Claiming Home Office Expenses

Many people are now working from home, either as employees or self-employed. This raises the question of whether you can claim a home office as an expense when filing your taxes. The answer is yes, but there are rules to follow, and they vary depending on your country and employment status. In the US, for instance, employees are not eligible to claim the home office deduction, while in Canada, salaried employees have more restrictions for claiming a home office. Self-employed people, on the other hand, can generally claim a portion of their household expenses, such as utilities, insurance, property tax, and mortgage interest.

Claiming home office expenses as a self-employed person

If you're self-employed and work from home in Canada, you can claim tax deductions for your home office expenses. This is known as the business-use-of-home deduction. To qualify for this deduction, your workspace must meet one of the following conditions:

• It is your principal place of business.
• You use the space only to earn your business income, and you use it regularly and continuously to meet your clients, customers, or patients.

Calculating your deduction

To calculate your deduction, you need to determine what fraction of your home is taken up by your workspace. You can do this by dividing the size of your office by the total size of your home. For example, if your office takes up 10% of your home's total square footage, you can deduct 10% of your household expenses.

Eligible expenses for the home office deduction include:

• Interest on your mortgage
• Utilities (heat, electricity, water, etc.)
• Maintenance (including cleaning and repairs)
• Property taxes
• Insurance

It's important to note that you cannot include the principal portion of your mortgage in the calculation, as it is not deductible. Renovations are also not deductible, but repairs that return the property to its original state are.

If you use your home office for both business and personal purposes, you must also calculate the percentage of time you use the space for work and apply that to your calculation. For example, if you use your office 33% of the time for business and it makes up 20% of your home's total size, you can deduct 6.66% of your home expenses.

Common tax-filing mistakes

When claiming home office expenses, it's important to be careful to avoid common mistakes that may trigger an audit. These include:

• Claiming the full mortgage payments for the year
• Claiming a percentage of repairs that are not related to the home office
• Rounding up your home office expenses
• Failing to break down your home office expenses into different categories

Claiming home office expenses as an employee

As a salaried or commissioned employee, there are more restrictions on claiming home office expenses than there are for self-employed individuals.

Firstly, you can only claim a home office expense when you are required to pay for it by your employer; you cannot claim it if your employer reimburses you for it. Your employer must file the proper paperwork by certifying your obligation to use part of your home as an office. In the UK, this is done through Form T2200, Declaration of Conditions of Employment. In Canada, you will need a completed and signed Form T2200S or Form T2200 from your employer.

Secondly, you cannot make the same tax deductions as self-employed individuals. For example, in Canada, salaried employees cannot claim principal mortgage payments, home internet connection fees, or capital expenses.

In terms of what you can claim, this will depend on the country you are based in and whether you are reimbursed by your employer.

In Canada, if you meet the eligibility criteria, you can claim a portion of certain expenses related to the use of a workspace in your home. This includes:

• Utilities (electricity, heat, and water) as a portion of your condominium fees
• Home internet access fees
• Maintenance and minor repair costs
• Rent paid for a house or apartment where you live

If you are reimbursed by your employer, HMRC will accept reimbursements of up to £4 per week without the need for supporting paperwork. If reimbursements are higher, these must be justified and detailed records kept by the employee, or they must be specially agreed with HMRC.

In the UK, you can claim tax relief for additional household costs if you have to work at home for all or part of the week. This includes business phone calls and gas and electricity for your work area. You cannot claim for things that you use for both private and business use, such as rent or broadband access.

You can either claim tax relief on:

• £6 a week from 6 April 2020 - you will not need to keep evidence of your extra costs
• The exact amount of extra costs incurred above the weekly amount - you will need evidence such as receipts, bills, or contracts

You will get tax relief based on the rate at which you pay tax.

Home office expenses for two businesses

If you run two businesses from your home, you can claim a home business tax deduction for both businesses. However, there are specific rules to follow.

Firstly, you can only claim the home office deduction if you have a dedicated workspace in your home for an office. This area cannot be used for any personal activities. To claim it for two different businesses, the office space must be the principal place of business for both.

