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Maximize Your Business Income Tax Deductions

Part 3: Home Business Tax Deductions

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T1 General

T1 General

Image (c) Susan Ward

While many people run home businesses so they can work in a more congenial environment, or for family-related reasons, there are also certain home business tax deductions that home business owners should be aware of.

To qualify for deducting business expenses related to using a work space for business in your home, your home must be your "principal place of business" or you must "use the space only to earn your business income, and you use it on a regular and ongoing basis to meet your clients, customers, or patients" (Business and Professional Income Guide, Canada Revenue Agency (CRA)).

How much can you claim as a home business tax deduction?

The CRA advises taxpayers to "use a reasonable basis" to calculate the appropriate portion of home business expenses to claim; their formula of taking the area of the business work space in your home and dividing it by the total area works well when calculating home business tax deductions.

Most Canadian tax software programs will automatically calculate the expense portions based on your personal/business work space ratio.

Learn more about calculating the home-based business deduction.

Have you deducted your home utility costs?

Heat and electricity are eligible expenses. Make sure you keep your utility bills for the year.

Have you deducted an appropriate portion of all of your home maintenance costs?

Home maintenance costs include home and property repairs, but also, for instance, the cost of cleaning materials or a cleaning service. And what about house insurance? You can also deduct an appropriate portion of it as well.

If you own your home, have you deducted expenses related to home ownership?

For example, if you own your own home and are operating a home business, you can deduct a portion of your property taxes as a business expense. Your mortgage interest and capital cost allowance (CCA) will also be a tax deduction, if applicable. Using CCA (depreciation) on the business portion of your home should be discussed with your accountant, as it affects the principal residence exemption should you sell your residence in future.

The Canada Revenue Agency form T2125 contains a chart called "Calculation of business-use-of-home expenses" that you may find useful to figure out your allowable claim for home business income tax deductions.

How to Calculate Capital Cost Allowance.

Bear in mind that you cannot deduct an amount that's more than your net income from your business.

Home business owners, of course, can also claim any or all of the other small business tax deductions any other small business can claim if they're applicable to their particular business.

Another article I've written about taxes, More Ways to Maximize Business Income Tax Deductions discusses other business expenses that may apply to your situation, such as auto expenses, conventions, and employing a child or spouse in your business.

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