What the IRS $5 per square foot home office rate allows, and when actual costs apply

A home office can reduce the taxable income of a small business owner, but only when the space meets specific tests set out in federal tax rules. The IRS describes two ways to calculate the deduction: a simplified flat rate and an actual expenses method. Both depend on the same qualifying tests.

This explainer draws on three IRS pages: the simplified option page, last updated March 2, 2026; the business use of home topic page; and Publication 587, which covers 2025 returns. Figures for later tax years should be checked against IRS.gov before filing.

Who can claim the deduction

The deduction is available to self-employed owners, partners and farmers. The IRS lists six situations in which part of a home can qualify: as the principal place of business; to meet or deal with clients, patients or customers; in a separate structure not attached to the home; to store inventory or product samples when the home is the sole fixed location of a retail or wholesale business; for rental use; and as a daycare facility.

Employees cannot claim it. The simplified option page notes that miscellaneous itemized deductions for employee business expenses were eliminated for tax years beginning after 2017. Self-employed owners report the deduction on Schedule C, partners generally claim unreimbursed partnership expenses on Schedule E, and farmers use Schedule F.

The simplified rate
The simplified method uses $5 per square foot, up to 300 square feet, for a maximum deduction of $1,500 a year, according to IRS guidance last updated March 2, 2026.

The exclusive use and regular use tests

When exclusive use applies, no deduction is allowed for any part of the home used for both personal and business purposes. Publication 587 gives the example of a den that the family also uses for recreation, which does not qualify. The business space does not need a permanent partition, but it must be used only for business.

Occasional or incidental business use does not count as regular use, and whether use is regular depends on the facts and circumstances. Publication 587 also says that a profit-seeking activity that is not a trade or business, such as reading financial periodicals and clipping bond coupons for one’s own investments, does not qualify.

Two uses do not require exclusive use. For storing inventory or product samples, the home must be the business’s sole fixed location, and the storage space must be separately identifiable. For daycare, the owner must be in the business of caring for children, people 65 or older, or people unable to care for themselves, and must have applied for or been granted the required state license, or be exempt from it. Regular but nonexclusive daycare use is figured as a percentage based on the amount of time the space is used for business.

Principal place of business and client meetings

Whether a home is the principal place of business depends on where the owner performs the most important business activities and where they spend most of their business time. A portion of the home used for administrative or management work can also qualify, but only if the owner has no other fixed location where substantial administrative or management work is done. Publication 587 gives the example of a self-employed plumber who has no other fixed location for substantial administrative work and uses a local bookkeeping service to bill customers.

A home can also qualify when clients physically visit it, if that use is substantial and integral to the business, even when the owner has another main location. Occasional meetings do not count. A detached studio, garage or greenhouse used exclusively and regularly for the business qualifies without meeting the principal place test.

The simplified method: $5 per square foot

The simplified method multiplies $5 by the square footage of the qualifying space, up to 300 square feet. Under the simplified method, a home office can deduct no more than $1,500 in a year. The deduction cannot exceed gross income from business use of the home minus business expenses, and any excess cannot be carried over under this method.

Mortgage interest and real estate taxes stay on Schedule A in full when the simplified method is used. No depreciation is allowed for years in which the method is used. The choice is made on a timely filed original return for each year. Owners may use different methods in different years, but a regular-method loss carryover from an earlier year cannot be claimed while the simplified method is in use.

Under the simplified method, a home office can deduct no more than $1,500 in a year.

The actual expenses method and the gross income limit

Under the actual expenses method, which Topic No. 509 and the simplified option page call the regular method, the business percentage is the business area divided by the total home area. The publication gives the example of 240 square feet of business space in a 1,200-square-foot home, which is 20 percent. Direct costs of the business space are fully deductible. Indirect costs such as insurance, utilities and general repairs are deductible at the business percentage. Costs for unused areas are not deductible.

The deduction is also capped by a gross income limit. Gross income from the home business is reduced by the business share of mortgage interest, real estate taxes and any casualty losses attributable to a federally declared disaster claimed as itemized deductions, and by business expenses tied to the activity rather than the home. Self-employed filers also exclude the deductible half of self-employment tax from the second category. Depreciation is taken last. In the publication’s example, $6,000 of gross income, $3,000 of business-share mortgage interest and real estate taxes, and $2,000 of other business expenses leave a $1,000 limit. Of that, $800 for maintenance, insurance and utilities and $200 of depreciation are allowed, and the publication says the remaining $1,400 carries over to 2026.

Depreciation, recapture and what to keep on file

Only owners can depreciate a home, and land is never depreciable. The depreciable basis is the business percentage multiplied by the smaller of the adjusted basis or fair market value of the building, excluding land, when business use began. For business use that began in 2025, Publication 587 says the 39-year straight-line schedule applies, with first-month rates of 2.461 percent and twelfth-month rates of 0.107 percent. The simplified option page says no recapture applies on a later sale for years in which the simplified method was used, while the regular method requires recapture on gain at sale.

The IRS pages reviewed do not provide a document checklist. The inputs the formulas require are the total and business square footage, the direct and indirect expenses for the home, the gross income from the home business, and, for depreciation, the adjusted basis or fair market value when business use began. Owners who use the actual expenses method must have the figures behind each business percentage.

Photo: Tim Sheerman-Chase · CC BY 2.0 · via Wikimedia Commons