If both businesses meet the criteria, you need to file a separate Form 8829: Expenses for Business Use of Your Home for each business. To deduct home business expenses, divide the expenses between the two businesses based on how much you use your home office for each. The total square footage submitted for each business cannot be more than the total square footage you would submit if you only had one home business.

You can also use the simplified method for your home office tax deduction, which limits you to a maximum of 300 square feet for all your businesses combined. Divide this amount among your businesses logically, ensuring you don't allocate more square feet than you actually use for that business.

If you are a salaried employee, there are more restrictions on claiming your home office. You can only claim a home office expense when you are required to pay for it by your employer; you cannot claim if your employer reimburses you for it. Your employer must file the proper paperwork by certifying your obligation to use part of your home as an office on Form T2200, Declaration of Conditions of Employment.

As a self-employed person, you can claim your home office under two conditions: the workspace must be your principal place of business or used exclusively for earning business income, and the space must be used regularly for meeting clients, customers or patients.

The simplified method for claiming home office expenses

Standard Deduction

The simplified method allows for a standard deduction of $5 per square foot of home used for business, up to a maximum of 300 square feet. This means you can claim a deduction of up to $1,500 for a 300-square-foot space. This is a simpler approach than the regular method, which requires measuring actual expenditures against overall residence expenses.

Allowable Home-Related Itemized Deductions

Under the simplified method, you can claim allowable home-related itemized deductions in full on Schedule A. These deductions may include mortgage interest, real estate taxes, and other expenses. However, it's important to note that you cannot claim depreciation or later recapture depreciation for the years you use the simplified method.

Qualified Business Use of a Portion of the Home

To qualify for the simplified method, the portion of your home used for business must meet certain criteria. It should be used exclusively and regularly as the main place to conduct your business, meet with customers or clients, or store products or samples if your home is your only place of business. Additionally, it can be used to provide daycare services for children, the elderly, or disabled individuals.

Gross Income Limitation

The amount of deduction computed using the simplified method cannot exceed the gross income derived from the qualified business use of your home, reduced by any unrelated business deductions. Any amount exceeding this limitation cannot be carried over to subsequent years.

Comparison to the Regular Method

The simplified method offers a simpler approach to calculating home office deductions compared to the regular method. It eliminates the need for complex calculations and allocations, especially for small business owners. However, it's important to note that the simplified method may not always result in a larger deduction. You should consider the time and effort required for record-keeping under the regular method, as well as the potential for a higher deduction.

In summary, the simplified method for claiming home office expenses provides a streamlined approach to determining deductible expenses for qualified business use of your home. It offers a standard deduction per square foot, allows for itemized deductions, and has specific qualifications and limitations. When deciding between the simplified and regular methods, consider your business needs, the size of your home office, and the potential tax benefits of each approach.

Common mistakes when claiming home office expenses

When claiming home office expenses, there are some common mistakes to avoid. Here are some key points to consider:

Regular and Exclusive Use

The space must be used exclusively for work purposes on a regular basis. While incidental personal use is generally allowed, it is important to ensure that the space is primarily dedicated to work. Any personal use of the space should be minimal and no more than would be permitted in a regular office building.

Principal Place of Business

The home office must typically be the principal place of business, meaning it should be used for essential job-related activities, such as administrative or management tasks. However, there are exceptions to this rule, including day care and storage facilities.

Administrative or Management Tasks

Even if the home office is not the primary place of business, employees may still qualify for the deduction if they use the space for administrative or management tasks, such as scheduling appointments, bookkeeping, or ordering supplies.

Accurate Record-Keeping

It is crucial to maintain accurate records of all home office expenses. Ensure that these expenses are solely for business purposes and keep receipts or other supporting documentation.

Overestimating Deductions

Overestimating the amount of the deduction can lead to an audit by the tax authorities. It is important to calculate the deductible amount accurately, usually based on the percentage of the home used for business purposes.

Seeking Professional Advice

Consulting a tax professional or accountant is advisable to ensure that all requirements are met and that the deduction is claimed correctly. They can guide you through the specific rules and regulations applicable to your situation.

Frequently asked questions