The Tax Advantages of Working from Home

Having a home-based business can be incredibly rewarding— being your own boss, setting your own schedule, telecommuting while wearing sweat pants and a t-shirt. Working from home has a lot of things going for it, and there are many reasons why more and more people are choosing to start a home business. One aspect of telecommuting that all home business owners enjoy is the tax benefits of operating a business from home.

The home field advantage

When people think about working from home, one of two scenarios pops into mind: one, you are employed by a company but instead of driving to work every day, employees have the option to work from home; and two, operating your own home-based business. The latter can be anything from a tech startup to a small family-run contracting business to accounting or sales. Both of these scenarios have different tax breaks that people can take advantage of.

Telecommuting

Employees love telecommuting because it means doing away with long drives to the office, helps the environment, allows workers to be more productive, and helps create that elusive work-life balance. What many people aren’t aware of is that there is a tax benefit to telecommuting as well. For the area that a person would be working out of, they can claim a portion of expenses such as: heating, electricity, Internet or a business line, water, maintenance, property taxes, and home insurance. However, they would not be able to claim mortgage interest or capital cost allowance. According to the Canada Revenue Agency, if your employer requires you to have a home office, you can claim that as a deduction on your taxes. However, your employer must also sign a T2200 federal form that certifies this. If the company won’t sign, you can’t claim. As well, one of two conditions must be satisfied:

• “The workspace must be where you ‘principally perform the duties of employment.’ Principally means more than 50 per cent of the time.

• “Failing the first condition, the workspace must be used only to earn employment income, and you must use it on a regular and continuing basis to meet clients or customers.” (CRA website)

 

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Given these conditions, there are many employees who would not qualify, but for those that do, claiming these expenses can help boost tax returns.

Home-based businesses

With added risk comes added gain. As anyone who has started a small business knows, running a business can be quite costly. While there are many benefits to owning a business, there are also many more challenges and risks that people who are not self-employed may not be aware of. That is why, in Canada, the government allows businesses to claim necessary expenses that can be deducted off their tax bill. Expenses like education or professional association costs, equipment, office space, utilities, and more — and home-based businesses benefit from this too.

Like home-based employees, home-based businesses can claim the portion of the house that is used strictly for business for tax purposes. As long as it “is your principal place of business; or you use the space only to earn your business income, and you use it on a regular and ongoing basis to meet your clients, customers, or patients,” it can be claimed for business purposes. Again, like before, business operators can claim a portion of expenses like: heat, water, electricity, home insurance, rent, property taxes, phone and Internet bills (if they are strictly for business purposes, the entire amount can be claimed — otherwise, it is a portion of usage), office supplies and equipment, and more. What makes it different is that with a home-based business, claimants can also deduct a portion of their mortgage interest as well.

Another thing that you can claim is what is called “capital cost allowance” (CCA). CCA is “A yearly deduction or depreciation on the cost of certain assets. You can claim CCA for tax purposes on the assets of a business such as buildings or equipment, as well as on additions or improvements, if these assets are expected to last for some years.” These can be items like printers, filing cabinets, desks, chairs, computers, et cetera. This can also include a portion of the house itself; however, this is not generally recommended, as this can cause you to lose some capital gains protection when it comes time to sell the house.

Whether it is for a home office or home business, there are a few things people should be aware of.

Pitfalls

Like anything to do with taxes, it’s crucial that people understand what they are getting into. In case of an audit, it is recommended that people make sure to have all necessary receipts and documentation on hand to prove that they are not claiming more than they should be. This includes vehicle costs. If you are claiming your personal vehicle on your taxes, make sure to keep a log book and document the mileage any time it is used for business purposes. Also, make sure that you are claiming expenses that are allowable. Claiming an item that isn’t can raise red flags quickly. As well, as this article points out, home office claims can’t be used “to create or increase a loss from employment.” Allowable expenses that can’t be claimed one year can be carried over to the next, however.

One thing we always recommend is that people educate themselves as much as possible about taxes, on an ongoing basis. One of the best books on the subject of business expenses is Evelyn Jack’s Make Sure it’s Deductible. It is updated regularly and is one of the best resources a small business owner can have.

