Home Office: Claiming Business Expenses

If you work from home, you may be able to claim certain tax deductions for your home office expenses. This is known as the home office deduction. To qualify, you must meet certain criteria, including using a portion of your home exclusively and regularly for your business. This space must also be your principal place of business or a place where you regularly meet with clients. Additionally, you must be a registered business owner or independent contractor to take this deduction.

The home office deduction allows you to deduct expenses directly related to maintaining your home office, as well as a portion of certain home expenses that are not typically deductible, such as insurance, utilities, repairs, security system expenses, and cleaning services. There are two methods for calculating the home office deduction: the simplified method and the regular method. The simplified method allows for a deduction of $5 per square foot of home office space, up to a maximum of $1,500. The regular method involves calculating the percentage of your home used for business and deducting a portion of your home expenses accordingly.

Homeowner's insurance

If you run a business from home, your standard homeowners insurance policy may not cover all aspects of your home-based office or business. It is important to review your policy and find out whether there are business-related exclusions. If you run a business out of your home, which insurers qualify based on regular foot traffic directly from your business and inventory being stored at the property, then you need to look outside of home insurance and obtain commercial property coverage.

Homeowners insurance policies often provide limited coverage related to property and liability. You may not have enough coverage to fully protect yourself, which is why it is a good idea to review and tailor your home policy to meet your needs annually. Under homeowners insurance policies, some general exclusions for home-based offices include:

• No coverage for data loss
• Limited coverage for business equipment within your home (usually up to $2,500) and away from your property
• No coverage for business records
• No coverage for loss of income if your home is damaged and you can’t run your business
• No coverage for employers injured in your home or on your property

To protect your home office and your business, you may need to purchase additional insurance coverage. You can either add an endorsement to your existing homeowners insurance policy or sign up for a separate business insurance policy.

An endorsement can be added to a homeowners insurance policy to increase coverage for business-related equipment and assets. You may also be able to pick up a liability endorsement in case someone is injured on your property. Endorsements that expand the scope of coverage for business equipment can raise a $2,500 limit to $10,000 or more. An alternative is home business insurance, which offers protection against crime and worker injuries.

Instead of adding an endorsement to your homeowners insurance, you can purchase a separate business insurance policy. This option provides broader coverage than a homeowners endorsement and may be more cost-effective. Separate business insurance policies can include general liability insurance, business income insurance, and commercial property insurance, among others.

Utilities

However, it's important to note that only the business percentage of utility payments can be deducted. For example, if you use 10% of your home for business, you can deduct 10% of your utility bills as a business expense. If a particular utility is used more for business than others, you can increase the business percentage of that utility bill accordingly.

It's worth noting that lawn services are generally not considered deductible, even when clients visit your home office. Additionally, utilities that are not used for your business at all, such as a propane fuel bill for cooking when your business does not involve cooking, cannot be deducted.

Telephone bills are considered direct business expenses and are not part of the home office deduction. You can deduct a portion of your home or cell phone bill, but not the cost of basic telephone service on the first phone line in your home or on your cell phone.

Repairs and maintenance

When it comes to repairs and maintenance, there are a few things to keep in mind. Firstly, distinguish between a repair and an improvement. A repair keeps your home in ordinary efficient operating condition and does not add to its value or prolong its life. On the other hand, an improvement makes your home much better than it was before, restores it to operating condition, or adapts it for a new use. The cost of repairs to business property can be deducted as a business expense for that year, whereas improvements need to be depreciated over several years.

For example, replacing a few roof shingles is a repair, whereas replacing the entire roof is an improvement. Fixing a hole in your carpet is a repair, but replacing the carpet in your office is an improvement.

The next step is to determine whether the repair is a direct or indirect expense. Direct expenses are those that only benefit your home office, whereas indirect expenses benefit both your home office and your personal space. You can deduct the entire amount of a direct expense and only a portion of an indirect expense.

For example, fixing a window in your home office that won't close properly is a direct expense. In contrast, repairing the roof of your entire home is an indirect expense, and only the portion that benefits your home office is deductible.

Other deductible maintenance expenses include house cleaning, furnace repairs, exterior painting, termite inspection, pest extermination, and snow removal. However, keep in mind that you can only deduct the cost of materials if you do the repairs yourself, not the cost of your labour. Additionally, lawn services are generally not deductible, even if you meet clients in your home office.

Capital expenses

Capital Cost Allowance (CCA)

CCA refers to the depreciation of an asset over its useful life. It is a way to recover the cost of an asset over time by deducting a portion of it each year, using methods and tables established by the relevant revenue service.

In Canada, you can deduct part of your capital cost allowance as a business-use-of-home expense. This includes the interest related to the workspace in your home. If you later sell your home, the capital gain and recapture rules will apply if you deducted CCA on the business use of your home.

In the US, if you qualify for the home office deduction and own your home, you can recover the cost of the business percentage of your home through depreciation deductions. This is not a factor if you use the simplified method to determine your home office deduction.

Repairs and Improvements

Generally, the cost of capital improvements must be added to the basis of the property. However, if you can claim the home office deduction, you may be able to deduct a portion of your repairs. Repairs are considered to keep your home in ordinary efficient operating condition and do not add to the value of your home or prolong its life. Improvements, on the other hand, materially add value, prolong the useful life, or adapt the home to new uses.

If you make a significant, permanent improvement to your property after beginning to use it for business (e.g. installing a new roof or buying a new furnace), you will need to depreciate this capital expenditure. This involves depreciating the business percentage of the cost of the improvement over 39 years, beginning with the month and year of installation.

Casualty Losses

If your home office is damaged or destroyed by a disaster such as a flood, fire, accident, or vandalism, you may be able to deduct some of your losses as part of the home office deduction. To claim a casualty loss, you must file a timely claim for any insurance you have on the property, and you can only deduct the portion of the loss that is not reimbursed by insurance.

In the US, the rules for deducting casualty losses on business property are more favourable than for personal property. Losses on personal property are subject to a $100 per occurrence threshold and a 10% of adjusted gross income (AGI) limit, neither of which apply to business property. Additionally, business casualty losses are measured differently, and business losses are generally more tax-advantaged.

Business insurance

Protection Against Lawsuits and Liability

Coverage for Professional Services

Professional liability insurance, also known as errors and omissions insurance, is crucial if you provide professional services to clients. It covers legal costs if your business is sued for negligence, even if you haven't made a mistake. This type of insurance is tailored to your specific profession, such as IT consultants or business consultants, to address common risks in your field.

Protection for Business Equipment and Property

Loss of Business Income

Endorsements and Additional Coverage

You can also tailor your business insurance policy with endorsements to meet specific needs. For example, you can add coverage for essential personnel, off-premises utility services, interruption of computer operations, cyber liability, or data breach insurance.

Cost of Business Insurance

The cost of business insurance for your home office will depend on various factors, including the size of your business, its location, and the type of work you do. It's a good idea to consult with an insurance specialist to discuss your specific needs and get a customized quote.

Frequently asked questions