Many people who received buyouts and severance packages last year used the money to start home-based businesses. Now, they'll want to take tax deductions for their home offices.

The deduction for using part of your home for business purposes -- popularly known as the home office deduction -- used to be something scary. It was widely believed that taking the deduction would automatically land you an IRS audit. Tax advisers say that's no longer the case, especially since there are so many businesses being run out of homes, garages and apartments. But if you don't follow the rules and try to take too big a deduction, you could still draw the attention of IRS employees.

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GET TO KNOW THE IRS RULES

IRS Publication 587, Business Use of Your Home, spells out the rules under which you can take a deduction for using your home as your office, manufacturing facility or warehouse.

Your home office should be used:

n Exclusively and regularly as your principal place of business, or

n Exclusively and regularly as a place where you meet or deal with patients, clients or customers in the normal course of your trade or business.

"Exclusively" refers to the requirement that the part of your home that you use for business cannot be used for any personal reason. The IRS doesn't require that it be a complete room in a house, or that the space you use be partitioned. It does require that your home office

or workspace be a "separately identifiable space."

If your computer and papers are spread out on the dining room table and you put them away when it's time to eat, you can't take the deduction. But if you have a corner of your family room that is clearly a home office, and your kids don't use it to do their homework, then you can qualify for the deduction.

The structure that you use the deduction for doesn't have to be the one you live in. A garage, shed or barn that you use as a studio, for manufacturing or for storage can also qualify. But, you can't also park your car in the garage, or house your lawn mower and other gardening equipment in the shed.

Jeffrey Berdahl, a certified public accountant with RLB Accountants in Allentown, Pa., suggests that if you were thinking of using a garage or barn for both personal and business use, that you purchase a shed so you can legally take a deduction for one of your buildings.

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MORE THAN ONE PLACE OF BUSINESS?

"Exclusively" does not mean your home office has to be the sole place where you do business. If you have a home office but need to rent space by the hour to see clients in a more business-like setting (away from the kids and barking dog), you can still deduct the expenses take the home office deduction.

But even if the bulk of your business activity takes place in another setting, you may still be able to take a home office deduction. IRS Publication 587, which can be downloaded from the agency's Web site, www.irs.gov, gives the hypothetical example of an anesthesiologist who does all of his administrative work at home and who is allowed to use the deduction.

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WHAT CAN YOU DEDUCT?

Part of your expenses such as mortgage or rent, insurance, utilities, maintenance costs and repairs can be deducted. The IRS allows business owners to deduct the portion of their home expenses that can be attributed to the office or work area. The most commonly used method is to compute the percentage of your home's square footage that is devoted to the business, and then multiply that amount by what you've spent.

For example, if your home has 2,000 square feet and your office takes up 200 square feet, you can deduct 10 percent of your expenses.

But many home-based business owners are surprised to find how little they end up deducting, Berdahl said. "In the end it doesn't amount to a lot," he said.

Using the example of 10 percent, if you had $5,000 in expenses for your home, that's a $500 deduction. And your tax savings will be less than that.

The home office deduction also allows a business owner to take deductions that are not ordinarily available to homeowners, including depreciation on the home.

A word of caution: If you claim a deduction that seems exorbitant, it may catch the attention of the IRS. In that case, the agency might want to take a look at your home office to see if your deduction is justified.

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THE MECHANICS

To claim a home office deduction, you need to complete IRS Form 8829, Expenses for Business Use of Your Home. The form and instructions for it can be downloaded from the IRS Web site. Among other things, the form requires a business owner to compute the amount of space in a home that's devoted to business. There are separate lines for entering various expenses such as rent, repairs, utilities and mortgage interest.

Form 8829 should be filed only by business owners who attach Schedule C, Profit or Loss from Business, to their Form 1040s.