Are you running your business from home? A home office can be a convenient and cost-effective alternative to a traditional office setting. Avoiding a daily commute is a huge perk and so are the tax savings you could be eligible for. Here’s what you need to know about your small business and claiming business-use-of-home expenses.
Who Can Claim Business-Use-Of-Home Expenses?
Many small business owners have home offices, but having a home office isn’t enough to be able to deduct business-use-of-home expenses from their income tax. To deduct business-use-of-home expenses, you have to either be:
- Using your home as your principal place of business; or
- Using the space only to earn business income and using it on a regular and ongoing basis to meet your clients, customers or patients.
What Expenses Can You Deduct?
Common business-use-of-home expenses include a portion of:
- Your rent or property taxes
- Your home insurance
- Utilities such as heat and electricity
- Mortgage interest
How Much Can I Claim?
The size of your deduction depends on a couple of factors. The first factor is the size of the workspace in relation to the home itself. This calculation can be done using either the number of rooms you use for business versus the number of rooms in the home, or the square footage of your workspace versus the total square footage of the home. For example, if you use one of the nine rooms in your home for business purposes, you can claim 1/9 of the annual expenses. That’s 1/9 of the heat, hydro, property taxes, etc.
The second factor in the workspace calculation is the daily use of the space. For example, if your home office doubles as the kids’ playroom, an extra bit of math is required. You’ll need to determine the percentage of time you use the room for business. If the kids rule the room until bedtime, you may use the room for only 4 hours a day for business. If this is the case, you’ll divide 4 by 24 (hours in a day) to determine the percentage you actually use the room for business purposes.
Using this example, if your annual electricity bill is $1,000 for your 8-room home, $20.83 winds up as a business-use-of-home deduction:
($1,000/8) X (4/24) = $20.83
Losses and Carry Forwards
If your business has had a rough year or you’re just starting out, it’s important to note that business-use-of-home expenses cannot be used to create a business loss. In other words, your business-use-of-home expenses can’t be more than your business income. But, the good news is that the expenses aren’t wasted. You can carry forward any expense you weren’t able to deduct in the current tax year to the next tax year, as long as you still meet the business-use-of-home expenses conditions.