Put Money Back in Your Pocket with the Home Office Deduction

By Randall Orser | Personal Income Tax

Canadian dollars money TNIf you perform any type of work from home, whether as a freelance writer or selling merchandise via shopping or auction websites, the expenses you incur at home could save you a bundle on your taxes. Here are the things that you need to know and have available in order to reap all of the benefits of home office expense tax deductions:

Determine if your home office is actually an “office”.

In order to take this type of deduction, the area of workspace must be exclusively used for your business or you must be able to determine what percentage of the time you use that workspace for your business. For instance, if you have one room where your computer sits and you use that area only for conducting your business, that is considered your home office and is used 100 percent of the time for that purpose. If you conduct your business in your living room via a PC or laptop and you also use that room for entertaining guests, spending time in front of the television with friends and family, or you sleep there, your living room can still be considered your home office, but only at a fraction of the time. Let’s say your room is available 24-hours a day to use as an office, but you work 6 hours on a laptop and the other 18 hours, the room is used for watching television, playing video games, or sleeping on the sofa, your percentage of use for home office would be 6 out of 24 hours or 25 percent.

You will need these types of information to deduct your home office expenses.

Whether you own your home or rent, you will need to know how much money in total that you spend on either your mortgage interest or rent payments throughout the past year. Utility bills that you paid during the previous year for electricity and natural gas or propane can be used as a deduction. Repairs or maintenance that was conducted on any part of your home, indoors or outdoors, is deductible. These amounts are for your entire home and are separate from any purchases you made or bills that you paid exclusively for a home office.

Expenses that were solely for your home office.

Although it is rare, if you pay extra rent for an outbuilding where you live and you use that as your home office, that would be considered rent that is exclusive to your home office and is fully deductible. Lines of communication such as telephone, Internet or a separate line for a fax machine that are used exclusively for your home office are deductible and separate from the full home expenses.

Expenses that pertain solely to your business.

Certain expenses that incur in order to conduct your business, prepare for opening / starting a business, or drum up new business are deductible. Advertising costs, office supplies, computer equipment and software, purchasing new furniture for your home office, snow removal / trash removal that is exclusive to your home office and certain meals and entertainment expenses are deductible. Purchases of software, furniture, or equipment that you paid more than $100 for are depreciable. What this means is that over time, these items will lose their value or become obsolete. In such cases, you are allowed to deduct the amount of value that is lost whether you decide to take the depreciation deduction all at once or spread it out over time.

Vehicle expenses when you use your car, truck or van for business use.

Whether you drive children to school as part of your childcare service or you use your vehicle to drive to the post office to purchase stamps that you will use in your business, the expenses of powering and or maintaining your vehicle are deductible. The catch here is that you must keep written records of your mileage that pertains to the use of your vehicle for business purposes. When filing your taxes, determine which method will grant you the larger return: a) deducting standard mileage amounts or b) actual expenses for gasoline, oil, tires, and repairs. Another important factor to remember is that if you will be conducting the same type of business the following year, you must use the same method of deduction (standard mileage or actual expenses incurred) each year.

Home office expenses are often over-looked and not taken as deductions toward tax liability. These important tax credits and deductions could put as much as $500 – $5,000 or more in your pocket based upon your personal income, home, and home office situation. It is worth your time and effort to keep accurate records and explore all of your tax avenues before you file.

About the Author

Bookkeeper Extraordinaire Number Crunchers® Financial Services Learn how to just say stuff it to this bookkeeping thing with our 'Just Say: "Stuff It" To Bookkeeping program.