How to Save on Taxes When You Work at Home : Deductions: You may be able to consider a portion of your utilities, fire insurance, property taxes and mortgage insurance as legal write-offs.

Operating a full- or part-time business from your home may be more profitable than you think. Or perhaps your employer does not furnish suitable work space and requires you to work from your residence.

If you qualify, part of your home utilities, fire insurance, repairs, mortgage interest, property taxes and even depreciation of your business area in the home can become tax-deductible as business expense.

Internal Revenue Code 280A(c) allows home business tax deductions if your home office or shop area is your principal business location and is used to meet clients or patients. If you are an employee, your use of your home for business must be “for the convenience of the employer.”

However, your home business does not have to be a full-time job. But it cannot be just a hobby or an avocation.

In the leading Tax Court case, a dermatologist who worked at a hospital and managed his real estate holdings from his home was entitled to deduct some of his home office expenses (73 TC 61).

But in the Moller case (553 Fed.2d 1071), a stock and bond investor was denied “office at home” deductions because the court felt such investing was not a business. Other examples of nonqualifying circumstances include a realty salesperson who works at home and at an office where the broker provides a desk and phone.

Employees have an especially difficult time deducting home business expenses. Schoolteachers, for example, who bring work home, generally cannot deduct part of their residence expenses if their school has suitable work space, since the school is considered the teacher’s primary business location.

But a few Tax Court decisions do allow home office deductions for teachers whose schools do not provide quiet and safe office space.

When your home is your principal business location for your full- or part-time business, or if your employer requires you to work at home, the next test requires you to have an “exclusive business area.”

However, this area need not be a separate room. Several Tax Court decisions have accepted deductions for part of a room, such as a desk and file cabinets located in a bedroom. But the business area cannot also be used for personal use, such as a den used by the family as well as for an office.

When you qualify for the home business use tax deduction, a portion of your “business area” expenses become tax deductible as business deductions. Even renters can deduct part of their rent for the business portion of their apartment or house.

Strictly business expenses such as a telephone line coming into your home business area are deductible. Another fully deductible example would be painting your home office or shop area.

The apportioned deductions can be calculated either on a square-footage basis or by room count. To illustrate, if you have a 1,600-square-foot home and your 400-square-foot extra bedroom is used exclusively for business, then 25% of your applicable home business expenses, such as insurance, utilities and maintenance, become tax-deductible. In addition, you can depreciate the “business area” of your home by using the 31.5-year straight-line commercial depreciation rate.

You may even be able to deduct your automobile business mileage if you start your business day from your office at home. In the recent Leitch decision of the Tax Court (TC Memo 1989-549), auto travel expenses were held to be deductible for a building inspector whose home office was the “focal point” of his daily business activities.

The 1986 Tax Reform Act imposed limits on home office deductions. The maximum deduction is the net income earned from the home business activity. Employees required to use their home for business can deduct qualified business expenses that exceed 2% of their adjusted gross income.

For example, if you earned $10,000 net income from your home business activity, then your maximum home business deductions would be limited to $10,000, even if you can justify a higher deduction.

Home business deductions cannot create a tax loss to shelter your ordinary income from tax. But any leftover non-deductible home business losses can be carried forward to future tax years. Consult your tax adviser for more details.