Tax Benefits of Having a Home-Based Business

Operating a small business from your home is an increasingly popular option for many people. Not only can you reduce your expenses through the use of existing assets but this option also affords you the opportunity to set your own hours, spend more time with your family and avoid time consuming commutes. With a home based business, you also may qualify for a number of tax reductions.

When you operate a business out of your home, you are eligible to deduct Use of Home expenses on your personal income tax form. These Use of Home expenses represent the portion of your home maintenance costs that the business can fairly be determined to be consuming. A portion of your home's electric, water, heating, rent and other household bills may be claimed by your business. If you own your home, you may also claim a portion of you homeowner's expenses such as property tax and mortgage interest.

You may use any method you like to determine the amount of the home expenses that should be allocated as Use of Home Expenses as long as this method is deemed "fair" by the Canada Revenue Agency. The most common method used is to allocate these expenses in proportion to the amount of the home used by the business. If the business occupies 15% of the square footage of the home, the use of home expenses would be equal to 15% of the total cost of each expense.

For example, you receive your monthly electric bill in the amount of $ 200.00. Your small business utilizes your spare bedroom as an office and this represents 12% of the total square footage of your home. Thus, you may claim $ 24.00 of your electric bill as a Use of Home expense ($ 200.00 x 12% = $ 24.00). This process may be repeated using any valid home expense. Properly utilizing the square footage method will ensure that your deductions are deemed to have been "calculated fairly" and is the preferred method of calculation by the Canada Revenue Agency.

You should check with your municipality to ensure that the percentage of your home you claim for business use does not contravene any local by-laws. Many municipalities have a cap on the maximum percentage of your home that you may use for business purposes.

You may also claim a portion of the costs to repair your home. If you put a new roof on your home, your home office also benefits from this repair. You may claim a tax credit applicable on your tax return equal to the standard percentage used to calculate your Use of Home expenses.

When calculating the area of your home assigned to business use, there are a few things to keep in mind. The area you designate as business use must be used exclusively for this purpose. You may not claim a room for business purposes that you use as a bedroom each night after the business closes. Similarly, you may not designate your living room or kitchen for business use. The area you choose to designate for business use must also be a clearly defined and enclosed area. With this in mind, you cannot designate half of a room for business use. The area chosen must also have to ability to be secured from the rest of the home. In other words, the door into this area must have a locking mechanism attached.

If your business is a part-time concern, you must adjust your calculations accordingly. You may only claim the percentage of time your part-time business is open. For example, the business use portion of your home represents 8% of your total home and your business is open only half a day each day. If you receive a water bill for $ 300.00, the calculation to determine your tax credit for use of home would be $ 300.00 x 8% (use of home) x 50% (percentage of full-time that your business is open and operating). Your total tax deduction, in this case, would be $ 12.00 not the usual $ 24.00 that it would be if your business was open full time.

Cumulatively, this ability to claim tax credits can make a large difference on the taxes you have to pay on the income from your business. It is important to note that these credits can only reduce your taxable income from your business to zero. They cannot put you in a net loss position or create a refund situation.

To accurately calculate and claim your Use of Home tax credits, you may want to access the services of a financial advisor or tax specialist. Business Development Centre can assist you to calculate these and other tax credits for your business.