Home Office Deduction: Rules and Common Mistakes
Home office is one of the most-claimed and most-misunderstood deductions. Handled right, it saves real tax. Handled wrong, it invites questions. Here's the current version.
Who qualifies
The space must be used regularly AND exclusively for business. A guest room that doubles as an office doesn't qualify.
It must be your principal place of business, OR a place you meet clients regularly, OR a separate structure used for business.
W-2 employees can NOT deduct home office through 2025 (Tax Cuts and Jobs Act suspension). Self-employed and business owners can.
The two methods
Simplified method: $5 per sq ft, capped at 300 sq ft ($1,500 max). No depreciation, no receipts, no future recapture. Easy.
Actual expense method: allocate real home expenses (utilities, mortgage interest, insurance, repairs, depreciation) by business-use percentage. More paperwork, usually a bigger deduction.
How to calculate the business-use percentage
Measure the office square footage. Measure total home square footage. Divide.
Example: 200 sq ft office / 2,000 sq ft home = 10%. You deduct 10% of qualifying home expenses.
Common mistakes
Claiming a room that isn't exclusively used for business.
Using the actual method without keeping receipts and utility bills.
Deducting mortgage principal (only interest and depreciation are deductible portions).
Forgetting depreciation recapture when you sell the home (actual method only).
Claiming a home office as an S-corp owner without an accountable plan reimbursement — the S-corp owner doesn't get a Schedule C.
S-corp owners — do it through an accountable plan
S-corp owners can't deduct home office directly. Instead, set up an accountable plan reimbursement: the S-corp reimburses you for the business-use percentage of home expenses. The reimbursement is deductible to the corporation and non-taxable to you.
This must be documented in a written policy and monthly reimbursement calculations.
A quick disclaimer
This article is general information for Montana small business owners, not tax, legal, or accounting advice for your specific situation. Rules change, and how they apply depends on facts we don't know about you. Before acting on anything you read here, talk to a qualified professional. If you're a Montana business owner and want a real conversation about your books, payroll, or tax, that's what Marlow Accounting is here for — call 406-290-1214 or schedule a discovery call.