Note: This information differs slightly for employees who are required/allowed to work from home.
Many entrepreneurs love the idea of starting a business from home because now they get to claim the home expenses – or rather a portion of them – as a business expense! BUT entrepreneurs beware there are conditions to be met!
You need to meet ONE of the following conditions:
- It needs to be you principal place of business OR
- You use the space only to earn business income AND you use it regularly and on an ongoing basis to meet your customers, clients or patients.
So what does that mean?
If you always meet clients at a coffee shop, restaurants or their place of business, and never in your home, it can be a challenge to justify why you need to claim a home office. Furthermore, if you are also expensing a secondary office space (meeting rooms, rented office spaces) justifying the need for a home office becomes even harder. Needing a place to keep your computer and files often is not strong enough. However taking calls, doing client work, and using that room for other functions relating to contracting business can be a better justification. Note there is also an implied expectation of a separate room or dedicated work area; using the kitchen table does not cut it.
Once you have determined that your home office you can claim a percent of the following expenses:
- Mortgage INTEREST
- Property taxes
- Other expenses (such as water)
It is important to also mention that the amount you deduct cannot be more than your net income; so the expenses relating to the home office cannot create a business loss. So we recommend calculating your net income (Revenue less expenses) for everything else first, then seeing if home expenses make the cut. These expenses can be carried forward with certain conditions.
When you sell your house, there will be what’s called a recapture if you have deducted depreciation on the value of the house so our recommendations is not to do any depreciation relating to your house!
“Behind Every Great Business is a Great Accountant”
For more information on how to keep your business tax efficient, or to get a consultation on whether you are making all the right tax choices for your business, contact Dharna CPA. www.dharnacpa.ca. Info@dharnacpa.ca