Introduction To Deducting Home Business Expenses

If you are operating a home-based business, you can deduct relevant home business expenses from your income. For simplicity, this post assumes that the business is a sole proprietorship.

Are You Eligible?

CRA’s Guide T4002 tells us you can take the home office expense tax deduction if you meet one of the following conditions:

1. It is the principal place of business; OR

2. The space is used exclusively to earn business income on a regular AND continuous basis for meeting clients.

Expenses Deductible

The Canada Revenue Agency has a Form T2125, which can be found here. On that form is a list of eligible home office business expenses. Here is a snapshot of the list from Form T2125:

Once you have gathered the eligible home office expense original source documents as listed on form T2125 … which include utilities including water (but not your telephone), maintenance and repairs, insurance, property taxes, rent, mortgage interest … you must prorate them to your office space.

For example, if you have a home office that is 10 by 10 feet in a house that’s 1800 square feet. Then your calculation of allowable portion of business-use-of-home expenses would be: 100 divided by 1800 = 5%.

Finally, you cannot use the business-use-of-home expenses to create a business loss, so your deduction can’t be more than your net income before you deduct these expenses. If it’s more, you can carry the amount of these expenses forward into the next year.

This post is for information purposes only and should not be interpreted as tax advice or a legal opinion. Please consult with us to review your own particular circumstances.

© Copyright Jenny Lin, 2010.