If you are running a home-based business, are you aware of all the deductions to which you are entitled?
The CRA has specific guidelines regarding whether or not a home-based business owner can claim specific business-use-of-home expenses. Although there are deductions that are specific to home-based businesses, not all home-based businesses are eligible for them.
WHO CAN CLAIM A HOME-BASED BUSINESS TAX DEDUCTION?
For you to be able to claim business-use-of-home expenses, your principal place of business must be your home, or you must be using your work space at home exclusively for earning business income and using it on a regular basis to meet customers or clients.
You will not be able to claim business-use-of-home expenses if you are only conducting a portion of your business at home while conducting other parts of your business elsewhere, or if you are merely conducting business at home on occasion.
HOW TO CLAIM THE HOME-BASED BUSINESS TAX DEDUCTION
If you meet the CRA requirements, you are ready to calculate your business-use-of-home expenses. These expenses will be a portion of your home expenses, given that this is where your business is taking place.
The easiest way to do this is to have a single room, or specific area designated as a home office or work area. In this case, you can divide your work space by the total of your home.
As an example, if you happen to have a home office that measures 10 x 10 feet (100 square feet) and a home that measures 1,800 square feet, you would deduct 5% of your home expenses as business-use-of-home expenses. The other 95% of your home would be considered to be for purely personal use. Now, having calculated the percentage that you can claim, you can look at your total household expenses.
You are able to include expenses that relate directly to your business, such as your telephone (not your home phone) and internet. As a homeowner, you may claim a portion of your house insurance, mortgage interest (but not the actual mortgage payments), property taxes, water & sewer, hydro, gas, alarm system, strata payments and general repairs. If you are renting, you can claim a portion of your rent.
If, for example, your total expenses for the fiscal year are $22,000, then the 5% (as calculated above) would be equal to $1,100. This would be the total business-use-of-home deduction. Whether you are using a Chartered Professional Accountant or a tax software to prepare your taxes, you will always provide and/or enter the full amounts as the software programs will perform the actual calculation.
CALCULATION OF MIXED USE SPACE
If you are operating your home-based business part-time, or if the space used for business activities also sees personal use, you need to adjust your expenses to reflect this.
Imagine that you run your business 5 days a week, with your home office being used for personal activities the rest of the time. You would need to calculate the number of hours that the space is used for business each day, divided by 24 hours, then multiplied by the business portion of your home expenses.
To continue with the example started above, if you use your home office for work purposes a total of 7 hours each day, five days a week, that would be 35 hours each week, out of a possible total of 168 hours. Your calculations would be as follows: 35 working hours divided by 168 hours in a week, times $1,100 (the business portion of your expenses as calculated above). You would have a total of $229.17 to deduct.
Furthermore, in order to claim a deduction, you must actually be making income. You cannot claim a deduction form non-existent income. In other words, you are not able to use the home office deduction to create a business loss. If your deduction is greater than your income, you may carry it forward to the next year.
In running your home-based business, you will want to be aware of any deductions to which you are entitled. In some cases, these deductions may not be very large, but every bit counts.
***This blog is for information only and not to be used as tax advice or planning without first seeking professional advice. Information is also subject to change without notice.