The Home Office Deduction: Who Qualifies and How to Calculate It

If you run your business from home, the home office deduction can be valuable. It's also misunderstood, so many owners either skip it out of fear or claim it when they don't qualify.

Who qualifies?

To claim the deduction, the space must be used:

1. Regularly and exclusively for business. The area must be used only for your business, on a regular basis. A dedicated room or a clearly separated area works. The dining table you also eat at doesn't.

2. As your principal place of business, or as a place where you regularly meet clients, or as a separate structure used for business. Your home office can qualify as your principal place of business if you use it for administrative or management activities and have no other fixed location where you do much of that work.

There are exceptions to the exclusive-use rule for storing inventory or product samples and for certain daycare businesses.

Important: W-2 employees generally can't claim this deduction on their federal return. It's for self-employed people and business owners.

Method 1: Simplified method

Deduct $5 per square foot of office space, up to 300 square feet, for a maximum of $1,500.

• Easy to calculate and document
• No depreciation recapture when you sell your home
• No need to track individual home expenses

Method 2: Regular (actual expense) method

Calculate the percentage of your home used for business (office square footage divided by total square footage), then deduct that percentage of:

• Rent or mortgage interest
• Property taxes
• Homeowners or renters insurance
• Utilities
• Repairs and maintenance
• Depreciation (for homeowners)

Repairs that affect only the office can be deducted in full.

This method often produces a larger deduction, especially for renters in high-cost areas like the Seattle region, but requires more recordkeeping. If you own your home, depreciation you claim may need to be recaptured when you sell.

Example

A 150-square-foot office in a 1,500-square-foot rented apartment is 10% of the home. If rent and utilities total $30,000 a year, the regular method allows about $3,000. The simplified method would allow $750.

S-corp owners: a different approach

If your business is an S-corp, the usual approach is for the company to reimburse you for home office costs under an accountable plan, rather than claiming the deduction on your personal return.

Mistakes to avoid

• Claiming a space that's also used for personal activities
• Measuring the whole room when only part is used for business
• Forgetting to include renters insurance or utilities under the regular method
• Not keeping photos and a simple floor plan as documentation

The bottom line

If you have a dedicated workspace at home, the home office deduction is legitimate and worth claiming. Run both methods and choose the one that works best for you.

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Need help getting this right? TRIG Bookkeeping & Tax Services helps new business owners in Washington with company registration, monthly and annual bookkeeping, and government compliance. Contact us to talk about your business.

This article is general information, not legal or tax advice for your situation. Tax rules and fees change, so confirm current details with the IRS, the Washington Department of Revenue, or a qualified professional.