Working from home is becoming more and more popular, and it’s been reported that by the year 2020, upwards of 50% of Canadians could be working from home. With over 36 million Canadians living in this beautiful country, you can only imagine the number of Canadians who can, and will work from home regardless of their age, and ability to travel for work.
Along with the convenience of using your own bathroom and knowing your lunch won’t go missing, running your own business from home has a number of rewards, but it also has a bunch of negative drawbacks.
Here are just some of the advantages and disadvantages of running a small business from your home:
- No need to take a day off if your child has a stomach bug – that is of course provided that you have the ability to move an appointment if required.
- Household tasks like folding laundry or filling the dishwasher can be done in between appointments if you have some downtime.
- Just being in your own home. The freedom to work in your PJs or turn up the tunes when you need a break, just might be priceless.
- No commute means you’re always available. If a client needs a rush on that paperwork, no need to drive to the office.
- No need to fuel up, or plug in, the car or pay for public transit twice per day.
- A part of your household expenses may be tax-deductible.
- The sounds that come out of a sick child who stayed at kid may not be what your client expected.
- You never really have a break. If you’re vacuuming the stairs or walking the dog on your lunch break, is it really a break?
- Household distractions can affect your productivity. It’s easy to lose minutes (or hours) of work time playing with your pets, chatting with a neighbour, or watching TV.
- Family and friends may assume that if your car is in the driveway, you’re available – The concept that “working from home is still working” is sometimes hard for others to grasp.
- A bit of extra paperwork at tax time to claim your home office expenses as self-employed.
Do I Have a Tax-Deductible Home Office?
Not all home offices are a tax write-off.
To claim home office expenses (called business-use-of-home expenses by the Canada Revenue Agency), your home office must be either:
- Your primary place of work, or
- Used exclusively for work and meet clients, customers or patients in the space on a regular basis
For example, if your home office doubles as the kids’ playroom, it must be your primary place of work to qualify as a tax-deductible home office. If you only use that double-duty room on Wednesdays to meet clients, your home office expenses can’t be claimed. If you have a dedicated home office and meet clients one day a week, you meet that second condition so your expenses are tax-deductible.
Deducting Business-Use-of-Home Expenses
If your office qualifies as a tax-deductible space, you can write off costs associated with your home office including:
- Rent or mortgage interest & property tax,
- Utilities like electricity, heat, and internet,
- Insurance (homeowners’ or rental),
Because only a portion of your home is being used for business, only a portion of these expenses is claimed at tax time. To figure out the proper portion you can use one of two formulas:
- Number of rooms – If your home has a total of 8 rooms and one is your home office, claim one 1/8 of the expenses, or
- Square footage – If your home is 1600 square ft. and your office is 200 square ft., claim 1/8 of the expenses.
You can choose which of the two calculations you use. It may be worth your while to try both to see which one gives the higher percentage.
One 1/8 of your annual electricity expense may not seem like much of a deduction but remember that every dollar counts at tax time. Your expenses lower your business income, which equals less tax due.
Personal and Business Use Spaces
If your home office pulls double-duty, the percentage of deductible expenses you can claim decreases even further. If you use your home office for six hours a day but the space converts to a playroom when the kids get home from school, you’re technically only using the space 25% of the day. This means that when you’re figuring out your home office expenses, you’ll multiply each expense by .25 (over and above the number of rooms/square footage calculation)
For example, if your home office fills 10% of your home’s space and you use it 25% of the time as an office, you’ll end up writing off 2.5% of your home’s qualifying bills as business expenses.
Tax Tips for Home Office Expenses
- The amount of business-use-of-home expenses you’re allowed to claim is limited to your business’s income after other expenses. In other words, you can’t use home office expenses to create a loss. Don’t worry – the expenses won’t be lost. You’ll just carry them forward until you can claim them.
- Office supplies such as paper, stamps, and other stationery supplies aren’t subject to a “percentage” calculation like other home office expenses. If you bought $200 worth of printer paper for your business, the entire amount is a deduction.
- Sign up for online billing for utilities. Adding up your total yearly electricity cost is much easier if the numbers are accessible online rather than going through a stack of bills.
Use TurboTax Self-Employed
If you’ve gone this far to ensure that you are following all of the rules, and claiming all of the tax deductions and credits that are available, then you have to use one of the TurboTax Self-Employed products made by Canada’s most popular tax preparation firm, specifically for self-employed Canadians like you.
For more information, visit Turbotax.ca