The home office deduction is available to self employed people who use part of their home regularly and exclusively for business. Exclusively is the word that decides most claims, and it is stricter than nearly everyone assumes. If the space is used for business and for anything else, the deduction is not available for it, however genuinely the work happens there.
It is also the deduction most often abandoned by people who do qualify, because working out the numbers looks like more effort than the result is worth. That part has a straightforward answer.
Employees do not qualify
Start here, because it is the most common wasted question in the whole subject.
If you are an employee, you generally cannot deduct a home office. Not if you work from home full time. Not if your employer has no office at all. Not if your contract requires you to maintain a workspace. The deduction runs with a trade or business, and employment is not one for this purpose.
Everything below is about self employment, and this deduction belongs with the rest of what a self employed person can claim rather than standing on its own.
The exclusive use test, which is where claims fail
The space has to be used only for the business. The publication is blunt about the failure condition: you do not meet the test if you use the area both for business and for personal purposes.
It does not have to be a whole room. A clearly identifiable part of a room can qualify. But within that part there is no partial credit, no majority test, and no reasonable proportion. A desk in the corner of a bedroom used only for work can qualify. A spare room that is an office on weekdays and where guests sleep at Christmas does not.
This is why most refused claims are refused. The work was real and the room was real, and the room was also something else.
Regular is the second half of the test and is easier to meet. Occasional or incidental use is not enough, even if the space is exclusively reserved.
The two exceptions
Exclusive use is waived in exactly two situations.
- Daycare. If you provide daycare for children, people aged 65 or older, or people unable to care for themselves, and you are licensed or exempt from licensing, exclusive use is not required.
- Storage of inventory or product samples. This needs all of: you sell at wholesale or retail, your home is your only fixed location for the business, you use the space regularly, and the space is separately identifiable and suitable for storage.
Both are narrow, and the inventory one in particular is often claimed by people who have another fixed business location and therefore do not qualify.
Principal place of business, and the route people miss
The usual way to qualify is that your home is your principal place of business. Many self employed people assume they fail this because the actual work happens elsewhere, at client sites, on jobs, in other people’s buildings.
There is a second route, and it exists for exactly that situation. Your home qualifies if you use it exclusively and regularly for administrative or management activities, and you have no other fixed location where you conduct substantial administrative or management activities.
The named activities are ordinary: billing, bookkeeping, ordering supplies, scheduling appointments. A tradesperson who works on customer premises all day and does the paperwork at a dedicated desk at home can qualify on this basis, and frequently does not realise it.
A separate free standing structure, a studio or a converted garage, qualifies on exclusive and regular business use alone. It does not need to be your principal place of business at all.
The simplified method, and when to use it
Two ways to calculate it.
The simplified method is 5 dollars per square foot, up to 300 square feet. That caps the deduction at 1,500 dollars. It cannot exceed the gross income from the business use of the home. Electing it for a year means no depreciation and no actual home costs for that year.
The regular method apportions actual costs, mortgage interest or rent, insurance, utilities, repairs, and depreciation, by the share of the home used for business. It is computed on Form 8829.
For a small room, the simplified method is often close to the actual figure and takes minutes rather than an afternoon. The regular method earns its work where the space is large, the rent or mortgage interest is high, or there are substantial actual costs to capture.
The qualification tests are identical either way. The simplified method simplifies the arithmetic, not the rules, and a space that fails exclusive use fails under both.
What lands when you sell
This is the part that is not thought about until it is far too late, because a decision made in year one produces its consequence in year ten.
Depreciation claimed on a home office comes back as gain when you sell the home. It is recaptured, and it limits the exclusion that most homeowners rely on to shelter gain on a main residence. So the deduction taken across nine years is partly repaid in the tenth, out of the sale.
Two things follow. Keep a record of the depreciation claimed, year by year, for as long as you own the property, because you will need it at the sale and nobody reconstructs it comfortably. And note that a year under the simplified method takes no depreciation at all, which means nothing to recapture from that year.
Neither point makes the deduction a bad idea. They make it a decision with a second half.
Getting it right
Decide whether the space genuinely passes exclusive use, honestly, before anything else. If it does not, the answer is either to change how the space is used or to drop the claim, not to claim it and hope.
If it does, run the simplified method first. If the figure looks low against your actual costs, the regular method and Form 8829 are worth the work. Testing the qualification honestly, and comparing both methods before anything is filed, is part of preparing an individual return.