We often get asked about how to deal with home office expenses for your incorporated business. While there are a few different options, here’s the best way we’ve found to do it.
If you have a separate and distinct part of your home you have devoted exclusively to business use, you can deduct home office expenses from your corporate income. Talk to us in more detail about the boring tax stuff as it applies to your situation. For the purposes of this blog, we just want to talk about how you deal with the expenses from an administrative perspective.
A lot of people are tempted to record all their home office expenses in their accounting records or pay their home office costs from their business bank account. We think that leads to unnecessary administrative cost. Here’s an easier way.
You first need to document all your house costs. For example:
• Mortgage interest
• Property taxes
• Utilities (gas and electricity)
• Telephone and internet (sometimes)
This might be a simple spreadsheet, a neatly organized file folder or a bunch of labeled adding machine tapes. Figure out what works best for you, your bookkeeper and your accountant.
You then need to identify the percentage of the house used exclusively for business purposes. This generally would include any separate and distinct office space plus storage space divided by the total area.
You don’t need to track any of these in the business’ accounting records. You or your accountant can just multiply the total house costs by the percentage of business use to give you an accounting credit to your “shareholder loan” in the company books on an annual basis. This credit can be drawn out tax free and deducted from the taxable income of the company.
It’s that simple. If you need an Excel template for this, let us know. We give them to our clients free of charge.