Working at home under COVID-19 quarantines has inspired many Canadians to think about establishing their own home-based businesses or launching side gigs to help supplement their regular income. The good news is that you’re already surrounded by potential tax deductions that can help reduce the taxable income you earn in your home-based enterprise.
Here are eight deductions that, when properly applied, can be recognized by the Canada Revenue Agency (CRA).RELATED STORIES:How to optimize your time spent working from home
Business start-up costs
You might have bought office supplies or material related to your home-based business before you ever thought of becoming an entrepreneur. You can still deduct the cost of those supplies as long as you bought those items in the same year that the business is started.
Add up all the costs associated with the office supplies you use in the home office every day. That includes everything from pens, pencils and paper to ink cartridges, staples and rubber bands. Larger items you buy to last a long time — computers, desks and filing cabinets — are considered capital expenditures and their costs are deducted a little at a time, year after year, according to a CRA formula.
Wood, cloth, thread, solder, sheet metal, paint, sugar and flour — the raw materials you use to provide goods and services — are all deductible from your income.
It costs money to own a home and now that you’re devoting a portion of your home to your business, part of those costs are deductible. Simply calculate the percentage of floor space your business uses in your home. A 200-square-metre office in a 1,000-square-metre home works out to 20 per cent. You can now deduct 20 per cent of a wide range of costs — including mortgage interest or rent, property tax, heating, electric bills, home and property insurance and even property taxes — from your income. But the CRA can be picky. If you use a basement space as an office by day and a rec room by night, be prepared to cut those deductions in half.
Repairs and maintenance
You can deduct the cost of normal repair and maintenance on your home, but there’s a catch for do-it-yourselfers. If you hire someone to do the work for you, you can base your deduction on his or her entire bill. If you do the work yourself, you can only deduct the materials you use, but not your labour.
Salaries and wages
If you’re paying someone else to help you earn money, then their wages and benefits are deductible. You can even pay family members as part of your business team. But avoid CRA red flags, like having your kindergarten student listed as “executive vice president in charge of production.” They’ll need time to grow into that role and a regular salary.
You can deduct the cost of using your landline or cell phone, but you’ll have to prove to CRA that you use that phone 100 per cent of the time for business, or you’ll have to reduce the deduction to business use only. Some entrepreneurs make it easy on themselves by designating one phone for personal use, and another entirely for business.
Like your home, part of the cost of operating a car is a deductible expense. Total up the number of kilometres you drive for your business each year, then divide that by the total number of kilometres you drive: 15,000 kilometres for business out of 60,000 kilometres in total would be 25 per cent. That percentage applies to leasing fees, gas, oil, windshield washer fluid, car washes, insurance, registration fees and repairs. Keep detailed ongoing records of how far you drive for business, because it’s not easy to remember where you drove last week, let alone two years ago if the CRA asks to see your logbook.
One important tip from seasoned entrepreneurs: keep a record of all your expenses as you pay for them, save and organize your receipts as proof of purchase and enter those costs into the accounting or tax software package you’re using, such as The QuickBooks 2020 Essentials Bundle: Beginner to Bookkeeper. It’s a small task if you handle it every week — a massive and stressful task if you’re reconstructing your expenses the day before your tax submissions are due.
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Source: Financial Post