Home Office Deduction: Simplified vs. Actual Method
If you're self-employed and work from home, you can deduct part of your housing costs against your business income — and the IRS gives you two ways to do it. The simplified method is a flat $5 per square foot that takes about a minute; the actual-expense method is a percentage of your real home costs and usually deducts more, but it needs records. This guide walks the eligibility test both share, then compares the two methods on the same office so you can see which one leaves more money on the table.
Who can deduct a home office
The home office deduction is for people who work for themselves — sole proprietors, single-member LLCs, independent contractors, and other Schedule C filers (farmers use Schedule F). Since the 2017 tax law, employees generally cannot deduct a home office, even if they work remotely; the deduction survived only for the self-employed. You claim it on Form 8829 (actual method) or directly on Schedule C (simplified method).
The exclusive-and-regular-use rule
Both methods start from the same gate. To deduct any home office you must use a defined area of your home regularly and exclusively for your trade or business, and that area must generally be your principal place of business (which includes a space you use for the administrative work of a business you also run in the field):
- Exclusive — the space is used only for business. A spare bedroom that is your office qualifies; the dining table where you also eat dinner does not. (Two narrow exceptions relax "exclusive": storing inventory or product samples, and running a licensed daycare.)
- Regular — you use it on a continuing basis, not just occasionally.
Meet that test and you choose a method. You can switch methods from one year to the next, so it's worth re-checking each year which one deducts more.
The simplified method ($5 per square foot)
The IRS simplified option (introduced for tax years starting in 2013) skips the recordkeeping:
| Rule | Amount |
|---|---|
| Deduction rate | $5 per square foot of qualifying business space |
| Maximum space counted | 300 square feet |
| Maximum deduction | $1,500 per year (300 × $5) |
So a 180-square-foot office is 180 × $5 = $900; a 340-square-foot office is capped at
300 × $5 = $1,500. Under the simplified method you take no depreciation
(and no depreciation recapture when you sell the home), and you still deduct your full
mortgage interest and property taxes on Schedule A if you itemize — none of it is split out to the
business. The trade-off: there is no carryover of any amount the income limit
disallows, so in a low-profit year part of the deduction can simply be lost.
The actual-expense method
The actual method deducts a business-use percentage of your real home expenses. That percentage is usually the office's square footage divided by the home's total square footage:
business-use % = office sq ft ÷ total home sq ft
You then apply that percentage to indirect expenses that benefit the whole home — rent, mortgage interest, property taxes, utilities, homeowners/renters insurance, general repairs — and add any direct expenses that benefit only the office (for example, painting just that room), which are deductible in full. Homeowners can also depreciate the business portion of the house. Because it can include depreciation and your actual utility and insurance bills, the actual method often beats the $1,500 cap — but it requires Form 8829, receipts, and depreciation tracking, and the business portion of the home may be subject to depreciation recapture when you sell.
Side-by-side worked example
Suppose you rent a 2,000-square-foot home and use a 250-square-foot spare room exclusively as your office. Your yearly housing costs are rent $18,000, utilities $3,600, and renters insurance $400 — plus a one-time $300 to repaint the office (a direct expense). Here's each method on the same facts.
| Simplified method | Amount |
|---|---|
| Office square feet (under the 300 cap) | 250 |
| Rate | × $5 |
| Simplified deduction | $1,250 |
| Actual method | Amount |
|---|---|
| Business-use % (250 ÷ 2,000) | 12.5% |
| Indirect costs (rent $18,000 + utilities $3,600 + insurance $400) | $22,000 |
| Indirect share (12.5% × $22,000) | $2,750 |
| Direct expense (office repaint, 100%) | $300 |
| Actual deduction | $3,050 |
Here the actual method deducts $3,050 vs. $1,250 — an extra $3,050 −
$1,250 = $1,800 — because the business-use percentage of real rent and utilities easily clears
the $1,500 simplified cap. A renter with a small office and low utilities might land the other way,
which is exactly why you compare. (These dollar amounts are illustrative inputs; only the $5 rate,
the 300-square-foot cap, and the $1,500 maximum come from the IRS rules.)
How to choose
- Reach for simplified when your office is small, you rent, your utilities are modest, or you just don't want to keep records — and especially when the actual math would land near or under $1,500 anyway.
- Reach for actual when your business-use percentage times your real housing costs clears $1,500, when you own and can add depreciation, or when you had a big office repair — provided you're willing to keep the receipts and file Form 8829.
- Re-decide yearly. Nothing locks you in; run both each year and take the bigger number that the income limit allows.
See the bigger picture. Your home office deduction lowers the net profit that drives your self-employment tax and income tax. Use the calculator to see how a lower Schedule C profit changes what you owe.
Open the Self-Employment Tax Calculator →- IRS, Simplified Option for Home Office Deduction ($5/sq ft, 300 sq ft max, $1,500 cap; no depreciation)
- IRS, Publication 587, Business Use of Your Home (exclusive-and-regular-use test, the income limit and carryover)
- IRS, Form 8829, Expenses for Business Use of Your Home (actual-expense method)
- IRS, Home Office Deduction (overview; employees generally ineligible)
Frequently asked questions
How much is the simplified home office deduction?
Under the IRS simplified option you deduct $5 per square foot of the part of your home used regularly and exclusively for business, up to a maximum of 300 square feet. That caps the simplified deduction at $1,500 a year (300 × $5). You keep no depreciation and no home-expense records, and you still claim your full mortgage interest and property taxes on Schedule A.
What is the exclusive-use rule for a home office?
To deduct a home office you must use a specific area of your home regularly and exclusively for your trade or business, and it must generally be your principal place of business. Exclusive means the space is not also used for personal purposes — a spare room used only for work qualifies, but the kitchen table you also eat at does not. Limited exceptions apply for storing inventory and running a licensed daycare.
Should I use the simplified or the actual-expense method?
Use whichever gives the larger deduction for the year — you can choose method year by year. The simplified method wins on paperwork and works well for renters and smaller offices. The actual-expense method usually wins when your business-use percentage times your real home costs (rent or mortgage interest, utilities, insurance, plus depreciation if you own) exceeds the $1,500 simplified cap, but it requires records and depreciation tracking.
Can the home office deduction create a business loss?
No. Under either method the home office deduction is limited to the gross income from the business use of your home, so it cannot push your business into a loss. Under the actual-expense method any amount you cannot use this year carries forward to a future year; under the simplified method there is no carryover — the disallowed amount is simply lost.
This article is educational information, not tax, legal, or financial advice, and not an offer of any product. The home office rules have exceptions (daycare and inventory-storage use, depreciation recapture on a home you own, the gross-income limit, and special situations for multiple businesses); confirm how they apply to you on IRS Publication 587 and Form 8829. The $5-per-square-foot rate, the 300-square-foot cap, and the $1,500 maximum are the current IRS figures as of July 2026 and can change; the other dollar amounts here are illustrative. Confirm current numbers with a licensed tax professional. Last reviewed July 2026. No liability is accepted for decisions made from this content.