Magento – How to modify “shop by” to display category

Create a category attribute. That's beyond the scope of this answer - here are some links to help you create one in an upgrade script:

• http://inchoo.net/ecommerce/magento/how-to-add-new-custom-category-attribute-in-magento/
• http://www.atwix.com/magento/add-category-attribute/
• http://www.meteorify.com/2013/03/quick-tip-adding-custom-category-attributes-to-magento/

Let's call your new attribute displaySubcategory... You'll want to make sure that your newly created attribute is of type boolean and defaults to true.

You can now edit whether your categories display or not from within the Admin > Catalog > Manage Categories. Each category should have a dropdown now that allows you to show or hide it.

Showing/hiding in layered nav:

From within /app/design/frontend/[yourpackage]/[yourtheme]/template/catalog/navigation/left.phtml you can add the new displaySubcategory alongside the isActive display condition:

<dl id="narrow-by-list2">
    <dt><?php echo $this->__('Category') ?></dt>
    <dd>
        <ol>
        <?php foreach ($_categories as $_category): ?>

            <?php if($_category->getDisplaySubcategory() && $_category->getIsActive()): ?>
            <li>
                <a href="<?php echo $this->getCategoryUrl($_category) ?>"<?php if ($this->isCategoryActive($_category)): ?> class="current"<?php endif; ?>><?php echo $this->htmlEscape($_category->getName()) ?></a> (<?php echo $_category->getProductCount() ?>)
            </li>
           <?php endif; ?> 

        <?php endforeach ?>
        </ol>
    </dd>
</dl>

I am not sure how your homepage is configured, but by default you can't make it happen.

Try adding a Category block on your homepage, by adding

{{block type="catalog/product_list" category_id="8" template="catalog/product/list.phtml"}}

on you Homepage CMS's page content. Replace category_id with your category's id.

Cheers.