The Home Office Deduction: What You Can and Can’t Claim

For the growing number of freelancers, remote workers, and small business owners, the home office deduction is a valuable tax break. But it’s also one of the most misunderstood and frequently audited areas. Claiming it correctly can save you a significant amount of money, while getting it wrong can lead to headaches with the IRS.

Let’s demystify the home office deduction, outlining what you can claim, what you can’t, and how to do it properly.

The Golden Rule: Regular and Exclusive Use

Before we get into specific expenses, you must meet the foundational criteria set by the IRS. Your home office must be:

1. Regular Use: You use the space for business on a consistent, ongoing basis.

2. Exclusive Use: You use a specific area of your home only for your trade or business. This is the strictest rule.

What “Exclusive Use” Means (and Doesn’t Mean):

• ✅ A dedicated spare room used solely as your office.

• ✅ A partitioned-off section of a room that is used for nothing else.

• ❌ Your kitchen table where you work by day and your family eats dinner by night.

• ❌ A guest bedroom that doubles as your office when guests aren’t there.

Exception for Daycares: If you run a licensed daycare facility in your home, the “exclusive use” rule does not apply, as the space is used for both personal and business purposes.

What You CAN Claim: Eligible Expenses

If you meet the “regular and exclusive use” test, you can deduct a portion of the costs associated with running your home. These are divided into two categories:

1. Direct Expenses
These are costs that benefit only your home office. The full cost is deductible.

• Repainting or repairing the office room.

• A new window blind for the office window.

• Business-only phone line.

2. Indirect Expenses
These are costs for keeping your entire home running. You can deduct a percentage of these based on the size of your office relative to your entire home.

• Mortgage Interest or Rent

• Property Taxes

• Utilities (Electricity, Gas, Water, Internet*)

• Homeowners/Renters Insurance

• General Repairs (e.g., fixing the roof, repainting the outside of the house)

• Security System

• Depreciation (if you own your home)

*Note: There is debate about internet costs. If you have a single bill, you can deduct the business percentage. Be prepared to justify the business use if audited.

What You CANNOT Claim: Common Pitfalls

To avoid an audit, steer clear of deducting these personal expenses:

• The Entire Mortgage Payment: You can only deduct the interest portion, not the principal.

• Home Improvements Unrelated to Business: A new kitchen renovation or a swimming pool cannot be deducted, even if you occasionally take business calls there.

• Landscaping & Lawn Care: Unless you meet clients at your home and the curb appeal is a direct business necessity, this is a personal expense.

• Personal Phone Line: The base charge for your first landline is not deductible, even if you use it for business. However, long-distance business calls from that line are.

• Domestic Help: You cannot deduct the cost of a housekeeper who cleans your entire home, including the office.

How to Calculate the Deduction: Two Methods

The IRS offers two ways to calculate your deduction. You can choose the one that gives you the larger benefit.

Method 1: The Simplified Option
This is the easier, safer method for most people.

• How it works: Multiply the square footage of your office (up to 300 square feet) by a standard rate of $5 per square foot.

• Maximum Deduction: $1,500 (300 sq. ft. x $5).

• Pros: Extremely simple, no complex record-keeping required.

• Cons: You cannot deduct home depreciation or claim actual expenses, which might be higher if you have a large, expensive home.

Method 2: The Regular (Actual Expense) Method
This is more complex but can yield a much larger deduction.

• How it works:

  1. Calculate the percentage of your home used for business (e.g., a 150 sq. ft. office in a 1,500 sq. ft. home = 10%).

  2. Apply this percentage to your total indirect expenses (10% of your mortgage interest, utilities, insurance, etc.).

  3. Add any direct expenses (like repairs made only to the office).

• Pros: Can result in a significantly larger deduction, especially in high-cost areas.

• Cons: Requires meticulous record-keeping of all home-related expenses and is more complex to calculate.

Your Action Plan for a Bulletproof Deduction

1. Measure Your Office: Calculate the square footage of your dedicated office space.

2. Choose Your Method: For your first year, calculate using both methods to see which is more advantageous.

3. Keep Impeccable Records:

   • Take a photo of your dedicated office space.

   • Save all receipts for utilities, mortgage interest, repairs, and insurance.

   • Keep a log of the time you spend working in the office to prove “regular use.”

4. Be Consistent: Once you choose a method (Simplified or Regular), you must stick with it for the lifetime of that home office.

The Bottom Line

The home office deduction is a legitimate way to reduce your tax bill for the costs of running your business from home. By focusing on the “regular and exclusive use” rule, understanding what expenses are eligible, and keeping thorough records, you can claim this deduction with confidence and keep the IRS at bay.