At a glance
- What it is
- A deduction for the business share of your home costs when part of your home is your office.
- Two methods
- Simplified: $5 per square foot, up to 300 square feet ($1,500). Actual: your share of real home costs, including depreciation.
- Best fit
- Sole props directly; S corp owners through an accountable plan.
- Main catch
- The space must be used regularly and exclusively for business. A guest room that doubles as an office doesn’t count.
- When to review
- Every year. Run both methods and take the bigger one.
Key takeaways
- If part of your home is used regularly and exclusively for business, the business share of your home costs becomes a deduction.
- Sole proprietors claim it directly on Schedule C; S corp owners get it through an accountable plan that reimburses the business share.
- In the illustrative example, the actual method gives a $3,737 deduction versus $1,500 under the simplified method, more than twice as much.
- The catch: space also used for personal or family activities doesn’t qualify, and depreciation claimed is taxed when you sell the home.
The numbers
Picture a sole proprietor with a 300-square-foot office in a 2,400-square-foot home they own. The office is 12.5% of the home (300 ÷ 2,400).
For illustration purposes. Tax law may change, which may change these calculations slightly.
| Simplified | Actual | |
|---|---|---|
| 300 sq ft × $5 | $1,500 | n/a |
| Mortgage interest, property tax, insurance, utilities ($22,200 × 12.5%) | n/a | $2,775 |
| Depreciation ($300,000 building cost × 12.5% ÷ 39 years) | n/a | $962 |
| Home office deduction | $1,500 | $3,737 |
Personal tax (federal and Oklahoma)
| Simplified | Actual | |
|---|---|---|
| Federal income tax saved (24%) | $360 | $897 |
| Federal self-employment tax saved (× 92.35% × 15.3%) | $212 | $528 |
| Oklahoma income tax saved (4.5%) | $68 | $168 |
In this example the actual method is worth more than twice the simplified one. If you itemize, part of the mortgage interest and property tax you move into the home office deduction would have been deductible anyway, so the real gain from those two items is smaller.
The simplified method is easy, but it caps out at $1,500 and includes no depreciation. If you own your home, or your home costs are high, the actual method is usually worth running.
Could this strategy work for your business?
In a free tax analysis, your tax strategist checks whether it fits and what it could save, using your real numbers.
How it works
- Set aside the space. A room or clearly defined area used only for business, on a regular basis.
- Measure it. Office square footage divided by the home’s total gives your business-use percentage.
- Track your home costs. Rent or mortgage interest, property tax, insurance, utilities, repairs, and your home’s cost for depreciation.
- Run both methods. Compare simplified and actual each year, and take the bigger deduction. You can switch from year to year.
Who it fits
- Sole proprietors and single-member LLCs taxed as sole proprietors, who claim it directly on Schedule C.
- S corp owners, through an accountable plan where the company reimburses the business share of home costs (see Strategy 09).
- Owners who handle the administrative or management work of the business at home and have no other fixed location for it.
When it doesn’t fit
- A space that is also used for personal or family activities.
- Owners whose main work is done at another business location, with only occasional work at home.
The rules
- Regular and exclusive use. The space has to be used for business on a continuing basis, and for nothing else.
- Principal place of business. The office must be your main place of business, a place you regularly meet clients, or a separate structure used for the business. Administrative and management work counts if there’s no other fixed location where you do it.
- Income limit. For sole proprietors, the deduction can’t create a business loss. Any excess under the actual method carries forward.
- Simplified method limits. $5 per square foot, up to 300 square feet, and no depreciation.
Risks to weigh
- Mixed use. A desk in the guest room or kitchen generally doesn’t qualify.
- Depreciation when you sell. Depreciation claimed (or allowable) after May 6, 1997 is taxed when you sell the home, even if the rest of your gain is excluded.
- Thin records. Keep a floor plan or measurements, photos, and receipts for every home cost you count.
How we handle it for clients
With a Cannon & Brown tax plan, we calculate both methods every year, track your home’s depreciation, and claim the deduction the right way for your entity: on your return if you’re a sole proprietor, or through an accountable plan if you own an S corp. Because our technology keeps your numbers current all year, we can test this strategy against your real numbers and adjust it as your business changes.
Illustrative example. The business owner and figures on this page are hypothetical, used to explain how the strategy works. They are not a client and not a promise of results. The example assumes a sole proprietor who owns a 2,400-square-foot home with $22,200 of annual mortgage interest, property tax, insurance, and utilities, a $300,000 building cost (not counting land) depreciated for a full year, a 24% federal bracket, a 4.5% Oklahoma rate, and self-employment income below the Social Security wage base. This page is educational and is not tax advice for your situation; tax rules and limits change.
Brooks leads Cannon & Brown Tax Advisors, a forward-thinking tax firm serving business owners in Oklahoma and beyond. He builds year-round tax strategies that help business owners keep more of what they earn and reach their goals. More about Brooks
Common questions about the home office deduction
Can an S corp owner take the home office deduction?
Yes, through an accountable plan, where the company reimburses you for the business share of your home costs.
Should I use the simplified or actual home office method?
Run both each year and take the bigger one; you can switch from year to year. The simplified method caps out at $1,500 with no depreciation, so homeowners and people with high home costs often do better with the actual method.
Does a desk in my guest room count as a home office?
Generally no. The space must be used regularly and exclusively for business, and a guest room that doubles as an office doesn’t count.
Can the home office deduction create a business loss?
For sole proprietors, no. Any excess under the actual method carries forward.
Free strategy finder
Find the tax strategies that fit you.
Answer six quick questions and see which of our 46 strategies may fit your business and your goals. About a minute, and your answers stay in your browser.
Find my strategies →Free tax calculators
What could a strategy save you?
- S corp
- Solo 401(k)
- Augusta Rule
- Hiring your kids
- Oklahoma PTE