You started a business last year and you are facing a major milestone: Filing taxes for the first time as an entrepreneur. In an effort to replicate the successful entrepreneurs of the past, you have turned your garage into a workspace. Surely you can deduct those expenses on your tax return, right? And why just the garage? You eat, sleep, and breathe your new venture 24/7. Why not deduct the whole cost of the house?

Fast forward to three years from today. You are sitting in front of an Internal Revenue Service agent, who is auditing your 2013 tax return. You keep repeating the line from the classic Godfather movie: "It's not personal, it's business!" But she isn't buying it. Here's how to make sure you properly separate your personal and business expenses and avoid a visit from the auditor.

Make sure home is where your business is.

In order to deduce home or garage expenses on your tax return, you must regularly use part of your home exclusively for conducting business and demonstrate that it is your principal place of business. If you conduct business at a location outside of your home, but also use your home substantially and regularly to conduct business, you may qualify for a home office deduction. For example, if you have in-person meetings with clients or customers in your home in the normal course of your business, even though you also carry on business at another location, you can deduct your expenses for that part of your home.

You can also deduct expenses for a separate free-standing structure, such as a studio or garage, if you use it exclusively and regularly for your business. The structure does not have to be your principal place of business or the only place where you meet clients.

Here are two ways to calculate your deductions.

If you know your expenses, use the regular method.

Taxpayers using the regular method must determine the actual expenses of their home office. These expenses may include mortgage interest, insurance, utilities, repairs, and depreciation. Generally, when using the regular method, deductions for a home office are based on the percentage of your home devoted to business use. So, if you use a whole room or part of a room for conducting your business, you need to figure out the percentage of your home devoted to your business activities.

If you don't, use the new simplified method.

For taxable years starting on, or after, January 1, 2013, you now have a simpler option for computing the business use of your home. The unwieldy IRS Revenue Procedure 2013-13, January 15, 2013 actually significantly reduces the recordkeeping burden. A qualified taxpayer can multiply the square footage of her home office by a prescribed rate to calculate the deduction, in lieu of determining individual expenses.

Either way, document everything.

No matter the method of handling deductions, the best defense in an IRS audit is to have detailed contemporaneous records. You want to be able to hand a future auditor a binder with complete and detailed blueprints on areas used, photographs, detailed logs of client meetings and any receipts. A best practice for receipt accumulation is to have a "business only" credit card that is devoid of personal expenses or purchases. Make your future as an entrepreneur less stressful by acting today, and you'll always know what's personal, and what's business.