The Home Office Deduction: What You Need to Know
May 29, 2025
If you run your own business from home, you may be able to lower your tax bill through the home office deduction. This tax benefit allows eligible self-employed individuals to deduct certain expenses related to the business use of their home. Whether you're a freelancer, independent contractor, or sole proprietor, understanding how this deduction works can help you keep more of your hard-earned income.
Can Work-from-Home W-2 Employees Claim the Deduction?
Prior to 2018, employees who worked from home could claim unreimbursed business expenses, including a home office deduction. However, the Tax Cuts and Jobs Act (TCJA) changed that. From tax years 2018 through at least 2025, W-2 employees are not allowed to claim a deduction for home office expenses. This change applies to most employees, regardless of their work arrangements or how much time they spend working from home. But if you have a side hustle or run your own business in addition to your W-2 job, you may be able to claim the home office deduction.
What Are the Requirements?
To qualify for the deduction, your home office must satisfy two key requirements: exclusive and regular use, and it must be your principal place of business.
Exclusive and Regular Use
The space you claim must be used exclusively and regularly for conducting business. This means a dedicated room, a clearly defined area, or a separate structure that’s used solely for work activities on a continuous or recurring basis. Using your kitchen table or a corner in your living room won't qualify unless those spaces are strictly reserved for business on a regular basis. Even if you regularly use a spare bedroom for your business but you let a visiting relative stay for one night in that bedroom, it will make you ineligible for the deduction.
However, there are two exceptions to the "exclusive use" rule. First, if you run a daycare facility for children, seniors, or people with disabilities out of your home, you may still qualify for the deduction even if the space is also used for non-business purposes, as long as the business is properly licensed or exempt from licensing. The second exception applies to areas used for storing inventory or product samples. If you use a part of your home regularly for storage related to your business—such as keeping inventory for an online store—you can deduct the space even if it’s not used exclusively for that purpose, provided it’s a clearly identifiable area and is the only fixed location for your business.
Principal Place of Business
The second requirement is that your home office must be your principal place of business. This doesn't mean it has to be your only place of work, but it should be where you conduct your most important administrative or managerial activities, and you have no other fixed location that you can use to perform substantial amount of these activities. Examples of administrative or management activities include billing customers, setting up appointments, and keeping books and records for your business. If you occasionally meet clients or customers at your home, this can further support your eligibility.
How to Calculate the Deduction
There are two methods to calculate your home office deduction: the simplified method and the regular method.
The simplified method allows you to deduct $5 per square foot of your home office, up to a maximum of 300 square feet. It’s easy to use and requires minimal recordkeeping, but the deduction is capped at $1,500 per year.
The regular method involves calculating the actual expenses related to your home office and typically provides a larger deduction if you have substantial home-related costs. There are two types of expenses you can deduct under the regular method: direct and indirect.
Direct expenses are costs that relate solely to the home office, such as painting the office walls, installing a dedicated phone line, or replacing the flooring in that specific room. These are fully deductible.
Indirect expenses are costs that apply to the entire home—like rent, mortgage interest, utilities, property taxes, homeowners insurance, and general repairs. These must be allocated proportionally based on the business-use percentage of your home. For example, if your home office occupies 200 square feet of a 2,000-square-foot home, 10% of your indirect expenses are generally deductible.
In addition to these costs, the regular method also allows you to claim depreciation on the portion of your home used for business if you own your home. Depreciation reflects the gradual wear and tear on your home over time and is calculated using IRS tables based on the cost basis of your home (excluding the land value) and the percentage of business use. This can be a valuable deduction, but it also reduces your cost basis for the home, which may lead to a higher capital gains tax if you sell your home in the future.
Avoiding Common Mistakes
One of the most frequent pitfalls is misunderstanding the "exclusive use" rule. If your workspace is used for both personal and business purposes, it doesn't qualify. Another common mistake is failing to keep proper records. Be sure to document your expenses, measure your office space accurately, and retain any receipts or utility statements that support your deduction.
If you use the regular method, remember that you’ll need to recapture the depreciation when you sell your home. This means you may have to pay taxes on the amount of depreciation you previously deducted or could have deducted, even if you exclude capital gain on the sale of your primary residence. Keeping thorough records of the depreciation taken each year will help you report it accurately when the time comes.
Final Thoughts
The home office deduction is a legitimate and potentially substantial tax break for self-employed individuals who work from home. Whether you choose the simplified or regular method, the key to maximizing this benefit is to ensure your workspace meets the IRS requirements and that you maintain thorough documentation. If you're unsure about your eligibility or which method to use, we at Bing Luo CPA can help guide you through the process.
Tax laws are complex. Consult a CPA or tax advisor for personalized guidance. At Bing Luo CPA, we are committed to providing expert guidance to help you make well-informed decisions.