Tax Tips for Small Business Owners Who Work From Home

by Craig Anthony

3 min read

If you work from home, the Canada Revenue Agency allows you to write off a number of home-related expenses as business expenses. Most home-based workers are aware of the business-use-of-home or home business tax deduction, but if you haven’t been self-employed for long, you may not realize how expansive this deduction is. To reduce your tax liability, it’s critical to understand the special tax rules for home-based workers.

Qualifying Home Office

To claim a deduction for a home office, you must meet one of two criteria:1. Your office must be the primary place you do business. If you are a freelancer who works exclusively from home, you meet this criteria. 2. If don’t use your home office exclusively for work, you must meet clients there on a regular basis. To explain, imagine you own a plumbing business. You spend most of your time working in clients’ homes, but you work in your home office two days a week. In this case, you can only claim this deduction if you meet clients in your office. To prove you use your office in this way, you may want to keep an appointment log in case of an audit.

Home Office Calculations by Area

The Canadian home business tax deduction is not a set amount based on having a home office. Instead, you can deduct a portion of your home expenses based on the size of your office relative to your home. For example, if your home office takes up 10% of your home, you can write off 10% of eligible home expenses as business expenses.

Personal Use

If you use your home office for personal use, you have to lower the percentage you apply to expenses accordingly. For instance, if you use your office for business 40 hours per week and for personal use the rest of the time, you divide 40 by 168 (the number of hours in a week) to get 23%. Then, you must multiply this percentage by the home office percentage calculated based on area. To illustrate, if your home office is 10% of your home and you use the office 23% of the time as a work space, you can write off 2.3% of eligible expenses.

Eligible Expenses

When calculating your home office expenses, you should take into account your utility bills, home insurance, property taxes, and mortgage interest. However, you can also count things such as garbage pickup and even cleaning supplies. To explain, imagine your home office takes up 10% of your home and you use the office 50% of the time for personal use. You spend $500 per year on cleaning supplies for your entire home including your office. After multiplying $500 by 10% and 50%, you get $25. You can claim this amount as a business expense.

Phones

If you have a home phone that you use for both personal and business use, you can calculate your deduction as explained above. If you have a separate phone just for your business, you can write off the entire cost as a business expense. For instance, if your mobile phone is exclusively for business and the annual cost is $2,400, that entire amount is a business expense.

Rent Versus Mortgage

Renters may include their rent when calculating their home business deduction. For example, imagine your rent is $1,800, your office is 15% of your home, and you use the space exclusively for work. In this case, you can claim $1,800 multiplied by 0.15, or $270, as a business expense. If you are making mortgage payments, you shouldn’t calculate your deduction in the same way. Instead, you need to use the price of your home and its current fair market value to calculate your capital cost allowance. You should also claim other significant business expenses such as computers or motor vehicles as part of your capital cost allowance.

Office Supplies

Small supplies that you use in your home office are also deductible. This includes pens, paper, or any other routine business supplies. The supplies simply have to be for work and not for personal use.

Losses

Your home office expenses cannot create a loss for the year. If your expenses exceed your income, you cannot claim them, but you can roll them into a future year and claim them against business expenses in that year. For example, if you earn $6,000 and your home office expenses are $10,000, you can roll $4,000 to a future year. Working from home has huge advantages and a few disadvantages, but generous tax deductions are one of the biggest advantages. To claim your deduction, be aware of the rules so you can avoid an audit, and make sure to track all of your expenses. Records and receipts can be critical when claiming this deduction.

References & Resources

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