This post by guest blogger Randall Orser appears in our series of tools for WAHMs and mompreneurs.
Randall’s advice here is geared to Canadian home-based businesses. Other guest bloggers offer an American perspective. Similar tax breaks apply in most jurisdictions, but be sure to check with a local expert to confirm. Contact us to find an expert near you, in the Wave Pro Network.
If you are running a business from home, it's important that you have a specific spot in your home to work. You can work in one corner in your kitchen or in a spare room. Why? Because you are likely entitled to tax deductions for your home office? Of course, you must satisfy certain requirements before you can claim these deductions.
Once you invest in the purchase of furniture and equipment, the expenses of a home office are by no means minimal. Fortunately, anything you buy for the home-office such as furniture, new floors, paint, and such is 100% tax deductible.
Canada Revenue Agency (CRA) Requirements
Although working at home and being a mompreneur is fast becoming a trend, not many mompreneurs qualify for tax deductions. The CRA has two specific requirements you must satisfy so you can be eligible to claim deductions for your home office:
1. It is your principal place of business; or 2. You use the space only to earn your business income, and you use it on a regular and ongoing basis to meet your clients, customers, or patients.
(American businesses, see U.S.-targeted advice.)
You will need to prove that you are conducting your business principally at your home office and not anywhere else.
This means your home office should be where you run your operation from sales to billings, where you keep your records and books of accounts, and where you perform administrative tasks like accounting, ordering of supplies, and setting of appointments with customers.
You should also use the home office to meet and transact business with your customers although you can always build a separate structure within your property where you can work and carry out your trade.
The Tax Benefits
If you are qualified to claim your home office, you can include a portion of your house expenses as part of your business expenses. This includes a pro-rated part of your:
- Heat (gas)
- Electricity (hydro)
- House insurance (don’t include the rider you have on the house insurance for your business)
- Repairs and Maintenance (other than strata or condo fees)
- Mortgage interest
- Property taxes
- Rent (if you don’t own your home)
- City utilities (water, garbage, etc.)
- Strata fees (Condo Fees)
- Telephone (if you share a home phone with the business)
- Internet (if the business does not have separate Internet)
How much you can deduct will depend on how much home space you use for your business.
For example, let's say you have a 2,500 square foot house and use 250 square feet exclusively for your home office. That's 10% business and 90% personal. (Don't guess with your measurements: CRA will take a tape measure and measure your home office, so be accurate.)
Now suppose you incur the following expenses:
|Other expenses (specify): Water, garbage, etc.||$750|
|Minus: Personal use part = 90%||$18,801|
CRA does allow you to write off the space even if it’s not used exclusively for business. To do that, you must determine how many hours a day you use the rooms for your business, divide that figure by 24 hours, then take your total home expenses times that percentage to figure out the total deduction. You must reduce your claim if you only use the space part of the week or year.
You use your dining room as an office during the day (7.25 hours). That works out like so: 7.25 hours ÷ 24 hours in a day = .302 or 30.2%. Since you use it 5 out of 7 days of the week, you need to multiply that by 5/7, giving you 21.6%. That's the percentage of the room's expenses that you can claim. If the dining room amounts to 10% of the house, that means you can claim 21.6% x 10% = 2.16% of the home expenses I mention above.
See additional post: Can I write off my mortgage payment?
How to Take Advantage of the Tax Benefits
Do remember that you will have to prove the legitimacy of your operations as a business before you can claim your home office as tax deductible.
In this regard, you should secure a city/municipal license for your home business, and register your business name (if you’re partnering with someone, even your spouse, the business must register as a partnership for the other person to claim a home office); you may want to register for GST/HST too as this makes you look more legitimate to CRA.
Your sales receipts, invoices, accounting records and other documents will also serve as proofs of your home business enterprise. A separate landline to be used solely for your business communication will not only help in your efficiency but will also support your claim to your business operation.
—Randal Orser was the first certified professional bookkeeper in Canada. In the late 1990s he started his own business, Cascade Business Services, which was renamed Number Crunchers® Financial Services in 2007. Also in 2007, along with Randall and Dianne Mueller, he started the Institute of Professional Bookkeepers of Canada in 2007.
Randall Orser CPB, SACC Number Crunchers® Financial Services Div. of Cascade Business Services Centre Inc.
LinkedIn: Randall Orser
Facebook: Number Crunchers
Tel 604-637-9608 Fax 604-638-6549
201 - 12877 - 76 Avenue, Surrey, BC V3W 1E6
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