Running a business from home can help you lower your tax bill.

When you use part of your home for business, you may be able to deduct expenses for what the IRS calls the "business use of your home." If you meet the technical requirements of the tax law, you should be able to deduct a percentage of many of the costs of running your home, such as utilities, rent, insurance, depreciation, mortgage interest, real estate taxes, and some casualty losses, repairs, and improvements (if they relate to the part of the house you use for business).

The home office deduction is available to renters and homeowners alike. It is available for office space and other areas you use for business in your home -- such as a studio, workshop, or garage. And according to the IRS, your "home" can be a house, condo, or apartment unit -- or even a mobile home or boat, as long as you can cook and sleep there. However, you must meet two tax law requirements to qualify for the home office deduction:

Requirement #1: Regular and exclusive use. You must regularly use part of your home exclusively for a trade or business.

Requirement #2: Principal place of business. You must also be able to show that you use your home as your principal place of business. Alternatively, you must be able to show at least one of the following:

• You meet patients, clients, or customers at home.
• You use a separate structure on your property exclusively for business purposes.

We'll explain these requirements in turn below.

Ordinary business expenses are deductible even if you don't qualify for the home office deduction. If you don't meet the rules above, you can still deduct ordinary and necessary business expenses that you incur at home -- for instance, long-distance phone calls, a separate business telephone line, and the cost of office supplies and equipment. The above IRS rules apply only to the expenses of actually running and maintaining your home, such as utilities, rent, depreciation, home insurance, mortgage interest, real estate taxes, and repairs.

Regular and Exclusive Use

To take deductions for home-related expenses, you must regularly use part of your home exclusively for your trade or business.

Regular use. The IRS doesn't offer a clear definition of regular use -- only that you must use a part of your home for business on a continuing basis, not just for occasional or incidental business. You can probably meet this test by working a couple of days a week from home, or a few hours each day.

Exclusive use. Exclusive use means that you use a portion of your home only for business. If you use a room of your home for your business and also for personal purposes, you don't meet the exclusive use test. However, you can set aside a portion of a larger room to be used only for business, as long as your personal activities don't stray into it.

There are two exceptions to the exclusive use rule: You don't have to meet the exclusive use test if you use part of your home to store inventory or product samples, or if you run a qualified day care facility at your home. (The storage exception is discussed just below. For the day care rules, check IRS Publication 587, Business Use of Your Home, at www.irs.gov.)

Storing inventory or product samples at home. If you store inventory or samples at home, you can deduct expenses for the business use of your home, whether or not you use the storage space exclusively for business.

There are two limitations, however: First, you won't qualify for the deduction if you have an office or other business location outside of your home. Second, you have to store the products in a particular place -- your garage, for example, or a closet or bedroom. It's okay to use the storage space for other purposes as well, as long as you regularly use it for storing inventory or samples.