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Updated on July 6, 2007.

WORKING FROM HOME HAS obvious perks: There's no battling with morning traffic, the hours can be flexible, and maintaining basic hygiene is a choice, not a job requirement.

But to do the job right, you need a decent home office. Managing growth projections and marketing strategies from your dining room table will be tolerated by your family for only so long. And having business meetings with potential investors, employees, and so on in your living room probably isn't projecting that professional image you seek.

Be warned, however: Setting up a home office isn't always easy. Assuming you want to get the nice tax break that can come with a home office, you need to meet certain IRS rules. You might also need to get a business license to operate in your township, or take certain steps to meet zoning requirements.

Then there are the practical elements: Are you the type of person who will find yourself hanging out in front of the television, promising to get to work once you find out whether Candy has finally discovered her feminine side during the latest episode of "Starting Over"? (Hint: If you said "yes" to that last question, you might be better off renting office space outside your home.)

Today, more than half of the nation's small businesses are home-based, says the Small Business Administration's Office of Advocacy. That's around 15.6 million people, according to the latest statistics from the Department of Labor. Ready to join the ranks? Here's how to do it right.

Check In With State and Local Government

Believe it or not, some townships and neighborhoods put strict requirements on how home offices operate. If, for example, you're an attorney or real-estate agent, you might need a license to see clients in your home. Fees can range from $15 to hundreds or thousands of dollars a year, depending on your location and the type of business you'll be running.

You should also check out local zoning codes. Though most communities allow home-based businesses to operate (albeit with some restrictions), some still prohibit them outright. The city of Overland Park, Kan., for example, bills itself as "one of the best communities nationwide to start a home-based business," mainly because the city doesn't require any business to register or pay for a business license. But the city also strictly forbids certain kinds of home-based businesses — mainly those that sell products to the public directly from their homes. Such activities create too much noise and traffic in residential areas, says an Overland Park official.

Be sure to investigate these sorts of ordinances sooner rather than later, says Gene Fairbrother, the lead small business consultant for the National Association for the Self-Employed. If your neighbor complains to the authorities about the noise or traffic you're generating, you not only risk losing your business, but also might generate ill-will among your neighbors.

Upgrade Your Homeowners Insurance

Don't assume that your homeowners insurance will cover your home office. It probably won't.

Homeowners insurance typically doesn't cover events that happen in your home for business purposes, explains Jeanne Salvatore, the vice president of consumer affairs at the New York-based Insurance Information Institute. If, for example, a client comes to visit you in your home office and trips on the rug and breaks a leg, your homeowners insurance company might refuse to pay medical expenses.

Homeowners policies also often have clearly defined limits on how much office equipment they will insure. This figure is usually around $2,500, says Salvatore. So if you're planning on storing inventory worth more than $2,500, or if your office equipment alone costs more than that, you should consider taking out a separate policy for extra protection.

The good news: Many insurance companies offer an all-in-one basic business owner's policy, which can cost as little as $250 a year to as much as $1,000 a year, depending on the type of coverage you need.

Making Your Office IRS-Friendly

Uncle Sam offers some generous tax breaks for home offices — provided you follow all the rules. Just about everything in your home office, from the space itself down to your No. 2 pencil, can be deductible.

To claim the cost of the space itself, which is usually calculated by dividing the square footage of the office space by the entire square footage of your home, you must prove to the IRS that you use the office space regularly and exclusively for business purposes. And be warned: "Exclusively really does mean exclusively," says Martin Nissenbaum, the National Director of Personal Income Tax Planning at Ernst & Young. "The rule is clear. You can use the space only for your trade or business. If you happen to have a TV set in there and you watch it while you're working, fine. But if your kids play there and you use it as a den, you cannot take a home office deduction."

Bear in mind, if you're keeping inventory or equipment at home and you use a specific space — like a closet in the garage or a shed to store it — this square footage might also qualify as home office space, provided that you use it exclusively for business purposes. For more details on the home-office deduction, click here.

Business expenses might be deductible, too. If, for example, you've bought a vehicle or other machinery for the business, you can write off up to $112,000 of those expenses in the first year. The test for whether an item qualifies as a business expense is this: "If you had an office that wasn't in your home, would you need these things?" says Ed Slott, a CPA in Rockville Centre, N.Y. "If the answer is yes, you should deduct them." Things like a business phone line — the cost of your primary home phone line is never deductible — a fax machine and a printer would all qualify, if they're used only for business purposes. If equipment or supplies are used for both business and personal reasons, you can claim only the percentage for which the item was used for business purposes.

To make sure you get your deductions, keep your personal and business expenses completely separate. Your business should have its own checking account and credit card. "Most people think to themselves, I'm at home, what's the big deal?," Slott says. "But at tax time it's hard to say what's business and what's personal, and that's usually a business owner's downfall."