Home office deductions make many people nervous. Thought to be a red flag to the IRS for an audit, many taxpayers simply don't bother with the deduction. But they could be wasting quite a bit of money.

The trickiest part of home office deductions is knowing whether or not you are eligible to write off a portion of your home as a business expense. If you are able to write off a portion of your rent or mortgage costs, plus any utilities and housing expenses, you are able to reduce your taxable income.

You have to know what makes your home office space deductible. There are three basic rules that you must meet to determine eligibility.

The first rule is known as the "exclusive use" rule. Your office space must be devoted solely and wholly to your business and nothing else. That means that you can't use the space for other activities. If you use your office to run your business and run your household, you can't deduct it as office space.

The second rule is the "regular use" rule. Your home office must be used on a regular basis for business. For example, if you are self employed and rent an office outside of the home, you probably won't be able to deduct your home space. But if you can show that you regularly have meetings with clients in your home office, you may be able to deduct it.

The third rule is the "principal place of business rule." Your home office must be where you do your administrative tasks, bring your clients or a separate structure. You don't have to do the majority of your business there; you must only adhere to one of the above. So if you rent an office in town, but do your book keeping in your home office, you may be able to deduct the costs for that portion of the home.

The best way to protect yourself from a potential IRS red flag is to have your taxes prepared by a tax professional who is up to date on the changing laws.