01/24/2019 – By Jason Smale
Many small businesses start a venture hosted out of the owner’s primary residence. Setting up a home office to perform off-site work, or to meet with client’s can be a common and cost-effective strategy employed by the business owner.
Who is eligible to claim Business-Use-Of-Home Expenses?
It is essential to distinguish the difference between having a home office while maintaining off-site office space, and using office space in the primary residence as the principal place of business. To be eligible to deduct business-use-of-home expenses, the business owner must be:
- Using an office space within the primary residence as the principal place of business; or
- Using the space only to earn business income and using it on a regular and ongoing basis to meet with clients, customers or patients.
What expenses are eligible to be deducted?
- Rent or property taxes
- Home insurance
- Utilities such as gas, water, hydro, cable, phone, and internet.
- Mortgage interest
How much can I claim?
There are a couple of considerations to be made when evaluating how much a business owner qualifies to deduct from their income. The first consideration that must be made is the size of the workspace in relation to the home itself. This calculation can either be performed by factoring the number of rooms used for workspace vs. the number of rooms in the residence, or by calculating the square footage of the workspace in relation to the total square footage of the residence.
As an example, if the residence has six rooms and the business owner is using 1 of them as a workspace they can deduct 1/6 of the expenses mentioned above for Rent or property taxes, home insurance, utilities, mortgage interest, etc.
The second factor to consider when evaluating the eligible deductions calculation is the daily use of the space. The workspace must be dedicated to earning business income if it is not considered the principal place of business, but acts as the principal office space. However, in the case that the workspace is considered the principal place of business and the office space doubles for both personal and business use, the owner must account for the eligible expenses only for the amount of time that space is occupied for work purposes.
For example, if the home office space doubles as a playroom for the children in the evening, an additional calculation must be made. The business owner will need to determine the amount of time in each day that the office is being used for business purposes vs. family playroom space. As an example, if the space functions as a home office space for 8 of 24 hours, then the calculation for the home office expense eligibility in the scenario above would be 1/6 x 8/24 to determine the eligibility for deductions of home expenses.
Losses and Carry Forwards
The first year or two for any business can be slow, and it is important to note that business-use-of-home expenses cannot be used to create a loss or create a more significant loss in the eligible year. In other words, the business-use-of-home expenses cannot be higher than the income. But, the good news is that these eligible expenses do not go to waste. There is a provision in the Income Tax Act for carrying forward eligible expenses to another year in which the business owner generates a positive income.