Tax Deductions for your Home-Based Business
Friday, December 5, 2014
There are many positives to running a business from your home. You can be your own boss, set your own hours, and take time for yourself and your family when it’s needed.
Another big advantage to running a home-based business is the significant tax deductions that you can claim. Everything from your stapler to cleaning supplies can be considered a ‘business expense’.
Here’s what you need to know to get the most value from your tax return:
Deducting Your Transportation
If you use your personal vehicle for business, you can deduct a portion of the fuel and oil, licensing, insurance and maintenance and repairs on your car. You can also deduct interest on money you borrowed to buy your car, or the cost of leasing a vehicle that you use for your business.1
Since you can only deduct a portion of your vehicle expenses, the Canada Revenue Agency (CRA) recommends that you keep a paper trail record of the total kilometres you drive to earn income as proof for your claim.
Deducting Your Space
If you’re operating a business from home, you need to use a room or space from where you conduct business – even if it’s a kitchen table. Basically you can deduct expenses for business workspace in your home as long as:
- The workspace is your principal place of business; or
- 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
If you own your home, you can claim your house insurance, property taxes, and mortgage interest (but not the mortgage payments). Note that ‘house insurance’ is not the same as ‘home-based business insurance’, which is an important consideration for your business. See Insurance Tips for Small Businesses for more information.
If you are renting, you can claim your rent.
But - you can only deduct a portion of these expenses, depending on how much of your living space and time is actually devoted to business use.
To determine the cost of your workspace, the Canada Revenue Agency (CRA) says you must determine the percentage of the finished area of your home that is allocated for business, including all useable space like your front entrance and bathrooms. Take the square footage of your workspace and divide that amount by the total square footage of your home to get the percentage. For example, if your home has 2,000 total square feet of usable space and your home office takes up 200 of those square feet. The percentage of the home allocated for office space is 10 percent.
What if you’re using your workspace for both business and personal use? Then there is one more step you need to take: you need to figure out the business portion of use. Determine the number of hours per day you use that space for business and divide that by 24. Then you need to reduce your home office deduction by that percentage. So, if you use your space for 12 hours a day, divided by 24, your deduction is 50 percent. Based on the previous example, rather than claim a $2,000 deduction, you can claim half that amount - $1,000.
And there’s more. You can also deduct a portion of your expenses that directly relate to operating your business such as your utilities, telephone, Internet and even cleaning materials or a cleaning service.
The "portion" of expenses that you can claim is also determined by how much of your home you actually use for business.
Deducting Your Supplies
Even if your office is just your kitchen table, you will need supplies such as pens, stamps and paper clips. If you treat a client to coffee, keep your receipt and expense it. Any expense you pay out of your own pocket can be claimed. Though they might seem small – the little things add up over time.
Bigger supplies and equipment like computers and filing cabinets can also be deducted, but they fall under the category of Capital Cost Allowance, which means their cost is deducted over a period of time.
Like everything related to taxes, meticulous records are extremely important so keep all your receipts. The CRA states that "Purchases and business expenses must... be substantiated with a sales invoice, agreement of purchase and sale, a receipt, or some other voucher that supports the expenditure."
Whether you’re self-employed, an entrepreneur or a small, work-from-home business owner, no venture is too small to take advantage of business expense tax deductions. Don’t miss out on these opportunities to keep more of what you work so hard for.