Home Office Deductions: How Business Owners Can Save Money (and Keep the IRS Happy!)

If you're like most modern business owners, your day starts with a Zoom call and ends somewhere between a client email and a coffee refill, right from the comfort of home. Working remotely can absolutely boost productivity and cut costs, but there’s a hidden gem in the tax code that many entrepreneurs overlook: the home office deduction.

Used correctly, this deduction can help you reclaim hundreds of dollars (maybe thousands) in unnecessary tax payments.  However, if you implement the strategy the wrong way,  you could end up waving a red flag to the IRS.

Let’s break down how to legally and confidently claim your home office deduction, backed by smart documentation and a proactive approach.

💡 Who Qualifies for the Home Office Deduction?

This deduction isn’t just for tech startups or YouTubers. 

Whether you’re a coach, consultant, real estate agent, or small business owner, if you use a part of your home exclusively and regularly for your business, you might be eligible.

1. Exclusive Use: No Netflix Allowed

The first step to implementing the home office deduction is understanding that the area you claim as a home office must be used exclusively for business. That means no hybrid dining room-office combos or working from the couch between episodes of your favorite show.

Examples of what works as exclusive use:

• A spare bedroom converted into a dedicated workspace
• A basement office with a door and filing cabinets
• A backyard shed turned studio

What doesn't work:

• Kitchen table, living room, or your bed even if you’re answering emails there
• Any of the examples above that also combine the space for your personal workout equipment storage

Pro Tip: Snap photos of your office space and store them securely. Ensure that the office space is exclusively work related. Keep your workout equipment, hobby table, and other non-work items out of this space and keep it exclusively business related. Visual evidence supports your case in an audit. 

2. Regular Use: Make It Your Routine

The IRS wants to see that you use this space consistently for business, not just on the first Tuesday of every month. Infrequent use of the space can disqualify you from claiming the office space as a legitimate business deduction.

What counts for consistent use: Daily use for admin tasks, client calls, inventory management, etc.

What doesn't: Occasional or once-a-month check-ins

Pro Tip: Use your calendar app or time-tracking tool to document work done in your home office. 

3. Your Home Office: Where the Admin Magic Happens

Even if you meet clients in person or travel often, you can still qualify as long as substantial administrative or managerial tasks happen in your home office.

This can apply even if you have a physical office space outside of your home office.

A general rule is that you must perform 20% or more of your administrative or managerial duties from the comfort of your home office in order for those activities to be considered “substantial”.

What qualifies as administrative or managerial tasks:

• Invoicing, billing, marketing, scheduling, bookkeeping—all done from your home base
• You can also include time spent doing strategic planning for your business

Pro Tip: Keep digital records, such as email timestamps, invoices, or CRM logs, that show business activity tied to your home address.

Mythbusters Tax Edition: Just because you have a physical office outside of your home does not mean that you cannot take advantage of the home office deduction. Any busy business owner understands that when you show up to the office, there are hundreds of distractions and demands on your time.

Establishing your administrative home office to perform 20% or more of your administrative functions in the peace and quiet of your home office can actually yield more productivity and progress on those tasks. Operationally, this is a justifiable expense if the criteria are properly met.

4. Detached Structures: The Hidden Goldmine

Do you have a backyard studio, garage, or that infamous "she-shed"? 

It qualifies as a home office space if it meets the exclusive and regular use test.

A couple of examples: 

• A photographer who converts their garage into a studio for editing and client photography sessions could use that entire space as a home office.
• A business owner who builds a 10x12 shed in the backyard as an office space to work from could use that entire space as a home office.

Pro Tip: Note this space on your property records and save receipts for upgrades or equipment stored there.

5. Are You a Business Owner or W-2 Employee?

Here’s a major distinction: Unfortunately, employees (W-2 earners) can no longer deduct home office expenses, even if you work remotely full-time. 

But business owners, sole proprietors, LLCs, S Corps, and freelancers? You're in the clear.

Those who qualify:

• Independent contractors
• Sole proprietors
• S Corp owner-employees (with proper reimbursements—more on that below)

Those who do not qualify:

• Remote employees without business ownership

Pro Tip: Ensure your business structure and filings clearly show you’re a qualified business owner. 

6. Special Situations Worth Highlighting

Even if your space isn't an "office," there are exceptions that still can qualify as legitimate business use of home expenses:

• Storage of Inventory or Samples: If you use space to store goods, tools, or supplies for your business regularly, the exclusivity rule is relaxed. This could apply if you are a contractor that uses all or substantially all of your garage for storing equipment (saws, machinery, and other tools used in your business). Or if you are a real estate agent who stores staging supplies, signage, and other items used in your real estate business.
• Daycare Operators: If you run a licensed daycare from home, you’re eligible even if the space is used for other things after hours. Special rules apply to day care operators.

Pro Tip: Set aside time in your calendar on a quarterly basis to spend 30-90 minutes updating your documentation on how and when the space is used, and keep your licensing and insurance paperwork up to date. 

📊 Calculating Your Deduction: Two Paths to Choose From

Once you have determined if you qualify for the home office deduction, you have two ways to claim the deduction:

1. The Simplified Method

The IRS instituted, in recent years, the “simplified method” of deducting the home office. It effectively is a “standard deduction” for home office deduction, and it works like this:

• $5 per square foot (max 300 sq ft)
• Easy calculation, low audit risk
• Great for solopreneurs or small spaces
• Minimal record keeping (but also potentially significantly less of a deduction)

Assuming you had a 300 square foot office that meets the criteria, your ANNUAL deduction would be $5 x 300 = $1,500 home office deduction for the year.

