Using a work space at home for business

We are keeping busy getting ready for the upcoming tax season.  We have been addressing many office administrative needs and reaching out to our clients.  It has been fun getting back in the new year and getting things in order for 2011.

Tax issue: Home use for Business puposes.
We see many self employed clients, claiming a home office as a business expense.  This is a legitimate business expense that can be deducted on the business schedule of your tax return when a portion of your home is used as the principal place for business.

It allows you to deduct legitimate office expenses to reduce your taxable income. These office expenses are the portion of your home costs that you already pay to run your house. However your home office must qualify as a eligible work space.

Most people think that if they use the phone to answer a couple of calls in a month and have a desk set up, this is being used for business purposes.  Then they take the large % of the home and want a deduction.

So although the work space in home is a great way to deduct valid office expenses for a self employed individual, it should not be misunderstood.

The income tax act requires the home office to meet the following criteria:

(a) the principal place of the business of the individual, or

(b) used exclusively to earn business income and on a regular and continuous basis for meeting clients, customers or patients of the individual in respect of the business.

So what this means is, that the home office must be the main place where business is conducted. So if you have a home office and conduct business at another office or in other places, your home office expenses would not be valid

The second criteria is that the home office must be used to regularly and continuously meet customers.  So at least several customers a week must come to your home.

So immediately many home offices are ruled out since these two criteria are not met.  However if they are met you then can use a reasonable method to calculate the home office %.  (Usually square footage). Using this % you can deduct the home office portion of the following

• Utilities
• Mortgage Interest or Rent
• Home Insurance
• Property taxes 

So if your home office qualifies as a business workspace, it can be used as an useful tool to claim a portion of home expenses relating to your business to reduce your taxable income.

Hoping to get some skiing in this weekend.