Home Office Deduction FAQ

To qualify for the home office deduction under IRC Section 280A, you must meet two primary requirements: regular and exclusive business use, and one of several qualifying use tests.

Requirement 1 - Regular and Exclusive Use: You must use a specific area of your home regularly (consistently, not occasionally) and exclusively (only for business, not personal activities) for conducting business. A desk in a room that doubles as a guest bedroom typically fails the exclusive use test.

Requirement 2 - Qualifying Use Test (meet at least one):

• Principal place of business: Your home office is where you conduct substantial administrative or management activities, and you don't have another fixed location where you conduct these activities
• Meeting clients or customers: You regularly meet with clients, customers, or patients at your home in the normal course of business
• Separate structure: Your office is in a structure not attached to your home (like a detached garage or studio) used exclusively for business
• Storage of inventory: You store inventory or product samples at home for a retail business (exclusive use not required)
• Day care facility: You operate a licensed day care in your home (exclusive use not required, but pro-rata allocation applies)

Critical limitation: The Tax Cuts and Jobs Act (TCJA) eliminated the home office deduction for W-2 employees from 2018 through 2025. Only self-employed individuals - including sole proprietors, partners, LLC members, independent contractors, and freelancers - can currently claim this deduction. Remote employees working from home for an employer cannot deduct home office expenses on their federal return, regardless of whether the employer requires remote work.

The simplified method, introduced by the IRS in Revenue Procedure 2013-13, provides a straightforward way to calculate your home office deduction without tracking actual home expenses. This option is available for any tax year and can be elected annually regardless of which method you used previously.

How the simplified method works:

• Deduct $5 per square foot of home office space
• Maximum allowable area: 300 square feet
• Maximum deduction: $1,500 per year (300 sq ft x $5)

Advantages of the simplified method:

• Eliminates need to track and categorize actual home expenses
• No depreciation calculations or recordkeeping requirements
• No depreciation recapture when you sell your home
• Mortgage interest and property taxes remain fully deductible on Schedule A (not reduced by business use)
• Simpler Form 8829 completion

Disadvantages of the simplified method:

• The $1,500 cap may significantly understate actual expenses for expensive homes or large offices
• You cannot deduct actual home expenses in excess of the $1,500
• No carryforward of unused deductions to future years
• If your home office exceeds 300 square feet, you only get credit for 300

The simplified method is generally best for small home offices, taxpayers in lower-cost housing markets, and those who prefer simplicity over maximizing deductions.

The regular method requires calculating your actual home expenses and allocating a percentage to business use. While more complex than the simplified method, it often produces larger deductions, especially for bigger home offices or expensive homes.

Step 1 - Calculate your business use percentage:

Divide your home office square footage by your total home square footage. For example: 200 sq ft office / 2,000 sq ft home = 10% business use.

Step 2 - Categorize and calculate expenses:

• Direct expenses (100% for business, like painting the office): Fully deductible
• Indirect expenses (benefit whole home): Deductible based on business use percentage

Deductible home expenses include:

• Mortgage interest (or rent if you don't own)
• Property taxes
• Utilities (electricity, gas, water, trash)
• Homeowners or renters insurance
• Repairs and maintenance (direct or indirect)
• Depreciation (for owned homes)
• Security system costs
• HOA fees
• Pest control

Depreciation calculation: For owned homes, you depreciate the business portion over 39 years using the straight-line method. Calculate your home's basis (typically purchase price plus improvements, minus land value), multiply by business use percentage, and divide by 39. Depreciation is claimed even if your home appreciates, and must be recaptured at sale.

Report the regular method deduction on Form 8829 (Expenses for Business Use of Your Home) attached to Schedule C.

The regular and exclusive use requirement under IRC Section 280A(c)(1) is the most common reason taxpayers fail to qualify for the home office deduction. Both elements must be satisfied.

Regular Use:

You must use the space for business on a consistent, ongoing basis - not just occasionally or incidentally. While the IRS doesn't specify a minimum number of hours or days, using a space sporadically (like twice a month) likely doesn't qualify. The standard is whether the space serves as an integral part of your regular business operations. Factors considered include the frequency of use, the nature of your business, and whether the space is essential to conducting business activities.

Exclusive Use:

The space must be used only for business purposes, with no personal activities conducted there. This is where many taxpayers trip up:

• A desk in a spare bedroom also used for guests fails exclusive use
• A dining room table used for both meals and work fails exclusive use
• A dedicated office with a child's play area in the corner fails exclusive use
• An office where you occasionally watch TV fails exclusive use

Two exceptions to exclusive use:

1. Inventory storage: If you use part of your home to store inventory or product samples for a retail or wholesale business, you can claim the deduction without meeting exclusive use if: (a) your home is your sole fixed business location, (b) your business involves selling products, and (c) the storage space is regularly used and separately identifiable.
2. Day care facilities: If you operate a licensed day care in your home (for children, elderly, or disabled), you can claim a deduction even though the space is also used personally. However, you must calculate the business percentage based on both the space used and time used for day care.

Under IRC Section 280A(c)(5), your home office deduction is subject to an important limitation: it generally cannot exceed your gross income from the business activity conducted in that home office. This rule prevents you from using home office expenses to create or increase a business loss.

How the income limitation works:

Your gross income from the business (reported on Schedule C) minus non-home-office business deductions equals the maximum home office deduction you can claim. If your home office expenses exceed this limit, the excess carries forward to future years when you have sufficient business income.

