Business Income, Expenses, Self-Employed, Tax Basics, Tips & Advice

Your Small Business & Business-Use-Of-Home Expenses

Are you running a business out of your home?

Are you fully or partially employed and running a side business and use your home as the location for meeting people, or for holding inventory?

If so, 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 Home Office deductions and how to calculate the amount(s) that can be claimed.

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 eight rooms in your home for business purposes, you can claim 1/8 (or 0.125 or 12.5%) of the annual expenses. That’s 1/8th 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 the 4 hours a day the room is used for business by 24 hours in a day, which is 0.1667 or 16.67% of the time that the room is used for business purposes.

Using this example, if your annual electricity bill is $1,000 for your 8-room home, you would divide the amount of the bill by the number of rooms, or $1000/8 = $125, and then further reduce that amount that can be claimed by the amount of time that the room is used for business (4/24hrs = 0.1667).  This is done by multiplying $125 x 0.1667, which is $20.83.

That is the amount of business-use-of-home deduction which can be claimed.

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.

The good news is TurboTax takes care of all of these calculations for you if you use the software, and if you choose to have your taxes prepared by a TurboTax expert then all you need is the supporting documentation and the information related to your home office workspace.

For more information, visit www.turbotax.ca and view the suite of products available for Self-Employed Canadians.