How to Calculate Your Home Office Tax Deductions as a Freelancer or Small Business Owner

Freelancing or running a business from home can often mean long hours and late nights. However, there are several perks to being your own boss. If you work from home more than 50% of the time, the Canada Revenue Agency (CRA) offers a number of tax breaks to encourage small businesses to start up, succeed and stimulate the economy.

Buying the equipment you need for your business and organizing your home office properly can benefit you come tax time. With a bit of research and an accountant, you're in the driver's seat when you file your taxes. For the first few years, you might get sizable returns and ongoing write-offs related to your home office, transportation and equipment.

For ease of explanation, let's use the sole proprietorship scenario of one person running their own business, 100% of the time, such as myself. Yes, part-time or salaried employees working for a company from their home have write-offs too, but they also have more limits on what and how much they can claim.

What you need to know

Photo by Paige Cody on Unsplash

While tax specialist George Winfield said every tax situation is different, there are resources and a few general rules to follow.

While tax specialist George Winfield said every tax situation is different, there are resources and a few general rules to follow.

“You have to use your house as your place of business and be able to prove the percentage of the home that is dedicated to business purposes,” Winfield said. “From there, there is a formula to determine the amount of rent or mortgage, reasonable maintenance and capital expenditures to keep the office portion of your home functioning.”

To start, the CRA will want to know  if you use this space exclusively as a principal place of business or on a frequent basis for operating or meetings.

Like many of us, we have a dedicated office or workspace at home, but after hours we vacate—because who wants to hang out at the home office after a long hard day?

Be accurate and reasonable

Image by tookapic from Pixabay

In our above-mentioned scenario, as a work-from-home business owner, a portion of that space and all of the needs required to run it-—like utilities and upgrades—are tax deductible. It should go without saying this is based on a reasonable amount of space and associated expenses based on accurate calculations of the square footage of your home, detailed receipts and records, as well as an explanation for any questions, should it arise in the future.

For example, my house is 2,640-square-feet and the dedicated office space I use is 355-square-feet, but I use it 100% of the time for business as I'm a full-time freelancer. My household expenses total $28,500 for items in Section 7 of the T2125 CRA form:

• Heating;
• Home insurance;
• Electricity;
• Cleaning materials;
• Property taxes;
• Mortgage interest; and
• Maintenance, repairs, home office renovations.

So the basic calculation for my tax deductible expenses would be: 355 ÷ 2,650 square-feet x $28,500 = $3,817.

While the calculation is not an exact science, what's important is to have all receipts and documentation needed and be accurate about what your business space requires. Be reasonable about what is needed for the business. If you decorate your house from top to bottom and replace your roof, that might not be applicable—unless, of course, your office area was leaking and needed some upgrades to be functional.

Capital expenditures

Photo by Michael Soledad on Unsplash

Being your own boss also means  you need to get the proper equipment, upgrades and office furniture needed to operate at maximum potential. An ergonomic chair, keyboard and computer are all reasonable business expenses, but what about upgrades to the home office that are part of the house?

Upgrades like a gigabit wired network, better router, new electrical outlets, proper lighting, ventilation and insulation might be imperative to the workspace, too. It might even include a lock on the door so those persistent kids or pets don't barge in during meetings. These are outliers you need to think about, all of which can be considered reasonable expenses to further business operations.

Tax season

If you're unsure about making any expenditures for your home office, contact an accountant to get an informed answer whether the spend qualifies for a tax write-off or what you want to spend or ideally where to spend it.

The goal is to keep your home and home office running like a well-oiled machine and get a few bucks back at tax time.

The article above is for information purposes and is not financial or legal advice or a substitute for financial or legal counsel.

Source: realtor.ca