Home Office Deduction
Home Office Deduction allows self-employed taxpayers to deduct expenses for business use of their home, calculated using either the simplified method ($5/sq ft, max $1,500) or the regular method based on actual expenses.
Exam Tip
W-2 employees = NO home office deduction (suspended). Self-employed only. Simplified: $5/sq ft, max 300 sq ft = $1,500. Regular method = actual expenses x business %.
What is the Home Office Deduction?
The home office deduction allows qualifying taxpayers to deduct expenses for the business use of their home. This deduction is available to self-employed individuals and independent contractors but NOT to W-2 employees (suspended through 2025).
Who Qualifies?
| Status | Eligible? |
|---|---|
| Self-employed / Sole proprietor | YES |
| Independent contractor | YES |
| W-2 employee | NO (suspended 2018-2025) |
| Gig workers (1099) | YES |
Requirements
The space must be used:
- Regularly and exclusively for business
- As your principal place of business OR
- To meet clients/customers OR
- As a separate structure used for business
Two Calculation Methods
Simplified Method (Safe Harbor)
| Feature | Amount |
|---|---|
| Rate | $5 per square foot |
| Maximum space | 300 square feet |
| Maximum deduction | $1,500 |
| Form | Schedule C (no Form 8829) |
| Depreciation | Treated as zero (no recapture) |
Regular Method (Actual Expenses)
| Step | Calculation |
|---|---|
| 1. Business % | Office sq ft / Total home sq ft |
| 2. Direct expenses | 100% deductible (office paint, repairs) |
| 3. Indirect expenses | Business % of: mortgage interest, property taxes, utilities, insurance, repairs, depreciation |
Comparison Example
Home: 2,000 sq ft total, 200 sq ft office (10%) Annual home expenses: $20,000
| Method | Calculation | Deduction |
|---|---|---|
| Simplified | 200 sq ft x $5 | $1,000 |
| Regular | $20,000 x 10% | $2,000 |
Important Rules
| Rule | Details |
|---|---|
| Gross Income Limitation | Deduction cannot exceed gross business income |
| Carryover | Regular method allows carryover; simplified does NOT |
| Switching Methods | Can change methods year to year |
| Depreciation Recapture | Regular method may trigger recapture on sale |
Deductible Expenses (Regular Method)
| Expense Type | Deductibility |
|---|---|
| Mortgage interest | Business % |
| Property taxes | Business % |
| Utilities | Business % |
| Homeowner's insurance | Business % |
| Repairs (whole house) | Business % |
| Repairs (office only) | 100% |
| Depreciation | Business % of home's basis |
CFP Exam Focus
Know that W-2 employees CANNOT claim the home office deduction (suspended through 2025). Understand both methods: Simplified ($5/sq ft, max $1,500) vs. Regular (actual expenses x business %). Regular method may create depreciation recapture on home sale.
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