those who are starting freelancing or a small business, since they will likely have fewer expenses. If your business is more developed and has more expenses, the regular option may be a better fit.
How to calculate and take the home office deduction
There are two different methods you can use when calculating and determining home office deductions: the regular method and the simplified method.
- The simplified method: Those using the simplified method take the deduction directly on Schedule C when reporting the income and expenses for their business.
- The regular method: Those who calculate deductions using the regular method submit Form 8829 with their tax return. Afterward, they report the total deduction from the business income on Schedule C.
Here’s a breakdown of what each method entails.
The regular method
The regular method measures the size of your home office as a percentage of the total square footage of your residence. The formula is as follows:
Business percentage = (Home office square footage / Total home square footage) x 100
For example, if your office is 75 square feet and the total area of your home is 1,000 square feet, the calculated business percentage is 7.5%.
Any direct business expenses can be deducted in full, and any indirect expenses can be deducted using that business percentage. (If you are filing your taxes as a self-employed person using Form 1040, you can use Form 8829 to determine the allowable expenses for the business use of your home.)
In keeping with our example, you could deduct 7.5% of your rent or mortgage since that money is spent on your office space. You can generally apply that percentage to your electric and internet bills as well.
If you only use a home workplace or office part of the time, you will need to multiply the business percentage by the percentage of time that you use the space.
The simplified option
A simpler calculation is to divide the number of rooms in your home you use for business by the total number of rooms in the house:
Business percentage = (Number of rooms used for business / Total number of rooms) x 100
However, this calculation is only accurate if all the rooms in your house are a similar size. Special rules also apply for certain professions, such as those who use their home as a daycare.
The second method for claiming a deduction uses a determined rate, which is then multiplied by the amount of square footage used for business within the home. The prescribed rate is currently set at $5 per square foot with a 300-square-foot maximum.
Deduction = (Square footage used for business) x $5
This would mean that a deduction for an office measuring 200 square feet would be $1,000 because you would multiply the square footage by the $5 per square foot rate (200 square feet x $5 per square foot).
Which method is best for you?
While the simplified method may be easier to calculate and claim, it may not offer entrepreneurs all the deductions they qualify for. Currently, the simplified method only allows up to $1,500 in deductions. The regular method is based on actual expenses incurred and does not have a cap, so long as the deduction does not exceed the income generated from business use of the home.
The simplified option will likely work best for those who are starting freelancing or a small business, since they will likely have fewer expenses. If your business is more developed and has more expenses, the regular option may be a better fit. Since eligibility and qualifications may change from year to year, it’s important to stay up to date on the current qualifications and rules for a home office deduction.
Home office deduction FAQs
Can you claim a home office deduction as a work-from-home employee?
If you’re a work-from-home employee, you cannot claim a home office deduction due to the Tax Cuts and Jobs Act of 2017. The tax break is only available to self-employed individuals, including freelancers, gig workers, and independent contractors. W-2 employees are not eligible, even if they work remotely for an employer.
There are exceptions, however. If you are both self-employed and employed separately as a W-2 employee, you may qualify, but only for the months when you earned self-employed income. To be eligible, this income must be reported on Schedule C.
Can you claim the deduction if you’ve been self-employed for a few months?
Even if you were only self-employed for a few months out of the year, you can still claim a partial home office tax deduction. Be sure to only use expenses for the months you were self-employed, or otherwise eligible, to calculate the deduction.
If an eligible taxpayer decides to use the simplified deduction method, they can use the number of months they worked from home to prorate the amount they can deduct. They can deduct a portion of actual expenses for the months they were eligible for the deduction.
Should you use a CPA for home office deductions?
Enlisting the help of a professional is always advisable when it comes to a complicated tax situation. While you may have a strong understanding of your business’s tax obligations, the rules change every year, which can make it hard to ensure your business is meeting the requirements, even with the best intent.
Having a certified public accountant (CPA) prepare or review your tax filings can ensure you don’t take deductions you’re not qualified to take. This can help your business remain compliant and avoid unnecessary penalties — or worse, an audit, which can be resource-intensive for small businesses.
Beyond compliance, a CPA has a deeper understanding of deductions that are available to small businesses; their insights can help you claim additional benefits you may not have known were available.
Will I get audited by the IRS if I take the home office deduction?
While the IRS rules about home office deductions are strict, it’s not guaranteed that you will get audited simply for claiming your home office. There are measures you can take to reduce your chances of getting audited.
Before claiming the home office deduction, make sure your business isn’t claiming any deductions it isn’t eligible for. Maintain records of all your business expenses and purchases, and ensure that your residence, home office usage, and type of employment qualify for this expense.
The IRS has an automated system that helps detect red flags. The system compares your tax situation and deductions to others in your industry. If you claim something that others in your profession don’t generally claim, or if you claim “too much” space in your home as your home office, the system may flag the return for further investigation.
If you decide to take the home office deduction, it’s essential to follow the IRS guidelines to the letter, as they change somewhat frequently. A tax professional can assess and make recommendations based on your circumstances, allowing you to maximize your deductions while remaining in compliance.
How to keep audit-proof records
Although recordkeeping requirements vary by industry, you’ll need to ensure you can produce accurate records in the event of an audit. Inaccurate or incomplete records could lead to penalties.
Here are some best practices for maintaining audit-proof, IRS-compliant records:
- Maintain supporting business documents. An invoice or receipt must accompany any transaction your business completes to substantiate entries in your books and on your tax return. These documents must be kept for at least three years after filing a tax return.
- Keep records organized. Ensure you accurately record and categorize your transactions according to how the item was used. Incorrectly classifying your expenses could cause challenges for your business should the government not approve them.
- Log your business use of personal items. If you plan to take deductions like car usage or internet service, you must substantiate your business use percentage on your personal items. Keep accurate records with mileage logs that annotate the destination, business purpose, and mileage used. For internet or cell phone usage, you’ll need documents proving the time spent using the resource for personal versus business time.
- Use digital tools to store documents safely. It’s always best to have records safely stored in multiple places in case of an accident or hardware failure. Using digital tools can help you organize records easily and efficiently, ensuring documents are easily accessible when you need them.
- Maintain a recordkeeping schedule. Rather than waiting until tax time, set a recurring schedule for logging expenses, reconciling accounts, and updating key records. By making recordkeeping a consistent part of your business’s processes, you can guarantee that your documents are always backed up and ready when you need them.
[Read more: Ready. Set. Scale. Smart Tax Tips for a Stress-Free Filing]
Rachel Barton and Sean Peek contributed to this article.
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Published
Miranda Fraraccio