Working from home comes with a lot of advantages. It can help create an ideal work-life balance, help the environment, and foster economic growth, and there are many tax advantages out there to help ease the burden. By educating themselves and being aware of what is out there, employees and home business operators alike can reap the rewards.

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  • Storoszko & Associates, Tax Services
    June 5, 2014 at 8:16 pm

    Starting any business requires planning and soul-searching, but there are particular aspects of your business’ operations that need to be considered carefully before you start a home business. This response assumes that you already know what you want to do and how you’re going to do it; it provides guidelines for deciding whether to run your business out of your home or not.

    Legalities – Like any other business person, you need to set up your business legally. You will have to choose a form of business (such as a sole proprietorship, partnership or corporation), and register your business name, if your business has a name other than your own.

    You may also need a business license, depending on the type of business you’re running. And you have to run your business according to provincial and federal laws, which means you may need to register for Workers’ Compensation insurance with your province, or collect GST/HST and/or PST.

    But you have to do all of these things no matter where your business is located, so let’s look at factors specific to home-based businesses that you need to consider before you turn a room of your home into an office and start selling your products or services.

    Location – You know how important a consideration location is to real estate (both commercial and residential). The location of your home-based business is extremely important, too. You may not even be able to start the home-based business you want to start where you are now, because of issues such as space and zoning. Before you start a home-based business you need to consider the suitability of your neighbourhood and house.

    Zoning – Is your neighbourhood zoned for home-based businesses? If it’s not, you’re just asking for trouble down the road when the city catches up with you or a neighbour complains. Many municipalities don’t allow home-based businesses at all, and others place severe restrictions upon exactly what kind of business is allowed to operate out of a family dwelling in a residential neighbourhood. Check the zoning bylaws with your municipality.

    Neighbourhood suitability – How will your proposed home-based business fit into your neighbourhood? Most residential neighbours are not going to be very happy if you have noisy machinery running all day long, large trucks starting up early in the morning, or customers parking their vehicles all over the place. If your proposed home-based business involves manufacturing, or trucks or other vehicles arriving at or leaving your property on a regular basis, you should not be operating in a residential area. Unhappy neighbours can be bad for business in all kinds of ways.

    Neighbourhood location – Will your neighbourhood’s location work for or against your home-based business? If you’re delivering a product or service, it probably won’t matter if you’re located 15 km out of town down an obscure country road (except for the extra travel cost you incur). But if your home-based business involves people coming to you, then they need to be able to find it and get there easily. In many cases, you won’t be able to put up any signage for your home-based business, although in others you will be able to have a small, unobtrusive sign by or on your door.

    Your property’s location and appearance – You don’t have to live in a manor with a manicured landscape fit for a magazine to run a home-based business, but your property does have to be attractive enough that it won’t scare off prospective customers or clients. Old cars cluttering the yard, knee-high grass, and dilapidated buildings with peeling paint are all turn-offs that can lose you business. A poorly maintained house and property gives people the impression you don’t look after things – so why would you look after them? If you’re going to run a business out of your home, your home has to look neat and respectable – at all times!

    Your house’s suitability – I’m always amazed at the number of people who try to run their home-based businesses out of their kitchens. If the only space in your home you can devote to your business is the kitchen or a corner of your basement, don’t, unless your business is virtual and no one is ever, ever going to see your premises. People who visit your home-based business will expect it to look (and operate) like a “real” business. They expect to be able to do things such as sit down and sign papers in a business-like environment. Any home-based business will need to have an entire room set aside as an office space.

    Some home-based businesses will need even more space. For instance, if you consult with clients, you’ll need an actual consulting room separate from your office. If your home-based business involves creating arts or crafts, or manufacturing, you’ll need a suitable studio or shop. If you’re in this position, and you don’t have these already, it may be easier and cheaper to find suitable quarters for your home-based business elsewhere then try to renovate your home to accommodate your business plans.

    One of the main differences between operating a home-based business and a business “off-site” is that you lose that automatic separation between your business and your home life. Before you start a home-based business, you need to think about how well your work style and your family will fit into your home-based business plans.

