If your business will be primarily operated out of your home and the actual sales or services happen right there, you'll have no problem! In this case, your home office is your principal place of business. If you have another business location but customers also come regularly to your home office, you qualify under the second part. How often you need to have customers coming to your home is not specified in the law but IRS Pub. 587 uses an example of an attorney who works 3 days a week in her city office and works 2 days a week in her home office. It says that because the attorney regularly meets clients at home, her home office qualifies for the deduction. IRS defines "regular use" as meaning "on a continuing basis" and not "occasional or incidental". It is interesting that IRS does not ever clearly say exactly how often clients need to come.

But you may get caught on the second condition. If you have an off-site location that is actually the principal place of your business, then chances are your home office, where you do the bookkeeping, is not a place you meet and deal with customers. In this case, you would not be eligible for the deduction, even though the space at home is really used only for legitimate business purposes!

I have several clients who provide professional services at an off-site office, but in order to preserve their right to the home office deduction they make sure to meet with a few clients regularly at the home office. Think of ways you can draw customers to your home office on a regular basis if this provision puts your deduction at risk.

Whether or not you are eligible to claim the home office deduction recently became a little more gray, harder to be absolutely sure. This is due to a 1993 Supreme Court decision, Commissioner v. Soliman. Dr. Nader E. Soliman is an anesthesiologist who worked through several area hospitals. As a solo practitioner, he maintained an office in his home, completely devoted to his business, where he did his scheduling, billing, follow-up calls, and continuing educational study. He absolutely needed the office as there was no office provided at any of the hospitals. Nevertheless, the U.S. Supreme Court ultimately judged that his principal place of business was out in the hospitals where the service was performed. They determined that Dr. Soliman didn't have any one principal place of business! The decision turned on the fact that much more of his professional time was spent in the hospitals than in his home office. His home office was a secondary place of business and the deduction was not allowed because he didn't meet with clients there.

This precedent can be pretty scary to a lot of home based service businesses, such as home improvement contractors, business and computer consultants, and home inspection services. However, there may be some flexibility with determining just where your principal place of business is.

Melissa Bailey, the owner of Paw Prints in Standish, Maine, came across this problem because she was doing pet grooming and photography in her customers' homes. Bailey says, "I had always been a craftsperson as well, so I found a natural solution." She began producing pet-related crafts such as collars and bowls in her home business space which were then sold through a catalog to her grooming clients. By increasing the work hours she did at home, she was able qualify her home as the principal place of her business. Since her home qualified as the principal place of her business, Bailey didn't have to worry about meeting with customers regularly at home.

Greg Dumond of National Detail Systems in Thousand Oaks, California, provides his dealers with fully equipped mobile systems for cleaning cars on site. Dumond reported that "some of my dealers are offering free pick-up and delivery services so they can perform the work at their home business location instead of on-site." Many of his dealers are also using home space, such as a garage, for storage of cleaning supplies.

If this sounds similar to your situation, I recommend you take a few steps to assure that your home is seen as the principal place of your business. You will want to keep time records for at least a few months each year to establish your patterns of work and be able to show, should you be selected for an audit, that you spend more time there than anywhere else. The IRS is also interested in the relative importance of the activities you perform in each location, so keep records of what you are doing in each place as well as how much time you spend doing it.

The good news is that there has been a bill introduced in Congress which should make the home office deduction dilemma easier to crack. It could add a provision to the existing law which will make a home office eligible to be considered the principal place of business if a) the office is the location where the taxpayer's essential administrative or management activities are conducted on a regular and systematic basis, and b) the office is necessary because the taxpayer has no other location for the performance of the administrative or management activities of the business. This change would help the Soliman-type situations to qualify their home as the principal place of business, but will not change the result if your home is actually the secondary place of business and customers don't come there.

So, don't be afraid. Do your homework. Get your hands on the IRS publications and read the sections on the home office deduction thoroughly. Envision how your normal workdays will be structured ; if you need additional help, be sure to meet with a competent and conservative tax accountant. Together you will be able to determine whether or not you will be entitled to the deduction.

To arm yourself with an understanding of all the rules, call the IRS Publications number 1-800-829-3676 and ask for the following publications:

IRS Publication 334, Tax Guide for Small Business
IRS Publication 587, Business Use of Your Home
Form 8829 and Instructions