Do you telecommute or have a home-based business? What you need to know about claiming your office space at tax time.
Today’s workplace just isn’t what it used to be… In fact, it may be in your home. Today’s online environment makes it possible for more people to telecommute, and home is a good place to grow a small business. Working from home has its challenges, but it also has its perks — like a break at tax time.
Of course, what you can and can’t claim will depend on your individual situation. Whether you’re already established at home or weighing future job options, here are some things you should know.
Do you qualify?
You’ll need more than a desk and a computer to take advantage of these tax breaks. The Canada Revenue Agency (CRA) has a few rules:
1) Your home workspace is where you do most of your work. By “most”, the CRA means 50 per cent or more of your work. Working from home one day a week or in the evenings isn’t enough.
2) This one has two parts: The workspace is only used for employment income and you use it to meet with clients or customers on an ongoing basis. In other words, your home office isn’t also guest room or recreation room — it’s a dedicated space where you conduct business with real people on a regular basis. (Some sources say phone and online meetings count too, depending on your line of work — but you’ll want to double check with an expert.)
If you’re a telecommuter — that is, a salaried employee for a company — there’s an addition criteria:
Your conditions of employment require that you work from home. You don’t have to produce your contract, but you will have to have your employer to fill out and sign a form. (If your employer doesn’t require you to have a home office, you won’t get past the first two questions.)
If you’re a small business owner working out of your home, another criteria you have to meet is your income for the year is greater then your deductions. Remember, you’re seeking a tax deduction, not a rebate — and your home office expenses can’t be used to create or increase a business loss. That’s why experts like Evelyn Jacks recommend claiming your home office expenses after claiming other expenses like operating expenses, auto expenses and capital cost allowance (a deduction for assets that depreciate).
Sometimes it takes time to establish a profitable home business. If you can’t claim your home office expenses this year, don’t worry — the CRA lets you can carry them forward.
How much can you claim?
If you own your home, you can claim expenses like the cost of electricity, heating, condo fees and maintenance, says the CRA website . However, unless you’re a salesperson who works on commission or you’re self-employed, you can’t claim some expenses like property taxes or home insurance. The rules are different depending on what type of work you do and whether you work for yourself or someone else.
How much can you claim? The amount of your deduction is based on the size of your office compared to the size of your home. (You’ll need to get out the measuring tape and do some math.) Remember — it’s “living area” that you’re considering. Bathrooms, closets and unfinished basements aren’t often counted as “living space”, says Jacks in her book, Make Sure It’s Deductible. However, storage space where you keep items for your business counts towards both your home office space and the square footage of your home.
To find out how much of your home that your home office occupies, divide your office area by the total amount of living area in your home. For example, 100 square feet of office divided by 1000 square feet of living area x 100 per cent equals 10 per cent.
Your expenses are based on this number: if your office is 10 per cent of your home, you can reasonably claim that 10 of your energy costs, for instance.
Likewise, if you made improvements to your home, you can only claim the portion that affected your office space. Improvements made in the rest of the house don’t count.
What if you aren’t a home owner? People who rent an apartment or house can claim a percentage of their rent as well as any maintenance expenses they incur, according to the CRA.
For instance, let’s say your apartment is 800 square feet and your home office space is 8′ x 10′ (80 square feet). Because your office is 1/10 of the total space, you can claim 1/10 of your rent. If your rent is $1200 a month, you can claim $120 per month for a total of $1440 per year (assuming you use your office year round).
However, whether you rent or own, you’ll have to prorate the amount if your space sees both business and personal use. (That is, you do most of your work in your office but it isn’t exclusively used for your business). It’s time for more math: look at how many hours of the day or week you use the space for business purposes versus personal use. If you only use the office for part of the week or part of the year, you’ll need to factor that in as well.
For example, you could be using the space for work 75 per cent of the time and the remaining 25 per cent for personal use — like if your home office doubles as a guest room some weekends. The required form allows you add up your total business use and then subtract your personal use.
The proof you’ll need
You’ve done the math — now how do you prove it to the government? As with everything tax-related, you’ll need a paper trail. You’ll need to keep receipts and paperwork for any expenses — and keep them for the required seven years in case you are audited in the future. You may not have to submit these items with your tax return, but you may need to produce them if the CRA comes knocking.
Though it’s not required, experts say you should be prepared to dig down to details. Experts like Jacks recommend making a sketch of your home office in relation to your home and keeping logs of meetings, for example.
If you’re working for someone else, there’s also some paperwork — namely the T2200 - Declaration of Conditions of Employment which your employer has to fill out and sign. It asks about the particulars — like the dates of your employment, whether you are reimbursed for certain expenses and what percentage of your employment duties are performed at home. While you don’t have to include this form with your tax return, you have to have it for your own records in order to make a claim — and in case the CRA asks to see it.
To claim other employment expenses like internet or auto expenses, you’ll need to fill out T777 – Statement of Employment Expenses and include it with your return. (If you’re filing a paper return, that is. If you file electronically, the CRA says to keep it with your records.) Remember, you can only claim these expenses if your company requires you pay them and you aren’t reimbursed.
If you’re self-employed, you already know it’s a little more complicated than a form or two. You’ll want to do some more digging and read up on the CRA’s Guide for Canadian Small Businesses . Experts say the “tax man” is more generous to those who work for themselves, and you may be able to claim addition costs like capital cost allowance (with caution) or mortgage interest. If you’re thinking of consulting or working on contract, you’ll want to do some further investigation to see which option gives you the best tax breaks.
Naturally, there are no one-size-fits-all rules here — a lot depends on your individual situation. Make sure you have the correct forms and information for your situation, and that they’re current for the year for which you are completing taxes. These tips are for information purposes only and are just a place to start — you’ll want to get specific advice from tax professionals or the CRA.
One final caution: don’t be greedy, say experts. You could be inviting an audit if your deductions are out of line with other filers. Experts recommend keeping your claims reasonable — and having the numbers and paperwork to back them up.
ON THE WEB
Need more help? Visit the CRA website at http://www.cra-arc.gc.ca for more information
Want to talk to a human? If you don’t have an accountant, try the CRA’s list of telephone numbers at http://www.cra-arc.gc.ca/cntct/phn-eng.html to find out who to call with your questions and what hours agents are available. TurboTax.ca also has an “ Ask Caroline ” feature where you can submit your questions via an online form.
In addition, guides like Evelyn Jack’s Essential Tax Facts 2012 and Make Sure It’s Deductible along with other recent guides can help you sort through some of the complexities and questions.
Additional sources: About.com Small Business Canada, Bookkeeping-Essentials.com, CBC News, H&R Block, Small Business BC, TurboTax.ca.
Photo ©iStockphoto.com/ Jo Ann Snover