For over a year, many Canadians have worked from home due to the pandemic lockdowns. But if you worked from home because you run a home-based business or started one this year, you may be eligible for a number of tax deductions that could save you money.
This category of tax deductions aren't to be confused with the simplified home office expenses tax deduction that the Canada Revenue Agency (CRA) introduced for employees to claim for the 2020 tax year. This category of tax deductions cover a wide variety of your business-related expenses.
The tax deductions list can help whether you are just starting out or are in need of a reminder. Use this list below when considering allowable expenses as a self-employed entrepreneur operating from home.
Whether you just started your business in 2020 or you're in need of a reminder of what you can deduct, this tax deductions list will help you figure out what are allowable expenses self-employed entrepreneurs who operate a business from their homes can claim on their tax returns.
Start-up expenses
If you started up your business this year, there may be certain start up expenses that you can write-off. It's important to note, however, that not all business expenses can be deducted in the same way. For example, things like paper, paper clips, printer cartridges, and pens used by the business can be fully deducted as office supplies in the 2020 tax year. However, if you purchased anything that the CRA would categorize as a 'depreciable property' then you can only deduct your 'capital cost allowance' in 2020. 'Depreciable property' tends to refer to things like equipment or machinery that don't get consumed quickly and are assets owned and used by your business to earn income that have depreciating values. For a home office, that would mean that you can't claim the full cost of your new standing desk or your computer in 2020. Instead, CRA puts the assets into different classes and allows you to deduct capital cost allowance to reflect the depreciation of that asset over time.
Home office deduction
Many people wonder, “Can I get a tax deduction for working from home?” and the answer is yes, provided the conditions are met. But how do you calculate it?
It's easier than you might expect to calculate your deduction – especially if you use your work area exclusively for business. There are two things to consider when calculation your deduction: the amount of space and time you’re using for your home-based business.
Do the math for your deduction
Let's say you're using a spare bedroom as your office plus a portion of your basement to store products, marketing materials and supplies. Add up that space and divide the number into the entire square footage (or metres) available within your home.
For example:
- Spare bedroom/office is 200 square feet.
- Basement storage space measures 100 square feet.
- Divide 300 sq. ft into total footage of your home (say 1800 sq. ft.)
Therefore, 16.6% of your home is a workspace used for business purposes. However, this gets more complicated if you use some of the space that you use for your business for personal use as well. In that case, you also need to calculate how many hours of the day you use those rooms for business and divide them by 24 hours then multiply the result with the business part of your home expenses.
For example, if your eligible home expenses were $20,000 a year, then your tax-deductible portion would be $3,320 if you used those areas of your home only for business. If you used those areas of your home for business only 8 hours a day and for personal use the rest of the time, then you would have to divide 8 by 24 and multiply that by $3,320 to get a total deduction of approximately $1,106 for your office space.
Determine eligible home maintenance costs
Once you know your percentages of home use and time use of those areas by your business, you can also count all eligible home maintenance costs as home business expenses, like heating, home insurance and electricity. Be sure to check the CRA website for any recent changes to these allowances. You can also use the CRA's Business Use of Home Calculator.
Automobile expense deductions
Do you own a car or delivery vehicle that you use primarily or partly for your business? You can deduct your automobile-related expenses. CRA is very clear on these particular deductions, so it's important to follow their guidelines closely and fill them out correctly on your tax form.
If you use your vehicle exclusively for your business, you can deduct all your motor vehicle expenses from your income. If you use your car for both business and personal purposes, then you’ll need to deduct only the costs related to your business use:
- You can deduct the full amount of parking fees related to your business activity
- You can deduct the full amount of any supplementary business auto insurance
The rest of your expenses will have to be deducted based on how much you use your car for business. To do so, you need to keep a log of when you use your car for business that includes the:
- date
- destination
- purpose
- number of kilometers driven
- a record of the odometer at the start and end of the fiscal period
This can be used to calculate the percentage of your business use and you can then deduct that percentage of your vehicle expenses on your tax return. That includes vehicle expenses such as repair, maintenance, fuel, and insurance.
Other common home business expenses
As you purchase things for your business throughout the year, make sure to set aside your receipts. Consider getting a small business credit card to keep track of your business expenses in one place. Keeping up with your monthly expenses will help you avoid forgetting anything come tax time or having to scramble to find receipts.
Here are some common homerelated business expenses to consider deducting:
Home services
Do you use your phone or internet primarily for your business? Consider what amount you use and deduct a proportional amount related to your business use of that expense.
Office supplies
Items you buy and use in consumable office supplies can be fully deducted as a business expense including things like paper, ink cartridges, sticky notes, file folders, pens, pencils, and stamps.
Professional fees
Do you get help from professionals like lawyers, accountants, or advisors to run your business? Do you pay freelancers or independent contractors to help you with work when you're busy? If so, you can claim those expenses as deductions.
Promotional expenses, and professional development
In order to be successful, you need to promote your business and that can include marketing services, advertising, graphic design and customer giveaways (e.g. branded hats, shirts). You can even count donations to charities as promotional expenses in some circumstances. If you're upgrading your skills or networking at professional events or industry conferences – those expenses also count.
Meals, and entertainment expenses
You may be pleased to hear that you can claim meals and entertainment expenses as a tax deduction. There is a catch though. You can only claim 50% of the amount that you either incurred or the amount that is reasonable for the circumstances. That means that if you meet up with a client for lunch and pick up the $50 cheque, you will only be able to claim $25 as a tax deduction. You can also claim expenses for things like office parties, tickets or entrance fees for entertainment or sporting events, or room rentals for hospitality suites.
Unsure? Get help!
While you can do your own taxes as a small business owner, getting help from a tax professional can help you navigate what and how much you cancount as a deduction. They won't just reduce your tax related stress; they might find deductions you would miss. The best part? You can deduct their fee from your taxes next year!
