My income taxes are organized for tax year 2008 and submitted to my accountant. While going through my business deductions however, I realized that I haven’t posted in detail about how to claim a home office. Coincidentally, how to claim a home office was a reader question as well.
As I have an online business, I’m eligible to claim my office space within my home. Basically, a percentage of the expenses listed below can be used to claim against the business income.
What percentage you ask? Calculate the amount of square footage your office (may include bathroom as well) takes in relation to the livable square footage of your house. So if your home office is 100 sq. ft, and your living space of your house is 1000 sq. ft, then you can claim 10% of your mortgage, property taxes etc (see list below).
If in the first few years, your business is operating at a loss, the expenses can be claimed against other income. However, CRA will only allow this to continue for a 2-3 years at which point, they expect you to turn a profit.
Home Office Deductions
- Mortgage interest
- Property tax
- Fire insurance
- Mortgage life insurance
- Power bill
- Internet bill*
- Business Phone/Cell*
- Equipment/furniture used for the business **
* 100% of these expenses can be claimed if used solely for the business.
** Some may need to be claimed as capital cost allowance.
Lets take a look at a situation similar to my own. The home office is about 10% of my total livable square footage, which means that I can claim 10% of the following (assume that the office is used solely for business):
- Mortgage interest: $4500 x 10% = $450
- Property tax: $3000 x 10% = $300
- Fire insurance: $500 x 10% = $50
- Mortgage life insurance: $0
- Utility bill (heat/light): $3000 x 10% = $300
The following deductions are in relation to how much was actually used for the business:
- Internet bill: $480 x 50% = $240
- Business Phone/Cell = $0
- Equipment/furniture used for the business = $300 x 100% = $300
Total Deduction: $1,640
Simply gather some paper work together and start adding together expenses. Before you know it, you’ll have a fairly significant deduction for your business. In my case, a $1,640 deduction means that I’ll save about $656 income tax. If you’re a small business owner, here are some other tax deductions to consider.
Heads up to those those who procrastinate (like me)! If you have tax owing, the deadline to file is April 30th, 2009.