With the rising cost of gas, working at home is looking better all the time.

Along with a break at the pump, there's the added benefit of a tax break.

AAA's daily Fuel Gauge Report reveals the average national cost of a gallon of regular gasoline was $2.517 March 9, up a penny from a day earlier, up from $2.185 a month ago and up from $2.347 a year ago.

California, this time a reluctant leader, had the highest average cost of car fuel at $2.99 a gallon, but many pumps in major metro areas had already cut through the $3 barrier earlier in the week.

It ain't over.

AAA says gas prices aren't finished rising and expects another 10 to 15 percent increase at the pump before Big Oil is finished soaking consumers.

Apparently, it's a spring thing.

Concerns about the summer demand on supplies send oil prices higher in the spring because traders believe there won't be enough fuel to go around (as in buy and sell for a profit).

What are you going to do?

Work at home, put the brakes on gasoline spending (and global warming) and enjoy a tax break in the process.

If you run a business from your home (rented or owned), along with business expenses, you can deduct part of your rent or take a depreciation deduction based on the portion of the home you use for business purposes.

Home-based business expenses (office, payroll, labor, auto, travel and entertainment expenses, business asset depreciation, supplies, items purchased for resale, etc.) reduce your net profit which in turn reduces both your self-employment taxes and your income taxes.

For depreciation purposes, if your home is 2,000 square feet and you use 300 square feet as an office, for example, you can deduct 15 percent of your rent or take a depreciation deduction on 15 percent of your home. Likewise you can deduct 15 percent of your energy bill, home owners insurance and other costs to run your household.

First, however, you must qualify.

To qualify for the deductions, the IRS requires that you pass three tests:

1. Your home must be your principal place of business. If you work from two locations, in order to take the deduction, the home must be the most important location, generally, the one where you generate revenue, but not always.

If, you compare the two locations and it's not clear from which location you generate the most income, also consider time spent at either location. You must spend most of the time in the home for it to be the principal place of business under this consideration.

If after you look at revenues and time spent at each location and you still aren't clear if your home is the primary place of business, you probably shouldn't take the deduction, experts say.

There are two exceptions to this rule.

• If your home office is not your principal place of business, you can take the home-office deduction if, for part of your business, you see clients, patients, or customers face-to-face in your home or use the space for administrative duties, paperwork activities and other related activities crucial to your business or work.

• Also, if your home isn't your principal place of business, but you use some free-standing structure on your property, exclusively and regularly for business, you can claim the home-office deduction for that space. A barn, greenhouse, workshop, studio, detached garage, or any freestanding structure is eligible.

2. Your home business must also occupy a clear and identifiable space in your home. Generally, that means it must be in a location apart from the rest of your home, say, an addition constructed for your office, a converted bedroom, attic or basement, but also space in an alcove, nook or say, large walk-in closet space in a larger room.

3. You must use your home business space exclusively and regularly for your business. You can't use your business space, say, to watch TV with the kids, play computer games or temporarily house a visiting relative.

If you qualify for the home-office deduction, there's on more tax plus.

The Internal Revenue Service also gives work-at-home owners a break on the home-office deduction when they sell their home.

As long as your qualified home-based business is in the same dwelling as your primary residence -- rather than some unattached structure on your property -- you don't have to allocate a home sale's capital gains between the home and the business, according to "Exclusion Of Gain From Sale Or Exchange Of A Principal Residence".

The small windfall is a switch from the original requirements set forth by the Taxpayer Relief Act of 1997 . The relief act's most notable provision says when you sell your home, up to $500,000 of capital gains is excluded from federal taxes for married couples who file a joint tax return. Up to $250,000 is excluded for those filing separate or single-filer returns. You must have lived in your home as your primary residence for two of the past five years to qualify for the exclusion.

Before the act was adjusted, if you used 10 percent of your home for a home-based business, 10 percent of the gain on the sale would be subject to capital gain taxes because you couldn't use the exclusion on that portion.

Now, provided you meet the primary residency and other requirements, and operate a business from your home, you are entitled to the full tax exclusion on capital gains realized from the sale of your home, according to the IRS.

However, you still must allocate a home sale's capital gains between the home and your home-based business, if that business is not within the structure of the primary residence -- say, in detached granny quarters, a shed or garage, as opposed to an attached garage or other structure.

Published: March 12, 2007

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A journalist for 35-years, Broderick Perkins parlayed an old-school daily newspaper career into a digital news service offering editorial content and consulting services. Perkins' San Jose, CA-based DeadlineNews Group includes the flagship news site, DeadlineNews.Com, offering real estate, personal finance and consumer journalism, and a backshop, the Deadline Newsroom.