This is the third in a series of three articles by Lisa Balbes on working from home. The first article was How to get Free Home office Equipment and the second was The Next Best Thing.

These articles were originally published on Gobal Network Navigator (from O'Reilly Publishers, no longer on-line).

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This time we turn to another tax issue--deducting expenses involved in the business use of your home. IRS policy is that most people, whether self-employed or employees, are not eligible for this deduction. It is up to you to prove otherwise. The following summary is based on information in IRS publications. Contact a tax specialist about your specific situation.

In order to qualify for this deduction, the business portion of your home must be used exclusively and regularly for business. That means the area has specific boundaries, and is used on a continuing basis for business-related work only. In other words, if you use a spare bedroom as an office, but occasionally have house guests sleep there, you are not eligible.

If you conduct business at more than one location, you are eligible for the deduction only if your home is your principal place of business. You must consider both the relative importance of the work performed at each location and the amount of time spent at each location. Even if your home office is your only office, you use it to set up appointments, you do your billing there, and so on, you still don't qualify if all your work is done on client's sites.

Of course, there are exceptions to all rules (except this one). The two exceptions to the "principal place of business rule" are these: If you regularly and exclusively use part of your home to meet clients, patients, or customers, or if you use a separate, free-standing structure (studio, garage, barn, etc.), you can deduct expenses for those areas. The exceptions to the "exclusive use" rule are for daycare facilities and for inventory storage, where other restrictions apply. Employees cannot take the deduction if they rent all or part of their home to their employer and then use that portion to perform services as an employee, or if the use of their home is for their own convenience, and not for their employer's.

Once you have determined that you are eligible for the deduction, you calculate the percentage of your home used for business based on square footage, number of rooms, or any other reasonable method. (In many places, there is a limit on the fraction of your home that can be used for business purposes. This may affect how you want to do this calculation.) You then assign expenses for your home into those that are directly related to your business (such as painting your office), those that are indirectly related (rent, utilities, security systems, etc.) and those that are unrelated (such as yard work or repairs to personal areas of your home).

Direct expenses are completely deductible. Usually, the business fraction of indirect expenses is also deductible. Electricity is used for lighting both home and business areas, but also for non-business reasons such as laundry, television and cooking. Only the business portion of electricity for lighting is deductible. Unrelated expenses are never deductible. If your total business expenses exceed your business income, the deduction for certain expenses for use of the home will be limited.

If you are an employee, you will itemize deductions on line 19 of Schedule A, with other employee business expenses. (In some cases you will also have to file Form 2106.) If you are self-employed, you will use Form 8829 with Schedule C. More detailed information is available in Publication 587 (Business Use of the Home). All forms and publications are available from the IRS; call 1-800-TAX-FORM.

In case you are questioned or audited, you will want to save all documentation that supports these expenses. Keep bills and receipts to document all expenses, no matter what fraction was deducted. Take photographs of your business space, and draw floor plans (with dimensions). Save datebooks showing meetings with clients scheduled in your home office. You may also be asked to explain what steps you take to prevent personal use of this business space. Do you have a second computer for non-business use? Is the door to your office closed at all times? Do you have a separate checking account for business expenses? Remember, the burden of proof for home office deductions is on you.