Home office deductions for your small business: IRS rules and calculations

Published 9 March 2026

Table of contents

• What is the home office deduction?
• Who qualifies for a home office deduction?
• How to calculate your home office deduction
• Deductible expenses for home offices
• How to claim the home office deduction
• Make tax time easier with Xero
• FAQs on the home office deduction

Key takeaways

• The home office deduction is available to self‑employed taxpayers who use part of their home exclusively and regularly for their business.
• Employees of the business cannot claim this deduction.
• You can choose the simplified method or the actual expense method. Simplified lets you claim $5 per square foot, up to $1500, and with the actual expense method, you claim a portion of your home's bills based on the size of your office relative to the rest of your home.
• Sole props can claim the deduction on Schedule C. Use Form 8829 for the actual expense method, and keep clear records of expenses and measurements.
• Partnerships and S-corps can use accountable plans to reimburse partners or shareholders for home office expenses and then claim a deduction for the reimbursement.
• Keep thorough records of your expenses. This helps you maximize your legitimate deductions and minimize the risks if you get audited.

What is the home office deduction?

The home office deduction is a business tax deduction that self-employed people and small business owners can claim on their tax returns. The deduction lets you reduce your business income for costs incurred for maintaining an office in your home.

You must meet strict criteria to qualify. The IRS explains when small business owners can claim the home office deduction.

Who qualifies for a home office deduction?

To claim the home office tax deduction, you must be self-employed or a small business owner, and you must use the space exclusively and regularly for business purposes.

• Exclusively: You do not use the space for anything other than business.
• Regularly: You use the office on a recurring basis, not just occasionally.

In general, the office must be your principal place of business – for example, a self-employed graphic designer who runs a business out of their home, or a therapist who meets with clients in a home office.

However, the IRS home office rules also allow you to claim this deduction if you use the office for admin duties and there's nowhere else to perform them – for example, a restaurant or retail store owner who uses a home office for payroll, accounting, and other admin because there's no office space in their store or restaurant.

Employees cannot claim the home office deduction

Even if employees work from home, they cannot claim the home office deduction. This is a business deduction, which gets claimed against self-employment income. There are no work-from-home tax deductions for employees.

However, if your business reimburses an employee for home office expenses, you can generally claim a deduction for the reimbursement.

How to calculate your home office deduction

There are two ways to calculate your home office tax deduction: the simplified method and the actual expense method. The right choice of method depends on a few factors:

• Space size: If your home is large relative to your home, the actual expense method usually gives a bigger deduction because you can take a proportional share of all home expenses. If your office is small, the simplified method is easier and nearly as effective.
• Costs of maintaining the office: If you have high expenses (rent, utilities, insurance, etc.), the actual expense method lets you deduct a share of each. If your costs are low, the simplified method may give a similar deduction without all the bookkeeping.
• Recordkeeping effort: The actual expense method requires careful tracking of all qualifying expenses and the business-use percentage. The simplified method requires minimal effort as noted below.

Both calculations start by measuring your office space.

Measure your space and business use percentage

First, measure your home office. Then, to calculate the business-use percentage, compare the office to the rest of your home.

For example, if your home office is 200 square feet and your home is 2000 square feet, the business use of your home is 10%. A home office deduction calculator can help you with these calculations.

Calculate the deduction with the simplified method

If you're using the simplified method, multiply the square footage of your home office by $5 to calculate your deduction. For example, if your home office is 100 square feet, your deduction is $500. If you use the simplified method, you can only claim up to $1500 – regardless of the size of your office.

Check out the IRS overview of the simplified method.

Use the actual expense method to determine the deduction

For the actual expense method, add up all your home's qualifying expenses, then multiply that by the portion of space your office takes up in your home. For example, say your business use of home is 10%, and you have the following qualifying expenses for the year:

$20,000 – rent

$2000 – utilities

$120 – renter's insurance

Your total qualifying expenses are $22,120.

Now, multiply your total qualifying home expenses by the business use percentage to get your deduction.

$22,120 x 10% = $2212 home office deduction

Deductible expenses for home offices

If you use the actual expense method, you need to add up your expenses to calculate your home office tax deduction. Here's what to consider.

Indirect expenses

Indirect expenses are expenses related to your entire home – for example, rent, mortgage interest, property tax, homeowner's or renter's insurance, utilities, and whole-home repairs. With the actual expense method, you claim a portion of these expenses based on the size of your office relative to the rest of your home.

Direct expenses

Direct expenses are expenses related only to your home office – for example, if you put new carpet in the home office (but not the rest of your home), that is a direct expense. You can write off 100% of direct expenses – but again, only if you use the actual expense method, not the simplified method.

What expenses are not deductible?

