Home Office: Calculating Business Proportion

If you're running a business from home, you may be able to deduct some of your home expenses from your profits. This is called a business-use-of-home deduction and it's a way for business owners to save money on their tax bill. To calculate this, you need to work out the percentage of your home that is taken up by your office space. This can be done by dividing the area of your office by the total area of your home. This percentage is then multiplied by the amount of your allowable expenses, such as rent, utilities, and maintenance costs. It's important to note that you can only deduct expenses up to your net income from the business, and you cannot use these expenses to create a business loss.

Calculate the percentage of your home that is used for business

To calculate the percentage of your home that is used for business, you need to do some simple calculations. This will help you determine the amount you can deduct from your tax bill for business-related expenses.

First, you need to calculate the size of your workspace in relation to your home. You can do this by dividing the square footage of your workspace by the total square footage of your home. For example, if your home office is 100 square feet and your home is 980 square feet, your office takes up 10.2% (100 ÷ 980 x 100) of your home.

Alternatively, you can calculate the percentage based on the number of rooms used for business versus the total number of rooms in your home. For instance, if you use one room out of eight in your home for business, that's 12.5% (1/8 x 100) of your home used for business.

If you use a shared space, such as a dining room table, for business, you will also need to calculate the percentage of time that the space is used for business. For example, if you work 40 hours a week and the dining room is 12% of the total square footage of your house, you would calculate the percentage of time as follows: 40/168 (total hours in a week) x 100 = 23.8%. This is the percentage of time the space is used for business.

Once you have calculated the percentage of your home that is used for business, you can apply this to your allowable expenses. Allowable expenses include maintenance costs such as heat, electricity, cleaning materials, insurance, mortgage interest, and property taxes. You can also include rent if you are renting your home.

To calculate the amount you can deduct, multiply the percentage of your home used for business by the total amount of your allowable expenses. For example, if your home office takes up 10% of your home and your total expenses are $20,000, your home office expenses would be $2,000 (10% x $20,000).

It's important to note that if you are using a shared space for business, you will need to multiply the percentage of space by the percentage of time used for business to get the final percentage.

These calculations can help you determine the amount you can deduct from your tax bill for business-use-of-home expenses.

Work out the percentage of time the space is used for business

When calculating the percentage of your home that is used for business, the first step is to work out the size of your work area in relation to your home. This can be done by measuring the length and width of the room and multiplying them to get the area in square feet or metres. If you only use a portion of a room, you can estimate the area of that space.

Next, calculate the percentage of your home that constitutes this work area. To do this, divide the area of your work area by the total area of your home and multiply by 100. For example, if your home office is 100 square feet and your home is 1,500 square feet, then (100/1500) x 100 = 6.67%. This means 6.67% of your home is used for business.

If you use a shared space, such as a dining room table, you will also need to calculate the percentage of time you use the space for work. For example, if you work 40 hours a week at the dining table and this table is 12% of the total square footage of your home, you would calculate 12% x (40/168) x 100 = 2.8%. This is the percentage of your home that is used as a work space.

It is important to note that the size of your workspace must be reasonable. The Canada Revenue Agency (CRA) states that the size of your workspace should be a "reasonable percentage" of the open space if you have an open-concept design.

Calculate the proportion of expenses you can claim

To calculate the proportion of expenses you can claim for a home office, you must determine the size of your workspace relative to your home and the amount of time you use that space for work. This can be done by measuring the number of rooms used for business or the square footage of your workspace versus your home.

For example, if you use one room out of eight in your home for business, you can claim 1/8 (or 0.125 or 12.5%) of your annual expenses. If you use a portion of a room, you must determine the percentage of time you use that room for business. If you use the room for business for four hours a day, you would divide four by 24 hours in a day, which is 0.1667 or 16.67%.

You can then multiply the percentage of the room used for business by the annual cost of, for example, electricity. If your electricity bill for the year is $1,000, you would divide that by eight (the number of rooms in your house) to get $125. You would then multiply that by the percentage of time the room is used for business (4/24 hours) to get $20.83. That is the amount you can claim.

