24 Aug 5 Powerful Deductions For The Home-Based Business
One of the most powerful ways to reduce income taxes is to have a home-based business in addition to your regular nine-to-five job. As long as you follow the rules, you can deduct a wide range of business expenses such as:
Tax Tip 1: Automobile Expenses
Many Canadian home based business owners use their personal vehicles as business vehicles. That’s all right tax-wise; you can still claim a raft of automobile expenses. Besides deducting the costs of fuel and oil, licensing, insurance and maintenance and repairs as a home based business owner you can also deduct interest on money you borrow to buy a motor vehicle, automobile, or passenger vehicle you use to earn income.
You can also deduct the cost of leasing a vehicle that you use to earn income.
As you can deduct only a portion of your automobile expenses when you have a vehicle that you use for both business and personal use, the Canada Revenue Agency (CRA) recommends that you keep a record of the total kilometres you drive and the kilometres you drive to earn income to “support your claim”. The best method to do this is a mileage log.
Tax Tip 2: Office Expenses
Even if your office is just the spare bedroom, your home based business will have office expenses to claim. The catch here is to distinguish between office expenses (things such as pens, stamps and paper clips), and depreciable assets (things such as computers, filing cabinets, printers, and other equipment which fall under Capital Cost Allowance).
Tax Tip: You don’t have to claim Capital Cost Allowance (depreciation) in the year that it occurs and rolling your Capital Cost Allowance Claim forward may lower your taxes later on when you can use it to offset a higher income year.
Tax Tip 3: Mortgage Interest & Property Taxes
If you are carrying a mortgage on your home and running a home based business, you can claim a portion of your mortgage interest under Business-Use-Of-Home Expenses. Generally, you can deduct expenses attributable to the business use of a work space in your home 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. If you own your own home and are running a home based business, you can also claim a portion of your property taxes as expenses. If you are renting, you can deduct a portion of the cost of your rent.
Tax Tip 4: Other Business-Use-of-Home Expenses
There are other expenses that home based business operators who qualify for business-use-of-home deductions can claim. Some of the most common of these are: Heating, Electricity, Water, Property Maintenance, Cleaning materials, Telephone and Internet connection. Once again, you can only deduct the portion of these expenses related to business premises, and what you claim here can’t be claimed elsewhere.
Tax Tip 5: Carry Forward of Unused Expenses To Later Years
You can’t use business-use-of-home expenses to create or increase a loss for your business. So if you end up with having more expenses than income for your home based business, you will have what the Canada Revenue Agency calls unused Work Space in Home Expenses, which you can carry forward into the next year.
The beauty of this is that you don’t necessarily need to claim these expenses in the tax year following either. If your home based business continues to meet the conditions for claiming business-use-of-home expenses, “an indefinite carry forward” is provided meaning that you can use these unclaimed expenses when it’s convenient to offset higher income in a later year.
Like everything else related to taxes, meticulous records are a must; all your home based business deductions needs to be documented with receipts. Purchases and business expenses must be substantiated with a sales invoice, agreement of purchase and sale, a receipt, or some other voucher that supports the expenditure.
But if you have a home based business, these are tax deductions you don’t want to miss.