The end of another year is upon us, and personal tax season is right around the corner.
As a farmer, it is important to know what deductions you can claim. Home office expenses tend to raise a lot of questions.
A lot of farms use an office in their home for paperwork and storing records. The government allows you to deduct a portion of these home office expenses from your taxes if you have an area in your home that is dedicated exclusively to being your principal place of business.
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This means you cannot have another office, such as in your shop, and still deduct home office expenses.
Following is a list of common expenses to include when calculating this amount:
- utilities (heat and electricity)
- repairs and maintenance
- mortgage interest
- house insurance premiums
- property taxes
- telephone
However, this list is not all inclusive. If you have an expense that you think relates to the business, make sure you include it in a summary to discuss with your adviser when completing your taxes.
The claim is limited by the size of your office in relation to the size of your home. For example, if your office is 150 sq. feet and your entire home is 1,500 sq. feet, then you can claim 10 percent of your home expenses.
One limitation of home office expenses is that they cannot create an overall business loss. However, even if you are in a loss, you should still track this expense because it can be used against your income in future years.
If you have a farm corporation, one way to claim the home office expense would be to charge your corporation rent on the home office space.
This will allow for your farming corporation to get the deduction that relates to conducting business for the farm.
If your corporation has been paying all of your home expenses, you may be at risk. You should have some personal expenses for your home.
If the government determines that the amount that has been deducted is unreasonable, it may add this amount to your personal income and deny any deduction in the company.
This may result in a much larger tax bill and potentially interest and penalties.
It is important to understand the tax rules and apply the proper tax treatment when it comes to home office expenses.
Ensure that you consult with an adviser when determining the amount of home office expenses to deduct.
Colin Miller is a chartered accountant and partner with KPMG’s tax practice in Lethbridge. Contact: colinmiller@kpmg.ca.