Expense deduction priority (regular method):

1. Tier 1 - Always deductible: Direct business expenses (100% business use) are deducted first with no income limitation
2. Tier 2 - Mortgage interest and property taxes: The business portion is deducted next. These would be deductible anyway on Schedule A, so they're allowed even if they exceed business income.
3. Tier 3 - Operating expenses: Utilities, insurance, repairs, and other indirect expenses are deducted after tiers 1 and 2
4. Tier 4 - Depreciation: Home depreciation is deducted last and is most likely to be limited and carried forward

Simplified method limits:

• Maximum area: 300 square feet
• Maximum deduction: $1,500 (300 x $5)
• Deduction still limited to gross income from the business
• No carryforward of unused simplified method deduction

Example: Your business has $8,000 gross income and $5,000 in non-home expenses. Your maximum home office deduction is $3,000. If your actual home office expenses are $4,500, you deduct $3,000 and carry forward $1,500 to next year.

Under the Tax Cuts and Jobs Act (TCJA), W-2 employees cannot claim home office deductions on their federal tax returns for tax years 2018 through 2025. This change significantly impacted millions of remote workers, particularly during the COVID-19 pandemic when home-based work became widespread.

What changed under TCJA:

Before 2018, employees could deduct unreimbursed employee business expenses, including home office costs, as miscellaneous itemized deductions on Schedule A. These deductions were subject to a 2% AGI floor (only amounts exceeding 2% of adjusted gross income were deductible). The TCJA suspended all miscellaneous itemized deductions subject to the 2% floor through 2025.

Who CAN claim the home office deduction:

• Self-employed individuals: Sole proprietors, independent contractors, freelancers, and gig workers receiving 1099 income
• Partners: Partners in partnerships can deduct home office expenses as unreimbursed partner expenses
• LLC members: Members of LLCs taxed as partnerships or sole proprietorships
• Statutory employees: Certain employees (like full-time life insurance salespeople) who receive a W-2 with box 13 checked may qualify

California exception:

California did not conform to the federal TCJA suspension. Under California Revenue and Taxation Code Section 17076.5, employees can still deduct unreimbursed employee business expenses, including home office costs, on their California state tax return. To qualify, the home office must be required by the employer for the employer's convenience (not just the employee's preference). California uses Form 3526 (Investment Interest Expense Deduction) to claim these expenses.

Alternative for employees:

Employees should negotiate with their employers for reimbursement of home office expenses. Under an accountable plan (IRC Section 62(c)), employer reimbursements are tax-free to the employee and deductible by the employer.

Calculating your business use percentage accurately is essential for maximizing your deduction while avoiding IRS challenges. The standard method uses square footage, though other methods may apply in specific circumstances.

Basic square footage calculation:

Business Use Percentage = (Home Office Square Feet / Total Home Square Feet) x 100

Example: 200 sq ft office / 1,800 sq ft home = 11.1% business use

How to measure your home office:

• Measure length x width for rectangular rooms
• For irregular shapes, break into rectangles and sum them
• Include only space meeting the regular and exclusive use test
• If you use a portion of a room, measure only that portion

What to include in total home square footage:

• All living areas including bedrooms, bathrooms, kitchen, living spaces
• Finished basement or attic areas
• Attached garage (if used as part of home)
• Be consistent: if you include garage in total, include it if part of office

What NOT to include:

• Unfinished basement or attic (unless used for business)
• Detached structures (unless your office is there)
• Outdoor spaces like patios and decks

Multiple business areas:

If you have multiple qualifying areas (e.g., office plus inventory storage), combine their square footage for your total business use percentage.

Documentation for audit defense:

• Create a floor plan diagram with measurements
• Take dated photographs of your home office setup
• Keep property appraisals or real estate listings showing total square footage
• Save any professional measurements (carpet installer quotes, etc.)

When you sell a home on which you've claimed home office depreciation using the regular method, special tax rules apply that can partially reduce the tax benefits you received. Understanding depreciation recapture is crucial for long-term tax planning.

Section 121 exclusion still available:

The good news is that claiming a home office deduction doesn't disqualify you from the IRC Section 121 primary residence exclusion ($250,000 for single filers, $500,000 for married filing jointly). You can still exclude gain up to these limits if you meet the ownership and use tests.

Depreciation recapture under IRC Section 1250:

However, any depreciation claimed after May 6, 1997, must be "recaptured" and taxed at a maximum 25% rate. This is called "unrecaptured Section 1250 gain." The recapture occurs regardless of your ordinary income tax bracket - even if you're in the 10% bracket, depreciation recapture is taxed at 25%.

Example calculation:

• Purchase price: $400,000 (land $100,000, building $300,000)
• Home office: 10% of home for 10 years
• Annual depreciation: ($300,000 x 10%) / 39 years = $769/year
• Total depreciation claimed: $7,690 over 10 years
• Sale price: $600,000, total gain: $200,000
• Depreciation recapture tax: $7,690 x 25% = $1,923
• Remaining gain ($200,000 - $7,690 = $192,310) eligible for Section 121 exclusion

Important considerations:

• You must recapture depreciation whether or not you actually claimed it (depreciation "allowed or allowable")
• Depreciation recapture reduces the amount eligible for Section 121 exclusion
• The simplified method avoids depreciation recapture entirely since no depreciation is claimed
• If your total gain is less than depreciation claimed, recapture is limited to actual gain