We're right in the middle of tax season and what better time to talk about how to reduce your tax burden by operating a business out of your home? By using a portion of your home to run your business, you can start claiming a portion of your household expenses as business expenses. There are a few things you need to be aware of but in general it isn't that difficult to save a decent chunk at tax time.
Before we go any further, we should take a quick look at what constitutes a home office. The Canada Revenue Agency has some strict rules on this subject so it is worthwhile understanding the requirements.
In order for your home office to qualify, at least one of the following must be true:
So if you only use your office for doing some paperwork once a week but you spend the rest of the week in an office downtown, then your home office would not qualify.
The Canada Revenue Agency divides home based workers into three different groups:
Depending on which classification you fit into, there are different deductions permitted. Here is a table showing a rough breakdown:
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In the table above, an "o" indicates that the expense can be deducted and an "x" indicates that it cannot be deducted.
Of course, you can't deduct your entire electricity bill. In fact, you can't deduct all of any of these expenses. This is because part of these expenses are personal and the personal part is not deductible.
The most straightforward method for determining what percentage of these expenses is business related is to calculate what percentage of your home's floor space is taken up by your home office. Measure the floor area of your office and divide that number by the total area of your house. In general, you can exclude common areas such as hallways and bathrooms from this calculation.
Once you've figured out the percentage of your home that is used for your business, you can multiply all applicable household expenses by this number. So, if you've calculated that your office occupies 8% of your home, then you can claim 8% of your gas bill, electricity bill, rent, etc. as business expenses.
One thing to note is that you can only claim these business-use-of-home expenses against business income. So, if you've got $1000 worth of business related home expenses, but your business only earned $500 for the year, then you can only claim up to $500 on your taxes. However, the remaining $500 not claimed can be carried forward to future years to reduce your taxable income down the road.
As with any financial activities, it is a good idea to keep detailed records justifying these types of tax claims. Here are a few tips:
At the end of the day, you need to be able to show an auditor exactly what you've done and it needs to be clear.
You can realize some significant savings on your tax bill if you track everything properly, so it is worth your while to take the time to do things the right way.