What Is the Home Office Deduction?

The home office deduction allows a qualifying self-employed taxpayer to deduct certain expenses attributable to business use of a home. A workspace generally must be used exclusively and regularly for business and satisfy a qualifying business-use test. Eligible homeowners and renters may use either the actual-expense method or the federal simplified method.

Who qualifies for the home office deduction?

A taxpayer generally must use part of the home:

• exclusively for a trade or business;
• regularly, rather than occasionally; and
• as a principal place of business, a place used regularly to meet or deal with patients, clients, or customers, or a qualifying separate structure.

Exclusive use generally means the area is not also used personally. A dining table used by the family does not become a qualifying office merely because business work occurs there. Limited exceptions can apply for certain storage of inventory or product samples and for qualified daycare use.

A home office may qualify as a principal place of business when it is used for administrative or management activities and the taxpayer has no other fixed location for substantial administrative or management work.

Employees generally cannot claim a federal home-office deduction for unreimbursed employee expenses under current law. A person who is both an employee and self-employed must allocate the space and expenses to qualifying business use rather than treating employee work as self-employment.

How is the deduction calculated?

The two federal methods are:

Simplified method

The simplified option generally multiplies the allowable business square footage by $5, up to 300 square feet. The maximum is therefore generally $1,500 for a full year, subject to business-income and other rules.

The simplified method does not deduct home depreciation or create depreciation recapture for the years it is used. Certain otherwise allowable home-related itemized deductions are treated under their normal rules rather than allocated to the business.

Actual-expense method

The actual method allocates eligible direct and indirect expenses. Direct expenses benefit only the business area, such as painting the office. Indirect expenses benefit the whole home and are allocated by a reasonable business-use percentage. They can include qualifying rent, mortgage interest, real estate taxes, utilities, insurance, repairs, maintenance, and depreciation.

Expenses unrelated to the business area, such as lawn care when the lawn has no business use, generally are not deductible as home-office costs.

Home office deduction example

Assume a consultant uses a 300-square-foot office exclusively and regularly in a 2,000-square-foot rented home. The business-use percentage under a square-footage method is 15%.

The actual method appears larger in this example, but the final allowable amount can be limited by business income and expense-ordering rules. It also requires stronger records. For a homeowner, depreciation and potential recapture can affect the comparison.

In the shared batch example, the taxpayer uses the $1,500 simplified deduction. With $100,000 of gross receipts and $38,500 of other expenses, Schedule C net profit is $60,000.

Where is the home office deduction reported?

A sole proprietor using the actual method generally calculates the deduction and carryover on Form 8829, then reports the allowable amount on Schedule C. A Schedule C filer using the simplified method generally uses the Schedule C instructions and simplified-method worksheet rather than Form 8829.

The home-office deduction generally cannot create or increase a Schedule C loss under the business-use-of-home income limitation. Disallowed actual-method expenses may carry forward, while the simplified method generally does not create the same carryover.

Home office deduction vs. office supplies and rent

The home-office deduction allocates costs of using the home itself. A business computer, desk, supplies, dedicated business phone, and other equipment or expenses follow their own deduction and depreciation rules. They are not automatically part of Form 8829.

Rent paid for separate commercial space is generally a business rent expense, not a home-office deduction.

Federal and California treatment

California FTB Publication 984 states that California allows the home-office deduction based on the percentage used exclusively and regularly for business and generally follows the federal qualifications. California taxpayers should still review Schedule CA and current FTB instructions for differences in the underlying expenses, depreciation, and employee-business-expense treatment.

California's treatment can differ when federal and California basis or depreciation differs. Accurate records remain important for the eventual sale of a home and any federal or California basis adjustment.

For a California sole proprietor or disregarded LLC, the deduction generally affects the business result reported through Form 540. A California LLC can still have annual tax and Form 568 obligations regardless of whether the home-office deduction reduces federal Schedule C profit.

Common mistakes

• Claiming a mixed personal-and-business room without an exception
• Treating occasional work at home as regular use
• Assuming an employee's remote-work arrangement creates a federal deduction
• Using gross square footage inconsistently or including nonliving areas incorrectly
• Deducting all utilities, rent, or repairs instead of the allowable business portion
• Claiming both simplified and actual methods for the same business space and period
• Ignoring the business-income limitation and carryover rules
• Mixing furniture, computers, supplies, and phone costs into the home calculation without applying their separate rules
• Failing to consider depreciation and potential recapture under the actual method

Frequently asked questions

Related terms

• Business Expense
• Ordinary and Necessary Business Expense
• Schedule C
• Net Profit (Net Income)

Official sources

• IRS — Topic No. 509, Business Use of Home
• IRS — Publication 587, Business Use of Your Home
• IRS — Simplified option for the home office deduction
• IRS — About Form 8829
• California FTB — Publication 984, Business Expenses

The definitions and examples on this page are for informational purposes only and do not constitute tax advice. Tax laws change frequently and individual circumstances vary. Consult a qualified tax professional before making decisions based on this content.