Home-based business owner? There are some tax deductions you should be aware of
Did you know you can claim for cleaning costs and wear-and-tear on your furniture at your home business?
As the name suggests, a home-based business is one where you operate the business at, or from, home.
That said, you don’t have to do your work at home to be a home-based business. For instance, a house painter would do most of their work elsewhere, but if they didn’t rent or own premises other than the home, they would count as a home-based business.
Generally speaking, a home-based business can claim all the deductions any other SME can; yet there are also some specific deductions to be aware of.
There are broadly two types of expenses you can claim related to your home business area: occupancy expenses and operating expenses.
Parts of the home you use for business
Occupancy expenses include rent or mortgage interest, council rates, land taxes and home insurance premiums.
Before you can claim occupancy expenses, you have to pass the Australian Tax Office’s interest deductibility test. This means you must have an area of your home set aside exclusively for your business activities, such as an office or workshop. When assessing this test, the ATO will consider factors including whether you have a sign identifying your business at the front of your house; whether or not the business area is also suitable for domestic purposes; and whether it is used regularly for client visits.
If you pass the test you can claim the proportion of your home mortgage or rent which corresponds to the amount of space you use for your business.
For instance, if the floor area of your home office or workshop is 15 per cent of the total area of your home, you could claim 15 per cent of your rent or mortgage interest, council rates and insurance.
There’s a potential sting in the tail you need to be aware of before you start deducting a portion of your mortgage. You might have to pay capital gains tax on the sale of your home if you pass the interest deductibility test. This can apply if you ran a small business from home, even if you never claimed; the issue is how much you transformed your home into a place of business.
Operating expenses: the costs of doing business
You can claim a deduction for any expenses in running your home business that are above the costs you would have incurred by living in the home.
Running costs include electricity and gas for heating, cooling and lighting; phone and internet costs; the decline in value of plant and equipment like chairs, bookcases and computers; as well as the decline in value in furnishings like curtains, carpets and light fittings. Cleaning costs are also deductible.
Like claiming the mortgage or rent, you can only deduct these expenses for the portion of your house that you actually use for your home business – and there are different ways of working this out.
You can calculate this figure using the floor area of your home office. For instance, if the floor area of your home office is 10 per cent of the total area of your home, you can claim 10 per cent of electricity costs.
This is the simplest method, but if you don’t have an area set aside for home use only, you’ll have to use another method and you must be able to show how you calculated your deductions. If you get audited, the ATO will want to see that the claim is fair and reasonable and excludes the expenses associated with normal living costs.
It’s a good idea to keep a diary for a four week period to demonstrate how use of your work-at-home office has increased your expenses, particularly your phone bill.
Another alternative is to claim a deduction of 34 cents for every hour you work at home. This method, however, covers only heating, cooling, lighting and furniture depreciation, and you will have to work out other expenses such as phone and internet usage separately.
Don’t forget wear-and-tear
You might be able to claim a deduction for the decline in value of some of the assets used for your business, such as computers and other office equipment, electrical tools and motor vehicles, as well as furnishings, carpet and curtains.
As with other deductions, you can only claim the proportion used for business, so you should also record business and non-business use of these assets in a four week diary.
Chris Ridd is MD, Xero Australia