Claiming home office deductions

A house with several words indicating the business deductions you can make with a home office.

For many Canadians, tax time is like a scary movie, with frightful consequences lurking behind every corner and line item. But what if we told you that there may be a way to claim more deductions and reduce your taxes, and that—also like a scary movie cliché—the answer might be coming from INSIDE YOUR OWN HOME!

That’s right, you can help shrink the tax monster down to size if you have a home office. But a lot of people are quite possibly missing out on reducing their taxes if they’re not claiming home office deductions. Don’t be one of those people.

Let’s look at what you should know if you’re self-employed and you plan to claim home office expenses on your tax return.

Eligibility

So, are you eligible to claim home office expenses (aka business use of your home)? Home office deductions can be claimed whether you’re a homeowner or a renter, and they apply to all types of homes. You just have to meet one of these requirements:

  1. Your home office is your principal place of business (i.e., more than half your working time is spent there); or
  2. You use your home workspace only to earn your business income, and you use it on a regular and continuing basis to meet your clients, customers, or patients. You can’t have a second office location and still claim home office expenses.

How to calculate the deductions

To calculate the portion of your expenses you can deduct, use a method that is reasonable for your circumstances. One common method is to calculate the area of the space devoted to your home office relative to the overall size of your home.

Using this approach, you would measure the approximate area of your home office (in square footage) and divide that by the total area of your home (not including common areas such as hallways, bathrooms, stairs, etc.). For example, if your home is 500 square feet (not counting common areas) and your designated home office (e.g., a spare room) takes up 100 square feet, you can deduct 20% (100 ÷ 500) of your expenses.

If the rooms in your home are roughly equal in size, you could also simply divide the room(s) you use for your business by the total number of rooms in your home.

You may also need to consider the amount of time you use the space if it does double-duty for personal use and business use. Calculate the proportion of time it’s used for business activity, and factor that into your claim accordingly.

The main thing is, use a method that is reasonable; that is, a calculation that you could defend to the CRA if you were to get audited. If you have doubts about whether your method would stand up to scrutiny, err on the side of caution.

For more information about calculating your home office expenses, see the CRA website.

Types of expenses you can deduct

You can deduct the full cost of expenses that apply directly and solely to your home office space or business activity (i.e., direct expenses). For other expenses that also apply to your overall home costs (i.e., indirect expenses), you’ll be able to deduct the percentage of the cost that applies to your home office, as calculated by the square-footage method above.

Let’s take a look at how these expenses break out:

Direct expenses

These are some of the expenses that can be deducted in full if they apply solely to the home office part of your home:

  • Cleaning your home office
  • Repairs and maintenance
  • Dedicated telephone line
  • Professional web page expenses, domain hosting fees, etc.
  • Advertising and business cards
  • Office supplies
  • Business equipment (capital cost allowance)

Although you can’t deduct the cost of the first telephone line in your home, you can deduct the cost of any long distance business calls made on that line. However, if you set up a separate, dedicated phone line or cell phone for your business, you can deduct its full cost.

Office supplies—pens, paper, staplers, printer cartridges, etc.—can be deducted. But for bigger equipment purchases, or “capital property”—things that will benefit your business for years, such as a computers, furniture, vehicles and other equipment—this is where the “capital cost allowance” (CCA) comes in.

For these kinds of items, you can’t claim the entire amount of their purchase in the tax year they were acquired. Instead, you’re allowed to claim a percentage of the cost each year over the anticipated life of the item. The CRA determines CCA classes and the annual depreciation amounts for each.

Indirect expenses

You can deduct a percentage of these expenses that apply to the up-keep and operation of your entire home, based on the percentage of your home and time devoted to your business:

  • Rent (if you rent your home/apartment)
  • Mortgage interest (not principal)
  • Property taxes
  • Homeowner or renter insurance
  • General repairs and maintenance (of course, you can’t also claim these as itemized expenses specific to your home office)
  • Utilities and services, including heat, electricity and internet

If you’re a homeowner, you can depreciate the part of your house dedicated to business. But most tax experts advise not to do this because claiming this deduction means that the business portion of your home will be taxable if you later sell your home at a profit.

If you’re registered for the GST/HST and you qualify to claim home office expenses, you can claim input tax credits (ITCs) for the portion of your home expenses that apply to your business. But ITCs can be claimed only for expenses that are subject to GST/HST (e.g., heat, hydro, etc.) Property taxes and mortgage interest are not subject to the tax.

