Home-office deduction: simplified vs. actual-cost method

If you run a business from your home — whether as a freelancer, contractor, or owner of a small business — you can deduct a portion of the cost of operating that home as a business expense. The home-office deduction has been around for decades, but a lot of people skip it out of fear it'll trigger an audit (it won't, if you're entitled to it) or out of confusion about which method to use.

Here's how to choose.

Who qualifies

To deduct home-office expenses, you must use part of your home regularly and exclusively for business. Both words matter:

• Regularly — used on an ongoing basis, not occasionally.
• Exclusively — the space is used only for business. A desk in the corner of a guest bedroom counts (the desk area), but the entire bedroom doesn't if guests sleep there.

It must also be your principal place of business — meaning either the only place you work, or the place where you handle the administrative tasks of your business even if you also see clients elsewhere.

Important: since the 2017 Tax Cuts and Jobs Act, W-2 employees can no longer deduct home-office expenses, even if they work remotely. The deduction is only available to self-employed individuals (Schedule C), partners (with conditions), and certain rental property activities. S-Corp owner-employees use a workaround called an "accountable plan reimbursement."

Method 1: The simplified option

Introduced in 2013, the simplified method lets you deduct $5 per square foot of qualified home-office space, up to 300 square feet maximum. The largest deduction available is $1,500.

The advantages:

• No need to track utility bills, mortgage interest, or other home expenses
• No depreciation recapture when you eventually sell the home
• Schedule C reporting takes 30 seconds — one line
• Less audit risk because there's nothing to dispute

The trade-off: you give up potentially larger deductions.

Method 2: The actual-cost method

Under this method, you calculate the business-use percentage of your home (typically the square footage of the office divided by the total square footage of the home) and apply it to the actual costs of operating the home.

Eligible costs to apportion:

• Mortgage interest (the business portion goes on Schedule C instead of Schedule A)
• Real estate taxes
• Utilities (electricity, gas, water, internet)
• Homeowners insurance
• Home repairs and maintenance
• HOA dues
• Security system
• Depreciation of the home itself (business portion only)

Direct expenses (entirely for the home office) are fully deductible — for example, painting just the office.

A worked example

Sarah is a freelance graphic designer with a 200 sq ft home office in a 2,000 sq ft home. Her office is 10% of her home.

Simplified method: 200 sq ft × $5 = $1,000 deduction

Actual-cost method:

Expense	Annual total	10% business use
Mortgage interest	$18,000	$1,800
Property tax	$8,000	$800
Utilities	$3,600	$360
Insurance	$1,400	$140
Home repairs	$1,000	$100
Depreciation	$5,500	$550
Total	—	$3,750

The actual-cost method gives Sarah a $3,750 deduction — $2,750 more than simplified. At a 24% federal rate plus 15.3% SE tax, that's about $1,080 in additional tax savings each year.

The depreciation recapture catch

The actual-cost method includes depreciation of the business portion of your home. When you eventually sell, the IRS "recaptures" the depreciation — meaning you owe up to 25% federal tax on the depreciation taken over the years, even if the home as a whole qualifies for the Section 121 exclusion of capital gain.

For Sarah at 10% business use, after 10 years she'd have ~$5,500 of accumulated depreciation. At 25% recapture, that's roughly $1,375 of tax — versus over $10,000 of tax savings from the deduction over those years. The math still favors the actual method, but it's not pure gain.

The simplified method doesn't allow depreciation, so there's nothing to recapture later.

When each method makes sense

Use simplified if:

• Your office is small (under 200 sq ft)
• You don't have a mortgage or your home expenses are low
• You don't want to keep detailed records
• You plan to sell the home soon and want to avoid depreciation recapture

Use actual-cost if:

• Your office is larger than 300 sq ft (mandatory — simplified caps at 300)
• Your home has significant carrying costs (mortgage interest, property tax)
• You're willing to track expenses through the year
• The marginal savings justify the recordkeeping

You can switch methods year to year

The choice is annual — pick whichever produces the bigger deduction each year. The one exception: if you take depreciation under the actual method one year, then switch to simplified the next, then switch back to actual — you have to use the same depreciation method (and the same basis) when you return.

The bottom line

For a meaningfully sized home office in a home with normal carrying costs, the actual-cost method typically wins by 2–4x. For small offices or simple setups, the simplified method is fine and saves a lot of tracking.

The deduction itself doesn't trigger audits — taking it incorrectly does. Make sure you actually meet the regular-and-exclusive-use test, keep a simple measurement of your office, and document the basis for your numbers. We can help figure out which method works best for your situation.

This article is general information, not personalized tax advice. Rules change. Always consult a tax professional for your specific situation.