While this is super simple, you can see that the amount is not much.

2. Actual Expense Method

The actual expense method is exactly that. You are able to determine your deduction by identifying the square footage of business use and then allocating a percentage of various expenses of your home to the home office deduction.

It works like this:

• You must measure and determine the square footage of your business use space that is exclusively used for business purposes.
• You determine the TOTAL square footage of your home
• Divide the business use square footage by the total square footage to determine the percentage of your home that is business use.
• Determine your actual costs of the home (mortgage/rent, utilities, insurance, repairs, depreciation, etc.)
• Allocate the appropriate percentage of those expenses as a business deduction for the home office.

As you can see, this method requires more detailed records and calculations. However, more effort can yield a larger deduction.

For example: Assuming you had a home office that was 350 square feet and your total home square footage was 2450 square feet, then the percentage of business use would be 14.28% (350/2450).

Assuming you rented your home and your operating expenses were: Rent $2,000/month & Utilities $293/month for a total of $2,293, then the 14.28% allocation would be $327.44 for that month.

Your rent may be static (unchanging month to month), but your utility bill will likely fluctuate. But assuming that it does not, then the deduction would be $3,929.28 for the year.

Almost double the rate of the standard deduction because you’re not limited to the 300 square foot cap, among other factors.  If you own your home, then the deduction will likely be more significant because your carrying costs or eligible expenses for home office deduction allocation include:

• Mortgage interest
• Property taxes
• Homeowners Insurance
• Yard maintenance 
• Home repairs

The actual expense method can definitely yield a larger deduction, especially for high-cost homes

Pro Tip: Run the numbers for both methods and choose the one that yields the greater legal advantage. If you opt for the actual expense method, set aside time monthly to evaluate that month's bills that are NOT static. Utilities are likely to be higher in the peak summer and winter months because you are spending more on heating and cooling your home. Property tax bills increase every year.

Taking a few moments a month or at a minimum a quarter can increase your deduction significantly. 

Audit Tip: Spending 15-30 minutes a month to pull your numbers together, copy those documents and justify the deduction will help you in the event of an audit because your records will be accurate and up to date.

🧾 Pro Tip from the Pros: Use an Accountable Plan (If You're an S Corp)

If you operate as an S Corporation, you can't take a direct home office deduction on the corporate tax return.

This is because you cannot co-mingle your personal and corporate assets, and you do not want your corporation to pay your utility bills, mortgage payment, or rent, and other costs directly. Doing so can put your personal assets at risk from a legal standpoint (we are not attorneys, and if this is a concern of yours, we recommend consulting an attorney regarding the finer points of keeping your personal and corporate assets separate to avoid “piercing the corporate veil”).

So, is does this mean you cannot deduct the home office deduction at all? Not at all. Don’t worry—we’ve got you covered.

The solution? An Accountable Plan.

An Accountable Plan is the tool that keeps your personal and corporate structure separate and allows your S Corp to reimburse you for home office expenses—tax-free for you and fully deductible for the company.

It is also the gateway to additional tax strategies such as certain fringe benefits for employees and owners as well as protecting your deductions against audit.

The steps to stay compliant with an S-Corp reimbursement for a home office are:

• Create a written Accountable Plan
• Submit monthly reimbursement requests for actual amounts paid
• Keep receipts and square footage records

The Accountable Plan is a strategy that we teach as part of the Make Taxes Fair CLEAR EDGE Framework, under Deduction Maximization and Legal Structure.

🧠 Bottom Line: Documentation Is Your Best Friend

Regardless of your business type or setup, documentation is your defense if the IRS ever comes knocking in regards to the Home Office Deduction.

To keep your deduction airtight, here's what you need to keep on file:

• Photos of your home office
• Documentation of the square footage and the applicable percentage of the home office from the total square footage of the home
• Utility bills and rent/mortgage statements
• Proof of regular business use (calendar, email logs, task records)
• Written reimbursement plans (for S Corps)

🏁 Final Thoughts: Declare Independence From Overpaying

The home office deduction is one of the most accessible and impactful ways to reduce your tax burden—but only if done right. Rather than avoid this deduction out of fear, you should attack this strategy and write off with confidence.

Think of this in terms of ROI on your time: If you spend a cumulative of 3 hours during the year and it yields a deduction of $3,000, you have effectively taken $1,000 an hour out of your business for the time you spent implementing and maximizing this deduction.

The tax savings, assuming you are in the 37% federal tax bracket, are $1,110, which may not seem like much. But that still is an hourly rate of $370 per hour. And more importantly, acting with diligence in this small area is adding another cut to your total tax bill.

We argue that $1,000 here, another $5,000 with another strategy like the ADA Tax Credit, with another $5,000, $10,000 or even $20,000 of tax savings from other strategies all combine to give you a total tax savings picture that can mean up to a 50% or more reduction of your tax bill!

The point of tax strategy and tax savings is that each strategy builds on the next and helps you ultimately save thousands of dollars in taxes that you are flushing down the proverbial drain by overpaying the government!

So, if you're serious about keeping more of your hard-earned money, get organized, follow the rules, and don't leave this deduction on the table. If you are not optimizing this strategy, we guarantee you that there are other strategies that are not being utilized. Ready to start a conversation? Then reach out and contact us today.