Home Office Deduction for Small Business Owners: What Qualifies and What Doesn’t

The home office deduction is one of the most commonly claimed — and most commonly questioned — deductions for small business owners. The IRS has specific rules about what qualifies, and they’re stricter than most people think. Getting it right means documenting your space and your usage. Getting it wrong means losing the deduction entirely during an examination.

The Two Requirements: Regular and Exclusive Use

To claim the home office deduction, your workspace must meet two tests. First, it must be used regularly for business — not occasionally. Second, it must be used exclusively for business. That guest bedroom where you also have a desk? If it’s also used for guests, it doesn’t qualify. The kitchen table where you do your invoicing? Doesn’t qualify either.

The space doesn’t need to be a separate room. A dedicated corner of a room works, as long as it’s used only for business. But the exclusive use test is where most taxpayers fail during an examination.

Simplified Method vs. Actual Expenses

The IRS offers two methods for calculating the deduction. The simplified method lets you deduct $5 per square foot of your home office, up to 300 square feet — a maximum deduction of $1,500. No tracking of actual expenses required. This method is easier but caps your deduction.

The actual expense method requires you to calculate the percentage of your home used for business and apply that percentage to your actual home expenses — rent or mortgage interest, property taxes, utilities, insurance, repairs, and depreciation. This method can produce a larger deduction but requires detailed records.

Who Can Claim It

Sole proprietors and single-member LLCs claim the home office deduction on Schedule C. S-Corp shareholders typically need an accountable plan to reimburse home office expenses through the corporation. The deduction is not available to W-2 employees under current federal law — that deduction was eliminated by the Tax Cuts and Jobs Act and has not been restored.

What Documentation You Need

Measure your office space and your total home square footage. Take a photo of the space showing it’s set up for business use. Keep records of all home expenses you’re using in the calculation. If you’re using the actual expense method, track utility bills, insurance, rent or mortgage statements, and any repairs.

If the IRS questions your home office deduction, they’ll want to verify the exclusive use test and the business percentage calculation. Having documentation ready makes that conversation short.

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If you’re not sure which method is right for your situation or how to document your home office properly, schedule a consultation or check out our tax preparation services.