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The easiest way to set up your office is in a separate structure a(detached garage, barn or guest house) and use it regularly and exclusively for your business. It does not have to be your primary place of business, but you can't use it for anything else. You must use the home office regularly and exclusively to meet with clients, patients, or customers in the ordinary course of your business. Keep a log for proof. This is one of the ways to meet the IRS's standards.

You have to prove that your office actually is your principal place of business and is used regularly and exclusively for that purpose. The principle place of business rule is not a problem for some individuals for example, freelance writers, telephone salespeople and professionals who work in their homes. These people earn their keep from what's done in the office.

It is recommended to document with photos showing that the space is clearly devoted to business endeavors. The next issue is to add up the deductions. You can generally deduct portions of your mortgage-interest expense, property taxes, association fees, depreciation, repairs, utilities, security, garbage pickup, housekeeping, yard maintence etc.

The IRS permits any "reasonable" method, including square footage or number of rooms, if they are of similar size. Take the busines allocation, say, 10 percent, and deduct the remainder of your mortage-interest expense and property taxes as you normally would on Schedule A. For sole proprietors, home-office deductions ar initially reported on Form 8829 (Expense for Business Use of Your Home,) and the total is then carried to Schedule C. The IRS won't let you use home-office deductions to create a tax lost from the business, but any excess is carried over into future years. One piece of tax-planning advice that might be helpful is to bunch all of your big expenses (computer, fax, answering machine) into one tax year so you pass the 2 percent threshold.