Important IRS Rules for Deducting Home Office Expenses for Contractors

Contractors often maintain both a stand‑alone office and a home office for scheduling, estimating, bookkeeping, and client meetings. The IRS allows a deduction for the business use of part of your home if strict requirements are met. The summary below highlights eligibility, calculation methods, limits, and best practices for documentation most relevant to contractors and related trades.

Who Qualifies and When

To qualify for the home office deduction, you must use a specific area of your home regularly and, in most cases, exclusively for your business. For contractors, the most common qualifications are the home office being the principal place of business, a place to meet with clients, or a separate structure used for the business. There is a narrow exception to the exclusivity rule for storing inventory or product samples. These rules apply to self‑employed individuals and partners.

The “principal place of business” test weighs the importance of activities and time spent at each business location. A home office qualifies if it is used exclusively and regularly for administrative or management activities, and you have no other fixed location where you conduct substantial administrative work. Such activities include billing, bookkeeping, ordering supplies, and scheduling. Performing your primary work (e.g., construction) at job sites does not disqualify your home office, provided the administrative work is done at home.

Even with a separate office or with work conducted primarily at job sites, your home office can still qualify if you use it to regularly and substantially meet with clients. Occasional meetings are not sufficient to meet this test. A separate free‑standing structure at your residence, such as a workshop or garage, may qualify if used exclusively and regularly in the business, even if it is not your principal place of business and you do not meet clients there. For businesses selling products at retail or wholesale, you may deduct space used on a regular basis to store inventory or product samples if your home is the sole fixed location of the business. Exclusivity is not required, but the space must be separately identifiable and suitable for storage.

What Expenses Are Deductible

Deductible costs include the business portion of mortgage interest, real estate taxes, rent, utilities, insurance, maintenance and repairs, casualty losses, and depreciation. Direct expenses that benefit only the office area are generally fully deductible, while indirect expenses for the whole home are deductible pro rata based on business‑use percentage. Costs unrelated to the office (e.g., lawn care for non‑business areas) are not deductible.

When using the actual expense method, you must determine your business‑use percentage by a reasonable method, such as by square footage. You must also apply a gross income limitation, carrying forward any unallowed amounts to future years. Sole proprietors calculate the deduction on Form 8829, which is filed with Schedule C. Partners should use the worksheets in IRS Publication 587.

Two Ways to Calculate: Actual Expenses vs. Simplified Method

With the actual expense method, you calculate the business portion of your actual home expenses, determine allowable depreciation, and apply a gross income limitation. If your total home office expenses exceed the income limitation for the year, the excess can be carried forward to the next year.

The simplified method allows a deduction of $5 per square foot for up to 300 square feet of business use, also subject to the gross income limitation. If you choose this method, you cannot deduct any actual home expenses or depreciation. While you cannot claim prior-year expense carryovers in a year you use the simplified method, they can be used in a future year and may change methods by year.

Transportation and Multiple Work Locations

When your home office qualifies as your principal place of business, daily transportation between your home and other work locations for the same business (e.g., job sites or job locations) is generally deductible and is not considered nondeductible commuting.

Documentation and Compliance

It is critical to maintain thorough records to substantiate your deduction. Keep all receipts, canceled checks, and worksheets (e.g., Form 8829) to prove your business use, expenses, and calculations. If you use listed property, such as certain vehicles, keep detailed logs as required. For detailed guidance, speak to your tax representatives and review IRS Publication 587 and Form 8829 instructions, which provide definitions, examples, and worksheets.