Home Office Deduction Guide for the SC Self-Employed

The home office deduction has a reputation for triggering audits. That reputation is largely outdated — it is an ordinary deduction, claimed by very large numbers of people, and claiming it correctly does not invite scrutiny. Claiming it incorrectly might, and a great many people do claim it incorrectly, which is probably where the reputation came from.

Self-employed people. Employees working from home generally cannot claim it, including employees working remotely full time — the deduction that once allowed it was suspended, and being required by an employer to work from home does not restore it.

So this is for sole proprietors, single-member LLC owners, partners in certain circumstances, and S-Corp owners through a different mechanism than a direct deduction.

The space must be used regularly and exclusively for business, and it must be your principal place of business or a place where you regularly meet clients.

Exclusively is the word that disqualifies most claims, and it is meant strictly. A room used as an office during the day and a guest bedroom at weekends fails. A desk in the corner of a living room used for work and nothing else can pass, because the test applies to the space rather than requiring a whole room — but the area claimed must genuinely be used for nothing but business.

Regularly means ongoing rather than occasional. A space used a few times a year does not qualify.

The principal place of business test is more accommodating than it sounds. If you conduct administration and management from home and have no other fixed location for it, home can qualify even if most of the actual work happens at client sites — which covers a great many tradespeople and consultants.

The simplified method applies a set rate per square foot of qualifying space, up to a capped area. No expense records are needed and no depreciation is claimed, which also means none is recaptured on sale. It takes minutes.

The actual expense method calculates the business-use percentage of the home — typically office square footage divided by total square footage — and applies it to home costs: mortgage interest or rent, property tax, insurance, utilities, repairs and maintenance, and depreciation on the business portion. Costs relating solely to the office space itself can be deducted in full.

The actual method usually produces a larger deduction, particularly for higher housing costs or a larger qualifying area, at the price of record-keeping. You can generally choose method by year, so the sensible approach is to calculate both and take the better one — the simplified method is a reasonable default for a small space.

Worth knowing before choosing the actual expense method. Depreciation claimed on the business portion of a home is recaptured when the house is sold, and the exclusion available on the sale of a main home does not shelter that recaptured amount.

This does not make the deduction a bad idea — the benefit is generally taken over many years against a recapture at a defined rate, and the arithmetic usually favours claiming. But it is a consideration for someone in a rapidly appreciating home, and it is a reason the simplified method appeals to people who expect to sell.

The deduction generally cannot create or increase a business loss. Where business income is insufficient to absorb it, the excess is typically carried forward to a future year rather than lost — but it will not generate a refund in a loss year.

The direct deduction is not available in the same way, because you are technically an employee of your own corporation. The usual route is an accountable plan under which the corporation reimburses you for the home office costs, deducting the reimbursement while it is not taxable income to you.

This requires a written arrangement and proper documentation of the reimbursements. It is straightforward to set up and frequently missed entirely by S-Corp owners who assume the deduction simply disappeared when they elected.