Records you should have handy

Make sure you have records that provide the information you’ll need to calculate your deductions for the business use of your home. This may include receipts, cancelled cheques, bill payments for utilities, phone and internet, and any other proof of expenses you paid.

Your records must show the part of your home you use for business, and the expenses and depreciation that apply to the business part of your home.

If you’re claiming business use of your personal vehicle, keep a record of the total kilometres you drive and the kilometres you drive for business purposes. The CRA requires this. The vehicle expenses you can claim are prorated based on the business portion of the total kilometres you’ve driven in a tax year. So it’s a good idea to keep a mileage log.

Remember to hang on to your records for as long as tax law requires. The CRA recommends keeping them for at least six years.

A few things to remember

1) Don’t worry about being audited

Some people are wary of claiming home office expenses because they believe it’s more likely to trigger an audit. Perhaps there was a time when the CRA would look askance at claims of “home offices,” but with the self-employed economy as it is, those days are over.

2) Don’t be a loser

You can’t claim home business expenses that result in a loss. Home office expenses may help you reduce the amount of your taxable business income, but you can’t claim more than the amount of your home business income. However, you can carry any surplus home office expenses forward to use in the following year if they can’t be used in the current year.

3) Take a picture; it lasts longer

Pro tip: take a picture of your home office space for your records, just in case you do get audited later on and you’ve since moved or changed things around.

To get more information and details, be sure to check out what’s available at the CRA website.

For many Americans, tax time is like a scary movie, with frightful consequences lurking behind every corner and line item. But what if we told you that there may be a way to claim more deductions and reduce your taxes, and that—also like a scary movie cliché—the answer might be coming from INSIDE YOUR OWN HOME!That’s right, you can help shrink the tax monster down to size if you have a home office. But a lot of people are quite possibly missing out on reducing their taxes if they’re not claiming home office deductions. Don’t be one of those people.

Let’s look at what you should know if you’re self-employed and you plan to claim home office expenses on your tax return.

Eligibility

So, are you eligible to claim home office expenses (aka business use of your home)? Home office deductions can be claimed whether you’re a homeowner or a renter, and they apply to all types of homes. Essentially, there are two main requirements that need to be met:

  1. The part of your home you’re using as an office must be used regularly and exclusively for conducting your business.
  2. Your home office must be your principal place of business. You may still be able to claim home office deductions if you conduct some of your business away from your home, as long as you use your home office regularly and substantially for your business.

It doesn’t need to be a room, or even a space that’s marked off by any permanent partition. It just has to be a separately identifiable space that you use only for your business and not for personal purposes.

If your work involves a separate free-standing structure, such as a studio, garage, barn or greenhouse, you can claim expenses for that space—even if it isn’t your principal place of business—as long as you use it exclusively and regularly for your business.

There are a couple of notable exceptions to the exclusive use rule. One is if you use part of your home for business storage—for example, product samples or other business inventory, and the other is if you use part of your home as a daycare part of the time. You can find out more about these exceptions here.

How to calculate the deductions

There are two methods you can use to calculate your deductions: You can calculate the percentage of your actual home expenses that apply to your home office, or you can opt for a simplified method using a set rate.

In the percentage method, which had been required for tax years 2012 and prior, you need to determine all the actual expenses for your home business. Then you calculate the percentage of your home that is allocated to your home office, and apply that percentage to your eligible expenses.

To calculate the portion of your expenses you can deduct, any reasonable method is acceptable. One common method is to calculate the area of the space devoted to your home office relative to the overall size of your home.

The percentage is arrived at by measuring the approximate area of your home office space (in square footage) and dividing that by the total area of your home. For example, if your home is 500 square feet and your designated home office (e.g., a spare room) takes up 100 square feet, you can deduct 20% (100 ÷ 500) of your expenses.

If the rooms in your home are roughly equal in size, you could also simply divide the room(s) you use for your business by the total number of rooms in your home.

The other method is a simplified option that the IRS began offering with the 2013 tax returns. In this simpler method, you use a set rate multiplied by the square footage of your home office. For the 2017 tax year that rate is $5 per square foot, to a maximum of 300 square feet. So in the example above, if your home office is 100 square feet, your deduction is $500.

