"The guiding rule for deductions is always ‘what is reasonable under the circumstances’, so save your receipts, and be cautious in what you claim.”

When it comes to tax breaks it’s a pretty universal feeling among small businesses that they can use every opportunity they qualify for. If you work from a home office, you could be in line for some tax breaks, says chartered accountant Douglas Plummer of Neal, Pallett & Townsend LLP in London, Ont.

“Working from home – either as an employee with a T4 or a self-employed individual, may allow you to deduct certain house and car expenses. To qualify, you must meet specific requirements in the Income Tax Act. The guiding rule for deductions is always ‘what is reasonable under the circumstances’, so save your receipts, and be cautious in what you claim.”

Here is what can – and can’t – be deducted.

Employed:

* If your home doubles as your office, you must meet one of two CRA requirements to qualify for deductions: either your home office must be where you principally perform your duties of employment, or it must be exclusively used to earn employment income and used on a regular basis for meetings with clients, customers or patients.

* Deductions are based on whether the office is used exclusively to earn employment income versus a mixed-use space (home and office together) and the square footage of the house. The equation must also be calculated with the breakdown of hours spent in each area of the home.

* If you are renting your home, you can also deduct a portion of your rent. 

* A commission salesperson can deduct the cost of renting a telephone line or cell phone as long as they are rented for business purposes. They can deduct rental payments under a rule that allows them to deduct any reasonable expense incurred to earn commission income provided it is not a capital payment.

* An employee who does not earn commission income cannot deduct the monthly cost of renting a telephone line or cell phone, even if they are used exclusively for employment purposes, as the CRA does not consider the rental payment to be “a supply consumed in the course of performing employment duties.”

* While you can claim office costs, surprisingly you cannot claim tax depreciation on fixed assets such as computers.

* If the fixed asset is leased (as opposed to purchased), only the commission salespeople are entitled to deduct the lease payments as an expense to earn commission income.

* You may not claim a loss if home office expenses exceed employment income. However, any expenses that are not claimable can be carried forward and deducted against future employment income.

Self-employed:

* While the same requirements apply, you can also deduct a portion of property taxes and mortgage interest, and claim tax depreciation on fixed assets such as computers, furniture and fixtures.

Vehicle expenses – Employed and Self-employed:

* If you are required to drive to locations other than your principal place of employment or business, you can generally deduct some of your lease and vehicle costs, including gas, insurance and maintenance. If the vehicle is owned, you can deduct a fraction of the tax depreciation and interest if the vehicle was purchased with borrowed funds.

* The portion of the cost that is deductible is equal to the ratio of kilometres driven for business purposes divided by the total kilometres driven per year. If 50 per cent of the kilometres you drive are for business, then 50 per cent of the operating costs are deductible. Keep a logbook showing business use. Should you be audited, this is usually the first thing CRA wants to see.

* Certain employees and self-employed people can claim a refund related to the GST included in the vehicle costs.

What if you do work out of your home, but only occasionally? You’re out of luck – no deductions apply.

Written by the Institute of Chartered Accountants of Ontario.


Posted: 2010-03-18 06:14:58

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