You can also use a flat rate to calculate your expenses. This is a fixed rate based on the number of hours you work at home.

Understand what expenses you can deduct

There are two methods to calculate the home office tax deduction: the simplified method and the actual expenses method.

The Simplified Method

The simplified method uses a prescribed rate multiplied by the allowable square footage used in the home. The prescribed rate is $5 per square foot, with a maximum of 300 square feet. The maximum deduction under this method is $1,500.

The Actual Expenses Method

The actual expenses method values your home office by measuring actual expenditures against your overall residence expenses. You can deduct mortgage interest, taxes, maintenance and repairs, insurance, utilities, and other expenses.

Expenses You Can Deduct

• Homeowner's insurance: You may deduct the business percentage of your homeowner's or renter's insurance as part of the home office deduction.
• Utilities: As a general rule, you can deduct the business percentage of your utility payments for heat, electricity, and services that pertain to the entire house, such as trash collection, security services, and cleaning services.
• Repairs and maintenance: You can deduct a portion of certain expenses that are associated with your home but are not deductible by the average homeowner. These expenses include repairs and maintenance.
• Mortgage interest: Homeowners may deduct a portion of both real estate taxes and qualified mortgage interest (but not principal) payments on the home.
• Rent: Rent deduction is only applicable if you do not and will not receive equity in or title to the property.
• Depreciation: Depreciation refers to an income tax deduction that lets taxpayers recover the costs of property due to wear and tear, deterioration, or obsolescence of the property.
• Insurance: You can deduct insurance as a business expense if it is both ordinary and necessary for your trade, business, or profession.
• Other expenses: Other expenses you can deduct include real estate taxes, casualty losses, and maintenance.

Know how to claim home office expenses

If you work from home or follow a hybrid model, you can claim home office expenses on your tax return. Here are the steps to calculate and claim these expenses:

Step 1: Determine eligibility

You can only claim home expenses if you meet the following conditions:

• Your employer requires you to work from home, either through a written or verbal agreement.
• You are required to pay expenses related to your workspace, and these expenses are used directly in your work.
• Your home workspace is the only place you work, or you work from there for at least 50% of the time for a minimum of four consecutive weeks.
• Your employer provides you with a completed and signed Declaration of Conditions of Employment (T2200 form).

Step 2: Calculate the size of your workspace

To claim home office expenses, you need to calculate the size of your workspace as a percentage of your total home. You can do this by measuring the length and width of your workspace and your entire home. Then, divide the square footage of your workspace by the total square footage of your home and multiply by 100.

For example, if your workspace is 64 square feet in an apartment with a total area of 640 square feet, your workspace occupies 10% of your home, and you can claim 10% of eligible expenses as home office expenses.

Step 3: Determine eligible expenses

Eligible expenses may include:

• Home internet access fees (excluding connection fees or modem/router rental fees).
• Rent paid for a house or apartment (if renting; homeowners cannot claim the rental value of the workspace).
• Utilities such as electricity, heat, and water (if these are included in your condominium fees, you can claim this portion).
• Maintenance and minor repair costs related to the workspace, such as light bulbs and repairing walls or ceilings after installing equipment.
• Office supplies and equipment lease, such as a cell phone, computer, or laptop, for commission employees.

Step 4: Calculate the deductible amount

To calculate the deductible amount for each expense, multiply the eligible expense by the percentage of your home used as a workspace.

For example, if your annual electricity bill is $1,000 for your eight-room home, and one room is used for business, you can claim $125 (1/8 of the bill) as a business expense. If you use that room for business for 4 hours a day, divide $125 by 24 hours to get $5.21 as the deductible amount.

Step 5: Complete the necessary forms

For salaried and commission employees, all eligible expenses must be claimed on a T777 form – Statement of Employment Expenses. Self-employed individuals can use Form T2125, Statement of Business or Professional Activities, to calculate business-use-of-home expenses.

It is important to keep accurate records and receipts to support your claims and avoid issues with the tax authorities.

Frequently asked questions