Three eligibility tests
You qualify if you use part of your home (1) regularly and exclusively (2) as your principal place of business OR a place to meet clients in the normal course of business OR a separate structure used in the trade or business. The "regular and exclusive" test is the most-litigated — a guest bedroom that doubles as an office fails the exclusive test.
What qualifies as your principal place of business
Even if you provide services to clients outside the home, your home office still qualifies as a principal place of business if you use it exclusively and regularly for administrative or management activities of your trade or business AND have no other fixed location where you conduct substantial administrative activities. This rule (Section 280A(c)(1)) saved the deduction for many service professionals after the unfavorable 1993 Soliman decision.
Two methods
Actual-expense method (Form 8829): allocate utilities, insurance, repairs, mortgage interest, real estate taxes, and depreciation by business-use percentage. Simplified method: $5 per square foot, 300 sq ft cap, $1,500 maximum, no depreciation, no recapture, claimed directly on Schedule C line 30. Switch each year — you are not locked in.
Loss limitation
The home-office deduction cannot create or increase a Schedule C loss. Excess expenses carry over to future years under the actual-expense method only. The simplified method has no carryover.
Depreciation recapture
Under the actual-expense method, depreciation claimed on the home office is unrecaptured Section 1250 gain when the home is sold — taxed at up to 25%, even when the rest of the gain qualifies for the Section 121 home-sale exclusion. Project the future tax cost when choosing between methods.
Documentation that survives an exam
An IRS examination of this deduction will request three things: proof of payment (bank or card statement), proof of the underlying transaction (invoice or receipt), and proof of business purpose (a contemporaneous note or calendar entry). The first two are usually trivial to produce; the third is where most filers fall short. Capturing business purpose at the moment of the expense — a one-line note in your bookkeeping software or a category and memo on the receipt-capture app — converts a generic charge into a documented deduction that will withstand scrutiny three to six years later when memory has faded.