A common question that arises from clients is: How can the office space in my home qualify for a tax deduction and specifically, what expenses are deductible and how much can be claimed? In this article, we will discuss the conditions necessary to claim business-use-at-home expenses and the way that amount is calculated. If you are currently running a business out of your home or are hired externally and work primarily from your home, you are eligible to claim business-use-of-home expenses.
Who can claim business-use-of-home expenses?
Many small to medium business owners have home offices, but having a home office is not sufficient to claim these expenses on your income tax return. You are able to deduct expenses for a home workspace if one of the following conditions below is met:
- Your home is your principal place of business
- The workspace is only used for earning business income; clients, customers or patients meet with you on a regular basis in the space
If you meet one of the above conditions, you will be able to deduct a variety of expenses on a prorated basis. Interestingly, you do not have to be a business owner to deduct home office expenses. Employed individuals also qualify for home office write-offs if their employer signs the T2200 form indicating that they require the employee to have a home office. These expenses are deducted on the employees’ personal tax return on form T777 Statement of Employment Expenses.
What expenses are deductible?
Household expenses that can be claimed as your business-use-of-home expenses include:
- Mortgage interest
- Home insurance
- Utilities (such as heat, electricity, etc)
- Office expenses (such as cleaning supplies, pens, paper, etc)
- Property taxes
Calculation of amount to be claimed
The business-use-of-home expense can be calculated in different ways. The business-use-of-home expense calculation takes into account space in a home used for business, the percentage of time said space is used for business and household expenses that can be claimed. To calculate the proportion of home used for business, you either use the square footage of the office space relative to the square footage of the house OR calculate total rooms in your house divided by the number of rooms you use for your business space.
Example: If you have a workspace that is 250 square feet in your home and your home has a total of 1000 square feet, you could claim 250/1000= 25% of the expenses. Or, alternatively, if you are using 1 of 5 rooms in your house for work, the percentage for claimed expenses would be ⅕ = 20%.
When space is used for both personal and business purposes, in the sense that the room is not used solely as an office, track the amount of time you spend working in a given space to calculate the percentage of time you use the space for business.
Example: Suppose you are currently set up in the family TV room. You work in this room 6 hours every day, so divide that number by 24 (6/24 = 25%) and get 25% as the time you spend in the TV room for work. This is the percentage of household expenses you can claim.
Sample Calculation: Expense claimable for heating when using one room of the house for work.
The calculation would be the annual cost of heating, divided by the number of rooms in the house, multiplied by the percentage of time spent in the room for business
annual heating costs $7000
rooms in house =5
percentage of time in the room is 25%
the calculation is 7000 x 1/5 x 25/100 = 350
This amount of $350 is the business-use-of-home heating expense that can be claimed.
The maximum that you can deduct for business-use-of-home expenses is equal to your net income from the business before these expenses are deducted. This means that business-use-of-home expenses cannot be used to create or increase a business loss. Additionally, If you were not able to deduct certain expenses in the previous year, these amounts can be transferred and claimed in the current year.
For more information, visit the Business-use-of-home expenses webpage provided by the Government of Canada.
Business-use-of-home expenses, Government of Canada. CRA. February 12, 2019. https://www.canada.ca/en/revenue-agency/services/tax/businesses/topics/sole-proprietorships-partnerships/report-business-income-expenses/completing-form-t2125/business-use-home-expenses.html