If you work from home and use a specific space regularly and exclusively for business, you may qualify for the home office deduction. There are two ways to calculate it. The simplified method allows you to deduct $5 per square foot, up to 300 square feet (maximum $1,500), and requires no tracking of detailed expenses. The actual expense method lets you deduct a percentage of your real home costs such as utilities, insurance, rent, mortgage interest, repairs, and depreciation, based on the square footage of your office compared to your entire home. Direct expenses for the office itself are fully deductible, while indirect expenses are prorated.
For sole proprietors and single-member LLCs, the home office deduction is taken directly on Schedule C, and you may choose either the simplified method or the actual method. If you use the actual method and own your home, you must also track depreciation, which may result in depreciation recapture when you sell.
For S-Corp owners, the deduction works differently. You cannot take it directly on your personal return. Instead, the cleanest, most IRS-friendly option is to have your S-Corp reimburse you through an accountable plan. You calculate your home office expenses using either method, submit an expense report to the company, and the S-Corp reimburses you tax-free while taking the deduction on its books. This avoids rental income, payroll issues, and depreciation recapture. While you technically can rent your home office to your S-Corp, this creates taxable rental income and is rarely beneficial.
Overall, the simplified method is easier and audit-friendly, while the actual method may produce a larger deduction if your home expenses are high. Choosing the right approach can help you reduce taxes while keeping your records clean and compliant. Talk to your tax preparer about what is best for you.