Advantage: U.S.A.; Canada should copy the IRS's simple expense form
One of the advantages of running your own business, as opposed to being an employee, is the additional expenses such as mortgage interest and depreciation that you can write off if you maintain a home office. In order to do so, however, the Income Tax Act specifies the work space must be either your "principal place of business" or "used exclusively for the purpose of earning income from business and used on a regular and continuous basis for meeting clients, customers or patients."
Assuming you meet one of these conditions, home-office expenses must be pro-rated between business and personal use in a reasonable manner, generally on the basis of square footage. The types of expenses you can write off include a portion of the home's utilities, repairs and maintenance, property taxes, insurance, mortgage interest, and even tax depreciation, known as "capital cost allowance" or CCA.
For self-employed business owners or professionals, the deduction calculations are done on page three of CRA Form T2125, "Statement of Business or Professional Activities," under the heading "Calculation of business-use-ofhome expenses." In this section, you total your various expenses (heat, hydro, etc.) by adding up all your bills received throughout the year and then deduct the personal use portion.
Anyone who has done this knows that the task of tracking down all those monthly bills and then summarizing them only to multiply the total by some small percentage (often 10% or 15%) of the total home's square footage to get the deductible portion can be a mind-numbing task that hardly seems worth the effort.
But what if there was a simplified method that would allow you to avoid keeping all those burdensome records?
Such a method for tracking and deducting home-office expenses hasn't yet been proposed in Canada, but the U.S. Internal Revenue Service earlier this year introduced a simplified home-office deduction for U.S. tax filers beginning in 2013.
Instead of having to track and pro-rate multiple expenses, a U.S. individual can now simply write off US$5 per square foot for up to 300 square feet of office space, for a maximum total deduction of US$1,500 annually. Under this method, there is no need to calculate what percentage of the home a home-office space takes up. Other business expenses that aren't directly related to the home but still relate to the business (for example, advertising, professionals fees, supplies, etc.) are still fully deductible.
Ottawa, are you listening?