More and more businesses are choosing to operate out of personal residences rather than pay for corporate spaces. If you are a business owner, this means that you can deduct a percentage of your home expenses that are used for business purposes. How to calculate business use of home expenses is actually simpler than it sounds, so read on to learn how to get the most out of your tax deductions!
When Can You Deduct Home Expenses for Business?
If you are thinking about using home expenses as a business deduction, you will have to meet one of the two conditions.
- Your home is your principal place of business
- The space in your home is used only to earn your business income, and you use that space regularly and continuously to meet with clients, customers, or patients.
As an example, if you have an office space that you only use for business and you conduct business there regularly or it’s your primary business workspace, then you could deduct a percentage (the office relative to your entire home) of your mortgage and utilities as a business expense.
However, if your office is used only sometimes for business purposes, but you also have a primary business location, and/or your office is also a game room and used by other members of your household, you would not be able to deduct a percentage of your mortgage and utilities. No matter what kind of business you have – in any industry – if your home is a primary place of business, you can deduct household expenses as a business expense.
Who Can Claim Home-Based Business Tax Deductions?
Not everyone can deduct business expenses from their taxes. Only business owners – both sole proprietors and shareholders of Corporations – can deduct home expenses from their taxes as a business expense. If you’re an employee who works from home, there are different kinds of deductions available. You can learn more about employee deductions on the Canada Revenue Agency website.
What Kind of Expenses Can Be Claimed for a Home-Based Business?
If you are a business owner who conducts business at home, there are several expenses to keep track of. All your home expenses that can be deducted for business are based on the percentage of your home that is being used for business. As an example, if your home office and work spaces are 17% of your home, then you can deduct 17% of your home expenses. If you use part of your home for both your business and personal living, calculate how many hours in the day you use the rooms for your business, and then divide that amount by 24 hours. Multiply the result by the business part of your total home expenses. This will give you the household cost you can deduct. If you run the business for only part of the week or year, reduce your claim accordingly.
First, ensure you keep track of any maintenance costs for your home. A percentage of the following maintenance and utility costs can be deducted from your taxes.
- Cleaning materials
- Phone bill
Another aspect of your home expenses that can be deducted for business purposes are the recurring fees necessary for your home.
- Part of your property taxes
- Capital cost allowance
- Home insurance
Ensure that everything you use for business is tracked so you can deduct as much as possible as a home business expense.
How Much Can Businesses Claim?
If you’re a business owner who works out of your home, the only limit to how much you can claim and deduct from your taxes is based on the percentage of space and time spent using the home as a business.
Can You Claim Previous Year’s Expenses?
Sole proprietors of businesses are able to carry forward their business use of home expenses that were incurred but not deducted from the previous year’s taxes, according to the Income Tax Act. However, it is always simpler to deduct expenses incurred from the current taxed year, so do your best to stay organized and deduct what you can each year.
How Can Gallo LLP Help?
Gallo LLP can help you calculate your business’ use of home expenses and ensure your tax deductions are compliant with the CRA’s requirements. We also have a fantastic resource to help you calculate the use of home for business yourself. As Chartered Professional Accountants, our team is well versed in the rules and regulations put forth by the CRA, and as such we can assist in helping you deduct the most possible from your home expenses that were used for business purposes. If you need assistance with your business’ taxes, please contact us!