Using space in your home to operate your business allows you to write off a percentage of your home’s overhead including property taxes, insurance, mortgage interest and utilities. You can also write off a percentage of the regular (non-capital) repair and maintenance you make to the home.  Note that expenditures made in the business space for business purposes only (eg putting up shelves or painting, are written off as all business expense, not just a percentage).  The space must be used for business purposes on a regular, ongoing basis (eg not the kitchen table). 

The percentage to use is determined by the business space square footage over the total square footage of the home.  The total square footage includes the below grade rooms such as the basement.  This is not necessarily the square footage that the real estate agent told you.   This percentage is applied to the expenses for the home and used to decrease your business income, thereby reducing the tax you pay. 

If you use space in the home for your office or conducting business, then you need to account for the amount of time it is used for business over the total time in the period (year).  Multply that percentage by the square foot percentage to determine the accurate rate to apply to your expenses.

Home business expenses may only be used to reduce business income to zero and can not be used to increase a loss.  In either of these situations the unused home business expenses maybe carried forward, creating a tax free zone for next year.  It is beneficial to claim the home based business expenses each year, particularly during start-up of the business, to build up that tax free zone for that year when your business really takes off!