Covid-19 has had a huge impact on businesses not just in Canada but across the world. The current circumstances have been unpredictable for those paying corporate taxes; many want to know whether or not they can claim home office expenses. Small business accountants in Toronto are the best people to provide in-depth information. In this article, we will discuss the general limitations on deductions of home office expenses in line with the federal income tax Act (ITA), the statute that sets out the rules pertaining to home office expenses.
There are certain rules and regulations that must be followed when claiming home office expenses; there are hopes that in light of the Covid-19 pandemic, these provisions will be revised. Here is what the General Limitation on Deduction of Home Office Expenses:
Taxpayers find it very difficult to meet the terms because the meaning of the term “meeting” is unclear. Does an online meeting fulfill the terms of the limitation? The current situation is giving rise to the practice of virtual meetings, and it is yet unclear that when the term “meeting” is used does it include online meetings or not. To make the position of corporate taxes clear, it is crucial for the CRA to revisit the interpretation of the term “meeting” many small business accountants in Toronto have requested them to do so.
Requirements for home office expenses claim
An employee who claims home expenses must prove that they are actually an employee working from home by providing a statement of employment expenses, otherwise known as a T777. This form is to be completed and signed by the employer.
If an employee is working on a commission basis, then he/she is only permitted to deduct a certain amount of expenses. This is mentioned in the ITA and includes expenses such as home insurance and property tax but not necessarily corporate tax.
Annual deductible amount limitation
The number of expenses that are claimed, it is important that they are in proportion with the usage of the home office and it must be a reasonable amount. For example, instead of asking for the entire rent of the home where the office is based, only the rent of the office area must be claimed on the basis of square feet.
These expenses are not for the purpose of fulfilling losses through the employment year; however, claims can be made on expenses that exceed the employee’s income.
Home office corporate tax deductions for small business owners
There are two versions of claiming home office expenses. One is the simplified version; the other is known as the actual expense deduction.
If you are eligible for the deduction of home office expenses, you further need to choose which approach you will be taking. The decision is solely based on which side will get you a greater corporate tax deduction.
The actual expense deduction method
If you use the actual expense deduction method, you can use this to deduct expenses directly; these expenses include the cost of paint, repair, or maintenance of the home office. Indirect expenses include mortgages, insurance, utilities, taxes, and general repairs of the home. These expenses are deducted on a percentage of the space of the home that is used for the purpose of the business.
The simplified version
As the name suggests, this allows a simple and easy deduction of expenses from the home office expenses. An example is that if your home office measures to be up to 300 square feet or less and you want to make the simple deduction rather than the actual expense deduction, the procedure is that the IRS allows you a deduction of up to $5 per square foot for the part of the home that is used for your business, so you just need to multiply the amount with the measurements of the home office, and that is how much you are entitled to, but the amount must not exceed $1500 for a 300 square-foot office space.
Frequently asked questions
Do I need any kind of approval to deduct home office expenses?
Taxpayers cannot claim any deductions when it comes to home office expenses unless the ITA specifically allows them to. An employee who claims home expenses must prove that they are actually an employee working from home by providing a statement of employment expenses, otherwise known as a T777. There must also be a declaration of the conditions under which the person has been employed and must also state that the employee will be paying their own expenses while undertaking their duties, and these costs will not be reimbursed by the employer.
How can a home office be qualified for tax deductions?
The rule is usually, firstly, the place where the individual conducts the business must be there for more than 50 % of the time according to small business accountants in Toronto; secondly, the place must be used for the purpose of earning an income, for meeting clients and customers exclusively for business purposes.
What expenses can be attributed to the financial expense as home office expense?
Paragraph 8(1) (i) of the ITA includes the following as expenses that can be deducted:
- Electricity, heat, water
- Expenses that have been consumed whilst directly on duty
Can small businesses get any tax relief?
You can even claim a Covid-19 relief fund for your business, and many small business accountants in Toronto suggest we do so. The loan options and funding information can be found online.
Who can be termed as self-employed?
Self-employed persons are those who conduct their own business as sole owners or in a partnership. Provided that the prescribed tests are met, a person who is self-employed can generally deduct a home office expense the amount deductible can be to the extent that is incurred by the person earning an income from a business, the deductible expenses do not include corporate tax but do include deductions such as mortgage interest, capital cost allowance.
Using the simplified method can be more practical and makes more sense because it allows you greater deductions when you document your expenses. It is also less time-consuming as there is no need for collecting receipts and records. This method is ideal if you have a small business or a specific small room used as an office space.