Posted by: syncro
Posted by: email@example.com
I don't see deducting business expenses (including business-use-of-home expenses) as magically generating additional income or reducing my tax burden. These are real expenses so deducting them is simply part of calculating my net business income. If I didn't deduct those expenses, I'd be overpaying taxes.
No it's not technically magically (your words, not mine) generating income or reducing taxes, but for a home based business you're turning space you're already paying for that isn't providing you with any financial benefits into one that is. So for example if someone has a spare room that sits empty a lot of the time and hardly ever gets used, but using that space for a home based business it now provides with a tax credit against any income you make. Depending on how one's business is set up and run, if those business use of home credits are equivalent to the income the business generates (after costs like equipment purchases, insurance, etc) then there is no tax paid on that income. The result for the sole proprietor is they have generated additional income with no tax burden. Depending on the size of the business use of home expenses this could be a notable amount of income. But even if it's just a small amount, say under $10K, that's an extra $10K of income that's not being added to your overall tax burden. You can consider the same line of thinking with vehicle expenses if your vehicle is also used for business purposes. Whatever percentage of the vehicle use is for business purposed, that percentage of vehicles expenses is a write off. So while it may not be a net plus for things like fuel/oil/repairs, if a vehicle is leased then the business use percentage becomes a tax credit that you would not get if there was no home business. What's better, being able to write of 25% of your vehicle lease or zero?
Having a sole proprietor home based business can be a good way to generate extra income with no additional tax burden for potentially little effort into running the business depending on what it is. For some people it could offer the potential to turn a hobby that makes a little cash on the side into a legitimate business that provides an additional revenue stream. The point of my post is that you can use the tax system to your advantage if you know how. Big business has been doing it for decades, why shouldn't the average person take advantage of the same benefits as well?
I agree that using a space in your home for your business can be a more efficient use of that space. I also agree that turning a hobby into a small business can be a nice option to create an additional income stream in retirement. My point is that the space has a cost and while using it for business you can't use it for anything else. If that "anything else" is letting the space sit empty, that just means you optimized the use of your home, not your tax burden.
Compare it with downsizing to a smaller/cheaper home without that space and renting a separate workspace for your business. It's effectively the same from a financial point of view: you reduce personal living costs, while your business pays for a workspace. In both scenarios, the cost of using the workspace is a real business expense that you should definitely claim as such on your tax return. Semantics, I know, but your explanation reads like home-use-for-business is a trick to pay less taxes, which it is not in my opinion.
It is also worth mentioning that since we are talking about retirement, presumably this business would be part-time so you'd have to pro-rate the deduction. The CRA guidelines are pretty clear about this. For a few hours a week retirement side-hustle, the deduction may end up being pretty insignificant.
Obviously you should try to optimize the deductions that are available to you but as an average person you simply can't take advantage of the same benefits that big corporations have to legally avoid/evade taxes because you lack the scale and the multinational footprint, for example to set up complex structures leveraging differences in tax rules in different jurisdictions etc.
However you can get a slice of the profits made this way by big corps by investing in a low-cost world stock market index ETF! ;-)
Last edited by: firstname.lastname@example.org on Feb. 28, 2023, 12:20 p.m., edited 1 time in total.