Once you have determined that you are eligible for the deduction, you calculate the percentage of your home used for business based on square footage, number of rooms, or any other reasonable method. Direct expenses are completely deductible. Usually, the business fraction of indirect expenses is also deductible. Electricity is used for lighting both home and business areas, but also for non-business reasons such as laundry, television and cooking. Only the business portion of electricity for lighting is deductible.
Unrelated expenses are never deductible.
If your total business expenses exceed your business income, the deduction for certain expenses for use of the home will be limited. If you are an employee, you will itemize deductions on line 19 of Schedule A, with other employee business expenses. In case you are questioned or audited, you will want to save all documentation that supports these expenses. Keep bills and receipts to document all expenses, no matter what fraction was deducted. Save datebooks showing meetings with clients scheduled in your home office.