Non-deductible expenses include:

• repairs done to other parts of your home. If you paint your kitchen, say, you cannot claim a portion of that expense when calculating your home office deduction
• mortgage payments – instead, you claim a portion of mortgage interest and depreciation based on the home's value

Special-case deductions: storage facilities and daycares

Business storage space in your home qualifies for a deduction. In this case, you don't have to use the space exclusively for business, but your home must be the sole location of the business.

For instance, if you store inventory for your online boutique in your home, you can claim the storage deduction if your home is the only space you use for your business. But if you own a retail location and you store overflow items in your home, you probably don't qualify to claim this deduction, as your home is not your sole fixed location.

Daycares are an exception to the exclusive use rules: you can claim a deduction for the space used by your daycare, even if you also use the space for personal reasons.

The IRS assumes that any time the space isn't used for daycare, it's available for personal use. So, you don't have to add up your personal use hours – instead, just compare daycare hours to the total hours in the year (or however long you run the daycare if it’s less than a year).

This means there’s an extra calculation. After working out your home office deduction as explained above, (using the actual expense or simplified method), you multiply the result by the portion of time you use the space for your daycare vs your personal life.

Here's an example. Let's say the actual expense method gives you a $6000 deduction. You use the space as a daycare for 2920 hours per year, and there are 8760 hours in the year.

Divide daycare use by total hours in a year:

2920 hours of day care use / 8760 total hours in a year = 0.35

Then multiply the result by your deduction:

$6000 x 0.35 = $2100

Common mistakes and audit risks

Common mistakes include:

• claiming the deduction when you don't qualify
• miscalculating the business use percentage
• misunderstanding how direct and indirect expenses work

Track your numbers carefully, keep detailed records, and ask an accountant if you're not sure whether you qualify. Then, you're ready if selected for an audit.

To protect yourself from mistakes, check out:

• the IRS's Topic 509, business use of home
• Publication 587 – which covers both business and daycare use of your home

How to claim the home office deduction

Here's how to claim the deduction on your tax return. The process varies for sole props and partnerships or S-corps.

Sole proprietors: Schedule C and Form 8829

Sole proprietors should claim the home office deduction on Schedule C. Use Form 8829 to calculate the deduction if using the actual expense method.

The IRS has more details on Form 8829.

S-corps and partnerships: Use accountable plans

An accountable plan is a way for you to reimburse your employees for business expenses – and the employees don't have to report the reimbursement as income. It’s useful because S-corps and partnerships cannot claim the home office deduction on their business tax returns.

To use an accountable plan, the expenses must be business-related. The plan doesn't have to be in writing, but the expenses must be clearly documented.

Partners or shareholders should track home office expenses based on the actual or simplified methods. The business can then reimburse the partner/shareholder through an accountable plan and claim a deduction for the reimbursement.

Records to keep in case of audit

Keep all records of your expenses and payments – like copies of your utility bills or mortgage statements. Keep clear notes about how you calculated the business use of your home, relative to the rest of your home.

Make tax time easier with Xero

Use Xero to track all your small business tax deductions, including home office expenses, to make tax time less stressful.

Sync your bank account records with your books in Xero, or manually enter expenses, so your numbers are up to date and organized whenever you need them. Xero lets you easily split expenses as needed based on personal vs business use of your home.

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FAQs on the home office deduction

Still wondering, what are the IRS rules for the home office deduction? Do I qualify? Should I take this deduction? The home office deduction requirements can be pretty tricky – here are some answers to common questions on home office deductions to help you out.

Can I switch methods each year?

Yes, you can switch between the two home office deduction calculation methods every year. But unless you start using a new home office, you can’t switch methods in the middle of the year – only at the beginning of the tax year.

What if I move mid-year?

If you move mid-year, prorate the home office tax deduction based on the time you’ve spent in each location. For example, say you use the simplified method and your office is 200 square feet in both homes. The total deduction is $1000, and you'll claim $500 for each home office.

Can I claim the deduction if I rent?

Yes. You can enjoy home business tax benefits even if you rent, but you must use the space exclusively and regularly for work. If you use the actual expense method, you'll claim a portion of your rent as a home office expense. With the simplified method, you'll claim $5 per square foot, up to a maximum annual deduction of $1500.

I’m self-employed. Do I need Form 8829 with the simplified method?

No, you don’t. When claiming a home office deduction, self-employed people only need to complete this form if they're using the actual expense method.

How do I handle multiple businesses?

If more than one business has an office in your home, you must use the same method to calculate expenses for each office, and each business must meet the qualification requirements. If you use the simplified method, you can still only claim a total of 300 square feet. To make sure your claims are correct, talk with an accountant about how to claim the home office deduction for multiple businesses.

Does the deduction affect my home sale?

It depends on the deduction method you’ve used. The simplified method has no effect on selling your home, but if you've used the actual expense method, the home office deduction affects how you calculate capital gains when you sell. You must add any depreciation claimed using the actual expense method to your gain when selling your home. For example, if your gain is $200,000 but you've claimed $10,000 in depreciation due to your home office, that bumps up the gain to $210,000.