Most people do not start up a new business precisely on January 1. Most likely, you opened your business at some point after January 1 and before December 31, and your first year in the home office was not a complete one. Similarly, people who close down their business don't always do it precisely on the last day of their tax year.

As a result, for the first year in which you began using your home office, and the year in which you closed your business, you'll have to prorate your home office expenses based on the percentage of the time your home office was actually used.

If you began using your home office on July 1 of this year and continued to use it through the end of the year, you can use only your expenses for the last half of the year in computing your home office deduction.

Special rules for depreciation. For the first year you begin using your home office, the IRS provides a table showing the fraction of your depreciable basis that you can deduct, based on the month in which you started using the office. Our home office deduction calculator builds these amounts into the computation.

For the last year, you'll need to determine the amount of depreciation you'd normally deduct for the year, under the usual rules. Then multiply this amount by a fraction: the numerator will be the number of months that you used the office, and the denominator will be 12. Count the month in which you stopped using the property as half a month. For example, if you stopped using your office in October, the fraction will be 9.5/12.

Special rules for home day care operators. The IRS provides a special tax break for home day care operators: they can count as "business use space" whatever portion of the home is regularly used for day care purposes, even if the same space is also used for personal living purposes. However, they must prorate their home office expenses based on their hours of operation.

A home day care operator's expenses for mortgage interest, real estate taxes, depreciation, utilities, and property insurance amounts to $10,000. She estimates that 80 percent of her home is used regularly for day care activities. The day care center is open 12 hours per day, five days per week, which amounts to 60 hours out of a possible 168. She must multiply her home office expenses of $10,000 by .80 to arrive at her business use percentage of $8,000, and then multiply this amount by 60/168 to arrive at her allowable deduction of $2,857.