Starting a home-based business?
Though the potential tax deductions of running your own business from home are appealing, it's important to plan with care because the tax rules are tricky.
Is your office eligible?
The first step is ensuring the tax man agrees that you have an eligible home office. Sounds simple, but it depends on whether the room is your "principal" place of business and whether it is used "exclusively" for the business and on a regular basis for meeting customers. Your office must meet one or both of these two tests. If you are a salaried employee with a business on the side, the office must be the place where you meet clients and you must expect to eventually earn a profit.
Determine allowable expenses
Assuming your office qualifies, you can claim some of the expenses paid to run your home - in addition to the full amount of any direct costs of operating the business (e.g., equipment, printer paper). Mortgage interest or rent, property taxes, utilities, home insurance and even maintenance and repairs may qualify. Although it's permitted, claiming depreciation on your home may affect your principal residence exemption and should only be considered after consulting a tax expert.
Calculate tax-deductible portion of home expenses
Allowable home expenses are then subject to another calculation. The portion you can deduct depends on how much home space your office takes up and how much it is used for business. Example: if the office is one-sixth of total floor space or one of six rooms, you could claim up to about 17% of home expenses. If your office is used partly for family computer time, say 25% of the time, you would have to multiply the 17% above by 75% (the ratio used for business) to get 12.75% - the final amount of each home expense you can claim.
There are other rules to know, including the fact that any home expenses you claim must be reasonable and cannot exceed your business or employment income for the year. Direct costs like equipment, on the other hand, can be used to generate a tax loss.
Complicated enough? Don't let the complexity turn you away from pursuing your dream business. Our team can provide support by pointing out general issues and opportunities, and assessing the potential impact of your new venture on your other goals and overall plan.
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