The bottom line is that the simplified method will be much easier to calculate, but you might not end up with the largest possible deduction, depending on your expenses. If you use the percentage method, you may end up with a larger deduction, but it will require more effort on your part to keep track of all your business-related expenses, and to do all the calculating.

For more information about calculating your home office expenses, see the IRS website.

Types of expenses you can deduct

If you use the percentage method, here are some of the kinds of expenses you can claim. This is not an exhaustive list, but it’ll give you the main kinds of expenses to consider.

You can deduct the full cost of expenses that apply directly and solely to your home office space or business activity (i.e., direct expenses). For other expenses that also apply to your overall home costs (i.e., indirect expenses), you’ll be able to deduct the percentage of the cost that applies to your home office, as calculated by the square-footage method above.

Let’s take a look at how these expenses break out:

Direct expenses

These are some of the expenses that can be deducted in full as they apply solely to the home office part of your home:

  • Cleaning your home office
  • Repairs and maintenance
  • Dedicated telephone line
  • Professional web page expenses, domain hosting fees, etc.
  • Advertising and business cards
  • Office supplies
  • Business equipment

Although you can’t deduct the cost of the first telephone line in your home, you can deduct the cost of any long distance business calls made on that line. However, if you set up a separate, dedicated phone line or cell phone for your business, you can deduct its full cost.

Office supplies—pens, paper, staplers, printer cartridges, etc.—can be deducted. Bigger pieces of equipment bought for your business, such as a computer, can also be deducted, but you can choose to spread the deduction over a number of years (i.e., depreciation) or you can claim the entire cost all at once.

Indirect expenses

You can deduct a percentage of these expenses that apply to the up-keep and operation of your entire home, based on the percentage of your home devoted to your business:

  • Rent (if you rent your home/apartment)
  • Mortgage interest
  • Property taxes
  • Homeowner or renter insurance
  • Homeowner association fees
  • General repairs and maintenance (of course, you can’t also claim these as itemized expenses specific to your home office)
  • Utilities and services, including heat, electricity and internet
  • Security system

If you’re a homeowner, you can depreciate the part of your house dedicated to business. It’s a little complicated, but after you do it once, you’ll enjoy the savings from then on.

Also note that there are some limitations on deductions for certain expenses. These limits kick in if the gross income from the business use of your home is less than your total business expenses. For more information about these deduction limits, see the IRS documentation here.

Unrelated expenses

You cannot deduct any home expenses that are not used for business activities, such as regular lawn care costs or expenses for painting a room that is not used for your business. (However, if the appearance of your home is important for the success of your business—say for meeting clients, patients or customers—you may be able to claim expenses for things like landscaping.)

Records you should have handy

Make sure you have records that provide the information you’ll need to calculate your deductions for the business use of your home. This may include receipts, canceled cheques, bill payments for utilities, phone and internet, and any other proof of expenses you paid.

Your records must show the part of your home you use for business, that you use that area exclusively and regularly for business, and the expenses and depreciation that apply to the business part of your home.

If you’re claiming business use of your personal vehicle, keep a record of the total miles you drive and the miles you drive for business purposes. The IRS requires this. The vehicle expenses you can claim are prorated based on the business portion of the total miles you’ve driven in a tax year. So it’s a good idea to keep a mileage log.

Remember to hang on to your records for as long as tax law requires. This is usually either three years from the return due date or the date you filed, or two years after the tax was paid, whichever is later.

A few things to remember

1) Don’t worry about being audited

Some people are wary of claiming home office expenses because they believe it’s more likely to trigger an audit. Perhaps there was a time when the IRS would look askance at claims of “home offices,” but with the self-employed economy as it is, those days are over.

2) Don’t be a loser

You can’t claim home business expenses that result in a loss. Home office expenses may help you reduce the amount of your taxable business income, but you can’t claim more than the amount of your home business income.

3) Take a picture; it lasts longer

Pro tip: take a picture of your home office space for your records, just in case you do get audited later on and you’ve since moved or changed things around.

To get more information and details, be sure to check out what’s available at the IRS website.

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Jim Kelly
By Jim Kelly
Disclaimer

The information and tips shared on this blog are meant to be used as learning and personal development tools as you launch, run and grow your business. While a good place to start, these articles should not take the place of personalized advice from professionals. As our lawyers would say: “All content on Wave’s blog is intended for informational purposes only. It should not be considered legal or financial advice.” Additionally, Wave is the legal copyright holder of all materials on the blog, and others cannot re-use or publish it without our written consent.