Calculating the Home-Based Business Tax DeductionBrian Jang ON November 23, 2018
The rise of the internet has seen a growing number of people begin to work from home, and if you are one of them, then you are surely going to want to deduct all the home business expenses that you possibly can on your income tax.
While there are a number of home business-specific income tax deductions, not every home business will qualify for them. Looking at line 9945 of the T1 tax form, you’ll find that the Canada Revenue Agency (CRA) has very particular guidelines to determine precisely whom is eligible for business-use-of-home expenses.
Home Based Business Tax Deduction: Can You Claim It?
Determining this is actually easier than you might think, as it involves answering one simple question: is your home your principal place of business?
You cannot claim business-use-of-home expenses if your home is not your primary place of business. Your home must be the place where you conduct your business. Your work space at home must be used only to earn income, or be the place where you meet clients, customers, or patients.
How Do You Claim the Home-Based Business Tax Reduction?
Provided you meet the requirements as put forth by the CRA, you can start calculating your business-use-of-home expenses. With your home being your place of business, this means your business expenses will be a portion of your home expenses.
In most cases, those who work at home will have an area designated as their work space It may be a specific room that you use as a home office, and this makes calculations easy. All you need to do is determine the area of your work space (say, a 10 X 10 room) and divide it by the total are of your house. So, if your home is 1,800 square feet, the above room would represent 5% of the house as the allowable portion for business-use-of-home expenses. That means you can apply this percentage to the allowable household expenses.
“Allowable household expenses” are those that relate directly to the operation of your business, including such things as utilities and cleaning materials. As a home owner, you could also claim a portion of your mortgage interest (and only the interest), home insurance, and property taxes. If you do not own your home, you can claim a portion of the rent.
Continuing with the example from above, if your expenses for the year total $22,000, then you would be able to claim $1,100 (5% of $22,000) as the total business-use-of-home expense. You would enter this on line 9945 of your T1 tax form. This will be automatically entered by Canadian tax software programs, which will calculate your expenses based on your personal/ business space ratio.
How Do You Calculate for Mixed-Use Workspaces?
If your home-based business is part-time and your work space is also used for personal activities, you will be required to adjust your expenses accordingly. Fortunately, this is easy enough to calculate.
If, for example, you are using your work space for work-related activities 5 days a week, you would find the number of hours worked in a day and divide it by 24. Multiply the result by the business portion of your total home expenses.
To again continue with the example started above, if you work 7 hours per day, five days a week, then you are using your work space for work-related activities a total of 35 hours. A week consists of 168 hours, so your deductible business use claim would be: 35 divided by 168 hours, multiplied by $1,100, giving a total of $229.17 as your total home-based business tax deduction.
Of course, the other thing to be aware of is that you cannot create a business loss. This means that your deductions cannot be more than your net income. If it is, you may carry the amount of expenses forward to the next year.
Although it may not seem like a very large deduction, all the small amounts do add up, and you will find it well worth your while to claim everything you possibly can.
Need help calculating your home-based business tax deduction? Contact BCJ Group today.