I should just combine the two homes (square footage-wise for tax purposes) for a total of 1400 sq ft. and just deduct the back house at 400 sq ft. , which is about 28.5% of the total square footage. So do I use that 28.5% for all my usual deductions?
I would use the percentage of the total square footage only for figuring percentage of property taxes, mortgage interest and property insurance you can deduct, since those items are not billed separately.
Since the utilities are metered separately, assuming you receive two physically separate bills for each structure, then I'd claim actual utility expenses on the business use structure. If possible, I'd changing the billing name for the utilities on the business use structure, to the business name. Helps substantiate things "in writing" a bit better, in case you're ever questioned. But I really don't see you ever being questioned on it, unless you happened to be one of rare (and I mean extremely rare) "random draws" for an audit.
A heads up here, to check your property insurance policy. Typically a homeowner's policy insures the structure for "ordinary family/living use", and not for business use. So you may need to purchase a separate business insurance policy for the business use structure. Check your policy and check with your agent to "CONFIRM IN WRITING" that you are covered should anything happen in the business use property.
