How to Calculate Business Use of Home Space for Home-Based Business

The question of Business Use of Home calculation comes up frequently. Recently I received this message from a member in the Home Business Tax Secrets Facebook group, and thought I would share the conversation in a blog post to educate others.  

HB Owner: When it comes to my home office i claim by the room -- ie 10 rooms so i claim 10%...my wife claims sq footage as to her advantage to do so. We were speaking to CRA and they state you can only do by room if all rooms are similar size. They stated it is a common mistake made. Have you heard this before? Would you have the link stating either or - CRA stated the tax programs give you the option but they are wrong. Figured you may find this a little intriguing.

Doug: I recommend the actual SF measurement. I see lots of people doing the room count. I side with CRA on that... not all rooms are the same size. The tax program asks what % of your home is used for personal. Then it takes the business use % from the totals.

HB Owner: Actually the tax program asks for either amount of rooms or sq footage - I have used them for years and even CRA knows this. I will be changing to sq footage moving forward. I used an accountant this year.

Doug: Depends on what program you have. Ufile does %. I think turbo tax might do rooms.

HB Owner: Turbo gives the option.

Doug: What did your accountant have to say about your question?

HB Owner: I never looked as I advised him number of rooms - I am going to look at the T1 to see.

Unless you have some rare accountant who spends “hours” with you in preparation for your taxes, they most often just report on what you give them. You get exactly what you report to them!

Here's a few questions I tend to ask when it comes to hiring tax preparers:

• What are you missing that the accountant never asked for?
• What did you miss that possibly your accountant is not aware of as they themselves are not a home-based business?
• Does your accountant proactivity work with you through the year to help you maximize your write-offs claimed, even showing you simple tactics to help you increase your write-offs to save on income tax?
• Is the accountant relationship just a tax time single transaction with a focus to just your tax return?
• What exactly are you getting for your money with their services?

Here’s a little more details on calculating the square footage for home office use. Hope this helps you!

Calculate Your Home Office Space as a Total of Your Home - the Correct Way!

To calculate the home office deductions as a percentage of your house you first need to ensure you have a dedicated "home office", following the government guidelines.

The key is to calculate the total amount of "LIVING SPACE" versus your home office space either as a number of rooms or a SF %. It's important to note that "LIVING SPACE" does not have to include hallways, bathrooms, closest, stairways, etc. That is not "living space" in your home.

By using this "living space calculation" your total square footage of living space decreases which increases the % of your home office location. When your home office % increases your tax write-offs go UP! This simple tax calculation makes an impact on your income tax return!

In determining whether the office in your home qualifies as your principal place of business, you must consider the following two items:

1. The relative importance of the activities performed at this place where you conduct business.
2. The amount of time spent at this place where you conduct business.

Your home office will qualify as your principal place of business if you meet the following requirements.

• You use it exclusively and regularly for administrative or management activities of your trade or business.
• You have no other fixed location where you conduct substantial administrative or management activities of your trade or business.

Administrative or management activities. There are many activities that are administrative or managerial in nature. The following are a few examples.

• Billing customers, clients, or patients.
• Keeping books and records.
• Ordering supplies.
• Setting up appointments.
• Forwarding orders or writing reports

Following these guidelines, almost any type of "business activity" can be classified as a home-based business for tax purposes...!!