What it is:
The term home office has two definitions. First, a company's home office is its headquarters. Second, a home office is a place of business within a person's home.
How it works/Example:
Let's say John Doe is a freelance business writer and editor. His clients are around the world, and he does his work from a desk in a bedroom in his house. This is his home office.
When John does his income every April, he deducts a portion of the expenses associated with maintaining his house, as well as all of his business expenses.
Why it matters:
A home office is more than a desk in a corner. For tax purposes, it is a place of business. Not all home office expenses can be deducted, however. For one thing, the home office must be the taxpayer's primary place of business. If, in John's case, the square footage of his home office is 10% of his whole house, he may be able to deduct 10% of his mortgage, 10% of his utilities, 10% of his alarm system bills, and so on, as well as all of his business expenses. Alternatively, he may take a flat deduction of $1,500 beginning in the 2013 tax year.