Many small business owners and self-employed people work from home. The home office deduction can let you deduct part of the cost of your home, but the IRS sets specific requirements. Knowing them, and keeping the right records, prevents both missed deductions and incorrect claims.

The basic requirements

The IRS explains on its home office deduction page that, regardless of the method chosen, there are two basic requirements for your home to qualify: regular and exclusive use, and that the space is your principal place of business. The IRS states that you must regularly use part of your home exclusively for conducting business. A desk in the corner of a family room that is also used for other things generally does not meet the exclusive use test.

The same page explains exceptions and additional situations, such as places where you meet clients in the normal course of business and separate structures. Read it carefully, because the details matter.

Two methods

The IRS describes a regular method, where deductions are generally based on the percentage of your home used for business and can include items such as mortgage interest, insurance, utilities, repairs and depreciation, and a simplified option. The IRS describes the simplified option as allowing a qualified taxpayer to multiply a prescribed rate by the allowable square footage of the office instead of working out actual expenses. The rate and limits are set by the IRS, so check the current figures on the IRS page.

Records to keep

  • A floor plan or measurements showing the office area and the total area of the home
  • Photos showing the space is used for business
  • Bills for mortgage interest or rent, utilities, insurance and repairs if you use the regular method
  • A note of when the space started being used for business

The IRS recordkeeping guidance explains that you need records to support deductions you claim.

Employees versus self-employed

The rules differ depending on whether you are an employee or self-employed. Check the IRS page for which situations qualify; your tax preparer can confirm whether the deduction applies to you.

Key terms

  • Exclusive use: the space is used only for business, not also for personal activities.
  • Regular use: the space is used for business on a continuing basis, not just occasionally.
  • Principal place of business: the main place where you conduct your business, as described on the IRS page.
  • Regular method: working out the deduction from actual home expenses and the business percentage of the home.
  • Simplified option: working out the deduction from a prescribed rate and the square footage of the office.

Keep a simple file each year with your measurements, photos and bills so the deduction can be supported if asked.

Bookkeeping tips

  • Pay home costs from personal accounts and claim the business share at year end, rather than running household bills through the business
  • If you are reimbursed by your own corporation under an arrangement, keep documentation of how it works
  • Keep the records in one folder each year

See our guide to what business records to keep for related advice, and our tax services for year-end support. Self-employed owners may also want our guide to estimated tax payments.