As a Sole Proprietor, are you eligible to claim home office expenses? There is a good chance the answer is a big fat Yes! Home office deductions are a nice little thing to claim if you happen to have had a fairly successful year. You are reducing your profit and therefore paying less tax. Now then, before you start celebrating there are a few rules that you need to be aware of (we are talking about the Canada Revenue Agency after all).
Do you meet one of the following two conditions?:
- Your home office is your principle place of business
- You use the space only to earn business income and you use it on a regular and ongoing basis.
If you are a home based business and your home office is your only office, go ahead and celebrate! You get to make that claim.
If you do have an “official” office somewhere (you know, like the big executive types do in their flashy corporate building) all is not necessarily lost. You can still claim a home office expense provided you use it often enough. Think along the lines of “I work at the office 4 days a week and 1 day at home” …. or more likely “at the office 6 days per week and 1 at home!” There is a kicker though. The space you use as a home office must not used for any other situation. If you have a small desk in the corner of the kitchen or living room you can not claim the entire kitchen as your home office. And if you plop your laptop on the dinner table once per month to do your bookkeeping (first – yay for doing your bookkeeping each month but second…. ) you can not claim at all because your dinner table is exactly that. A dinner table and not an office!
So once you have established that you are able to make a home office deduction how do you calculate it? Again you have 2 options:
- Take the number of rooms that you use for your home office (like you use more than one??) and divide that by the total number of rooms in your home to calculate the percentage of expenses that you can claim. Confused? Here is an example: 1 room used for office / 8 rooms in the home OR 1/8 = 0.125 or 12.5%
- Take the square footage of space that is used for your home office / total square footage of your home. Example 180 sq ft for office / 2000 sq ft of the home OR 180/2000 = 0.09 which is 9%
Now that we have cleared that up, lets take a look at the expenses themselves. The one mistake that I’ve seen over and over again is business owners claiming for their entire mortgage payment. You can only claim for the interest portion of your mortgage and not the whole thing. When you receive your final mortgage statement for the year, it should list your total payments for the year and break out how much of those payments were principle and how much was allocated to interest. When you see the interest portion, you can claim your percentage of that amount. Would you like another example? Well okay then!
Let us look at Sally. Sally pays $2,500 to her mortgage each month. By the end of the year Sally has paid a total of $30,000. However that gets broken out to principle repayments and interest payments. Sally’s statement shows she paid $20,000 to principle and $10,000 in interest. Seeing as she has calculated a home office deduction of 12.5% she can claim 12.5% of $10,000 and not 12.5% of $30,000. So she gets to deduct $1,250 for the year towards her home office expenses. Make sense?
Now that we have the mortgage out of the way everything else is fairly easy. You simply take your home bills and calculate using the percentage you established earlier. “What else can I claim?” I hear you cry.
Home or renters insurance (no mortgage? You can claim your rent.)
Home phone and internet charges
If you have a cleaner that also cleans the space you use as an office you can even claim that.
You can NOT claim for things like:
Netflix – sorry
The person you pay to clean up after the dog – not work related I’m afraid (unless clean up is happening in your office in which case you have bigger problems than your tax filing).
Also …. another little technicality…. you can not use home office deductions to generate a loss in your business. So if you made $30,000 in the year and have $5,000 in home office expenses you’ve reduced your profit to $25,000 and therefore have saved yourself a little bit of tax. However, if you’ve only been in business for a few years (or had a particularly tough year) and only made $4,000 you can reduce your profit to $0 but you can’t claim a loss of $1,000.
For more information (or if you just don’t believe me) you can get all the technical and wordy information at the CRA website right here.
Do you use your personal vehicle for work purposes? Then sign up and you’ll find out all about those deductions in my next blog.