How Small Business Owners Can Deduct Their Home Office From Their Taxes

With a new year underway, entrepreneurs and small business owners should be armed with receipts and ready to tackle another tax-filing season. If you’re new to the world of owning a business, you’ll be relieved to know you can save on some of your business expenses. In fact, there’s a whole list of CRA-approved business expenses you can deduct from your taxes.

Since the pandemic started, there has been an increase in home-based-businesses. This article will cover the topic of home office-related tax deductions, discussing the terms and conditions and the allowable expenses that you can deduct.

Do I Qualify for a Tax Deduction on my Business Expenses?

According to the CRA, business owners can deduct several common business expenses from their taxes. An expense is tax-deductible if incurred to make and keep your business operational. Besides that, the expenses must be:

●?Recorded in accounting records (regardless of whether you’ve paid them or not),

●?Supported by original invoices/receipts,

●?The expenses must be reasonable, and

●?Claimed in the same year in which they were incurred (regardless of whether they’ve been paid).

Your home office expenses fall under the business use-of-home expenses in the CRA’s table of main operating tax-deductible business expenses.

Do I Qualify for a Home Office Expense Tax Deduction?

Canada Revenue Agency recognizes that many entrepreneurs and small business owners manage their business from home. If you’re one of them, CRA allows you to deduct home office expenses from your taxes as long as you meet at least one of the following conditions:

●?Your home is the main office where you conduct your business, or

●?You use your home exclusively to conduct business and hold all your business meetings there.

What Does a Home Office Tax Deduction in Canada Include?

If you meet the requirements, you can claim a deduction on your tax form for working from home (T2125) as a small business owner / sole proprietor.?Any expenses incurred in the normal course of business can be deductible for taxes, including expenses related to your home office / business use of your home:

●?Your total home office deduction?is calculated in one of two ways:

○?If you use a part of your home as an office and the other part as living space, you’ll need to calculate the percentage of the square footage of your home you use as an office. Only that percentage is eligible for a tax deduction, or

○?If you use the same rooms in your home as both office and living space, you’ll need to further prorate the business use by calculating the percentage over 24 hours that the room is used for business.?

●?Maintenance costs?— A portion of your maintenance costs is eligible for a tax deduction if you use your home as a business office. Maintenance costs include utility costs, general repairs and maintenance, home insurance, condo maintenance fees, and cleaning materials.

●?Property taxes?or Home Rental Fees—?You can write off a portion of your property taxes or your rent, if your home is a space where you both live and conduct business.

●?Mortgage Interest costs — Part of the interest on a mortgage is eligible for a tax deduction for the business use of home office.

Note: You shouldn’t deduct depreciation on your home as a home office tax deduction. Although CRA does allow this deduction, when you sell your home, you’ll be liable for the capital gains and recapture of depreciation taxes.

What’s the Amount Deductible from my Home Office Expenses?

The amount of your business-use-of-home expenses you can deduct depends on your net income. The home office tax deduction Canada will allow is the total of expenses calculated by using the lessor of:

●?Your business-use-of-home expenses from this year plus the unused amount carried forward from the previous year, or

●?Your net income before you deduct this year’s expenses. (Note if you have a net loss before using the Home Office Expenses, you cannot use this expense to increase your net loss.?The amount will be carried forward to be used in subsequent year(s).

If you’re having trouble calculating the amount your tax form for working from home as a small business should include, visit the CRA’s Form T2125?or the associated guide. The section Calculation of business-use-of-home expenses in this document can help you work out how much you can deduct.

Other Tax Deductions

Small business owners can deduct a few other expenses from their taxes, apart from those attached to their tax form for working from home. Take a look at the list of those deductions:

●?Business supplies,

●?Travel expenses,

●?Professional fees,

●?Advertising costs,

●?Business insurance,

●?Internet expenses,

●?Depreciation / Capital Cost Allowance (CCA),

●?Business use of your personal vehicle.

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This blog is not meant to provide specific advice or opinions regarding the topic(s) discussed above.?Should you have a question about your specific situation, please discuss it with your GBA tax advisor.

GBA LLP is a full-service accounting firm in the Greater Toronto Area, but we primarily service all of Ontario as well as the rest of Canada virtually, except Quebec. Our team of over 30, provides Audits and Reviews of financial statements, and Compilations of financial information, as well as corporate tax returns.?We also provide specialized corporate tax and succession planning for small and medium businesses, in addition to general advisory services.