🏢 Do you actually need an office?

The Basics

🏠 Do you even need an office anymore?

Somewhere around year two, most business owners have the same daydream: a real office, a real address, maybe a plant that isn’t fake. Then they price out commercial rent and quietly go back to the spare bedroom.

But there is good news — working from home doesn’t make your business less deductible. It just plays by different rules.

Nothing in the tax code says a legitimate business needs a lease or a sign on a door. A spare-bedroom business is taxed exactly like one with a corner office downtown.

What matters is whether you can deduct the space, and that comes down to two tests:

Regular use: You actually work there most days, not once a quarter
Exclusive use: Only business happens there (no pull-out couch and Xbox)

A desk next to the family TV usually fails both tests, even if you do send invoices there while streaming “Love Island.”

There are two ways to calculate the deduction.

The simplified one: $5 per square foot, capped at 300 square feet ($1,500 max). It only takes one line on your Schedule C and there are no receipts required.

Here’s the regular one: Your business-use percentage applied to actual housing costs via Form 8829. It’s more paperwork, but will usually get you a bigger deduction.

As for working from a coffee shop, it sadly won’t get you a deduction, however loyal you are to your corner table.

👉 Find out more about deducting your home office

The Strategy

🏢 Should you lease or buy your commercial space?

So you’ve outgrown the spare bedroom. Maybe the coffee shop stopped feeling charming around the 40th latte. Whatever got you here, you’re now facing the question that home-office rules never had to answer: Do you sign a lease, or do you sign a mortgage?

Everyone with something to sell you has a strong opinion about that — which is exactly why it’s worth working out the numbers yourself first.

Leasing is simple: your rent is fully deductible the year you pay it — no depreciation schedule, no asset on the books, no mortgage. The tradeoff is that you never build any equity in the space.

With buying, you don’t get to deduct what you paid for the building — instead, you depreciate it, spreading the deduction out over a 39-year schedule, since that’s how long the IRS figures a commercial building lasts. Land doesn’t wear out, so it doesn’t depreciate — you subtract the land’s value first and only depreciate what’s left. Say that leaves you with a $600,000 depreciable basis: your deduction is about $15,400 a year, showing up right on schedule, every year, for longer than most marriages last.

Here’s the upside: the building itself may be slow to deliver returns, but almost everything inside it isn’t. A cost segregation study goes through the building and pulls out things that don’t have to follow the 39-year rule — things like electrical work, plumbing, fixtures, and the parking lot, which the IRS treats as 5-, 7-, or 15-year property instead. Those pieces qualify for Section 179 (up to $2.56 million in 2026) and 100% bonus depreciation, so instead of waiting until year 39, you can deduct a real chunk of the purchase in year one.

Mortgage interest and property taxes are deductible just like any other business expense. But buying also means the maintenance and the illiquidity are now yours too — nothing on a depreciation schedule warns you the day the HVAC dies, though your bank account will let you know immediately.

Bottom line? Lease if you want flexibility or don’t plan to stay put long. Buy if you’re confident in the location and can handle the costs that come with owning it. A five-year lease and a 39-year depreciation schedule are built to answer two very different questions — make sure you’re asking the right one.

👉 Learn more about how to depreciate property

The Deep Dive

🧱 When your building does double duty

This topic separates business owners who’ve talked to a tax professional from those still guessing. It rarely comes up early. Then one day your home has an office in it, or your building has a tenant living upstairs, and suddenly every expense on the property needs an answer to one question: how much of this is business?

That situation is more common than it sounds — the salon owner who lives above her shop, the consultant with a converted garage office, the landlord who rents out the unit above his own storefront. Whenever one property does double duty, the IRS doesn’t want you eyeballing a different split every year. It wants one method, applied consistently.

The standard method is square footage: divide the space used for business by the total space in the building. A 2,400-square-foot building with a 900-square-foot shop works out to 37.5% business use. That percentage is what you apply to shared costs — property tax, insurance, repairs to things, like the roof or HVAC, that serve the whole building.

Expenses that are entirely business (fixing the shop’s display case) are 100% deductible. Expenses that are entirely personal (repainting the upstairs bedroom) are 0% deductible. The percentage only applies to costs that genuinely serve both sides. Depreciation gets the same treatment — the business percentage of the building depreciates on the usual 39-year schedule.

Here’s the part that catches people later: depreciation you claim now reduces your basis in the property, and it comes back to collect at sale. The IRS calls it “depreciation recapture,” taxed at up to 25%, and it isn’t covered by the $250,000/$500,000 home-sale exclusion that shelters the rest of your profit.

In other words, the regular home office method saves you money every year you use it, but it quietly builds a tax bill that shows up at closing. The simplified method skips this problem entirely, since it never involves claiming depreciation in the first place — one of the rare cases where the simpler option is also the smarter one.

If there’s no home involved at all — just a commercial building with your business on one floor and a tenant on another — the math is actually more forgiving. You’re splitting between two business activities instead of one business and one home: your own operations go on Schedule C, the rental income and expenses go on Schedule E, and both sides are fully deductible with no home-sale exclusion to complicate things.

Whichever situation you’re in, the rule is the same: document your square footage once, in writing, and use that same number every year.

👉 Read more about mixing your home and business

Freebie

📥 The mixed-use allocation worksheet

This week’s free download: the business space formula worksheet.

Every calculation from this issue, pulled onto one page with blanks to plug in your own numbers.

📥 Download the Business Space Formula Worksheet →