    You also need to consider if your family and your work style will support operating a home-based business. Working from home can be idyllic if your family is prepared to support your plans to start a home-based business and if you’re prepared to deal with the potential problems of actually working from home. Before you start a home business, think about:

    Your family – You’re not the only one involved if you start a home-based business; your whole family will be involved in the enterprise, for good or ill. You need to consider how running a business out of your home will affect your family.

    While many people start a home-based business thinking that they’ll be able to spend more time with their family than they would otherwise, the lack of separation between your business and personal life can seriously interfere with family activities. How will you keep your family life and your work life separate and how much time can you realistically devote to both?

    You also have to consider everyone’s expectations. Will you expect your family members to pitch in and help with your home-based business? How will your family members feel about this? Discuss your home-based business plans and expectations with your family first, and find out whether or not they’re prepared to actively support your business.

    Your work style – As much as everyone likes to fantasize about it, working from home isn’t for everyone. Before deciding to work from home, you need to think about your personality and your work preferences. The three main problems of working from home are:

    Working from home can increase your feelings of isolation and lack of contact with colleagues. Many people have difficulty coping with working alone for long stretches of time. This is especially difficult for those who are used to working in busy office environments and being surrounded by people.

    Working from home can cause increased family stress, because of the difficulty of separating business and home life. I’ve already touched on this, but it’s important. If you thought bringing a new pet into your home was stressful, wait until you start a home-based business!

    Working from home calls for self discipline and the ability to plan and manage one’s own time. On the one hand, being your own boss means that no one else is telling you what to do. On the other, if you don’t keep yourself focused and on task, no one else will.

    How will you handle these potential problems of working from home? Thinking about your work style and devising strategies to deal with these potential problems of working from home ahead of time can make all the difference when you’re faced with actually doing it.

    Your personality – Your personality is also a determining factor in whether or not you should start a home-based business. While many people start home-based businesses because they see it as a natural extension of the hobbies they love, having a hobby is not the key to running a successful home-based business.

    Are you an entrepreneur? Do you have the qualities an entrepreneur needs to have to be a success? Research shows that successful entrepreneurs share certain traits and attitudes, such as perseverance, the desire and willingness to take the initiative,competitiveness, self-reliance, a strong need to achieve, and self-confidence (William Jennings, “A Profile of The Entrepreneur”).

    Number one on my list of the personality traits you need to be a successful entrepreneur is determination. Enthusiasm is a great quality, but you won’t get far with your plans to start a home-based business if you don’t have the determination to put your plans into action.

    In fact, there are so many adjectives starting with the letter “D” that are associated with the attitudes shared by successful business people, that has coined the phrase “Type D Personality” to summarise them. Besides determination, you need drive, discipline, and desire to run a successful home-based business. You also need to be adaptable and flexible; each day will bring new challenges you may or may not have planned to meet, and often, a multitude of tasks that all seem to need to be done at once!

    Deciding to run a home-based business isn’t a snap decision. But if you do decide to locate your business in your home, it can be the most satisfying, exhilarating thing you’ve ever done. And know that you’re not alone. Thousands of others small business people are doing exactly the same thing – and operating successful home-based businesses.

    As for the tax portion of your question, it would be best that you connect with an Accountant that you can feel comfortable discussing your business with. The author of the above article touched on several issues when it comes to taxation, but neglected to mention that operating a business out of your home may and can be a ‘change of use’ of your home from personal to business and therefore cause any potential future sale of your home to be a taxable event in your life, which most people would want to avoid as they would not want to pay income tax on the proceeds of the sale of their home.

    I hope this has answered your question.

    Regards,
    Storoszko & Associates
    Canadian & US Tax Specialists
    http://www.storoszko.net
    647 367 3477
    Twitter: @Storoszko_Assoc

  • Shannon
    June 5, 2014 at 12:15 pm

    I’m planning on starting my own business and intend to do it at home since I have young children that would benefit from me working from home. What are some important factors I should consider before starting this project? And I also want to make sure that I do my taxes correctly.