The home office deduction, if you qualify, can be used to reduce your net income after all deductible expenses to zero. This deduction can not be used to create a net loss.
The qualifications for a home office are found at http://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Home-Office-Deduction
"1. Regular and Exclusive Use.
You must regularly use part of your home exclusively for conducting business. For example, if you use an extra room to run your business, you can take a home office deduction for that extra room.
2. Principal Place of Your Business.
You must show that you use your home as 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."
From your description you will qualify for any part of the home you uuse regularly and exclusively. It need not be an entire room and can be part of room so long as that part is used exclusively.
The new optional deduction, capped at $1,500 per year is based on $5 a square foot for up to 300 square feet. You can deduct less than 300 square feet at $5 per square feet and still deduct mortgage interest and property tax on Schedule A if you itemize deductions.
In regard to expenses that can be deducted the main requirement is that the expense is ordinary and necessary. That means everything you spend to produce the income is allowed as deduction (but personal expenses are not allowed).
For much detail on many particular types of expenses see http://www.irs.gov/publications/p535/index.html
For deductions that have recordkeeping requirements see the chart Table 5-1. How To Prove Certain Business Expenses at http://www.irs.gov/publications/p463/ch05.html#en_US_2012_publink100034069
If the expenses from the 1099 (except for the home office) are more than the income as you start out, you will be able to use that net loss to reduce your income from other sources that are subject to income tax.
Please ask if you need more discussion or clarification.