Changes that went into effect in 1999 make it easier for many additional taxpayers to qualify for this deduction. But understanding these changes isn't easy, and the overall batch of rules for home office deductions remains complex.

So, here's a guide to help you understand whether and how you qualify for a home office deduction, and how the deduction could benefit you.

Quick Overview... click here

Understanding the big change

The biggest change in home office deduction rules boils down to this: You now can qualify for the deduction as a business owner if you meet the following two conditions:

• You use the space at home regularly and solely for administrative or management tasks, such as billing customers, keeping books and records, ordering supplies and so on. (See the examples listed at the IRS Web site under "administrative or management activities.")
• You don't have another fixed location where you tend to those administrative or management tasks.

What this change does is potentially open the home office deduction to people who do their income-producing work outside of the home — such as plumbers, repairmen, contractors, therapists, computer technicians and other consultants — but who need to do their billing, scheduling and other paperwork or administrative/management tasks out of a home office.

It does not mean open season for everyone who wants a home office — among other restrictions, company employees can claim a home office only if it is required by and for the convenience of the employer.

Old qualifications still apply

The additional old categories for home office qualification have not changed. The three most common ways small businesses can qualify for the break:

• The home office is your principal place of business, and you use the office space regularly and exclusively for business.
• The home office is not your principal place of business, but you use it to meet regularly with clients (again, you have to use the space exclusively for that purpose).
• The home office is not your principal place of business, but it is in a structure separate from your home that you use regularly and exclusively for your work. One common example cited is a florist who grows plants in a greenhouse or converted garage space on his property.

For information on other ways people may qualify for a home office deduction, click again on the IRS Web site.

What you can deduct

Home office deductions generally are based on the size of your office relative to the size of your entire home. For example, if you have a 2,000-square-foot house and a 300-square-foot office space, you can deduct 15% of your home expenses as office costs.

These expenses can include property taxes, mortgage interest, homeowner's insurance, utilities, household maintenance and repairs, alarm systems and other costs. Expenses directly attributable to the office — such as paying to have it painted, for example — can be 100% deductible or depreciable.

One thing I like about the home office deduction: For sole proprietors, these expenses — many of which are ordinary expenses you would incur as a homeowner anyway — can reduce not just your income tax but also your self-employment tax. That's a nice added benefit for anyone earning under the Social Security tax maximum wage limit of $76,200 this year.

How you get the break

If you're a sole proprietor, taking the home office deduction means filling out Form 8829 as part of your overall tax return. You may have to fill out Form 4562 as well.

Note: Homeowners must consider the value of qualifying for the home office deduction against the possible additional taxes that could be incurred when you sell the home. The IRS recently came out with proposed guidelines for reporting sales of a residence that included a home office; I'll be discussing these guidelines and how they could affect you in next week's column.

The rules get trickier, however, for people who are not sole proprietors.

For example, if you're the owner of a corporation, you might be able to take home office expenses as miscellaneous itemized deductions on Schedule A.

"Another possible option is if the corporation requires you to have a home office and also has an accountable reimbursement plan," says Ed Zollars, a CPA and partner in the Phoenix firm of Henricks, Martin, Thomas & Zollars Ltd.

"In that case, the corporation would reimburse you for the home office expenses, but you would not deduct those expenses on your own tax return," Zollars says. "You also have to be sure in such a case to have a properly written reimbursement plan and to be sure that both you and the corporation maintain good records."

Home office deductions in general are complicated; deductions when you are both an employee and a business owner or partner can be extremely tricky.

For example — and this is a warning — as an employee, you cannot deduct any home office costs if you rent the space to the employer. So if you own your corporation and receive a salary and collect rent from the corporation for a home office, you will have to declare that rent as income — but will not be able to deduct any of the costs associated with the office.

Intricacies like these are part of why I advise anyone with a home office issue to consult one-on-one with a tax pro.