Claiming for your Home Office
Can you claim costs for an office at home?
Many consultants, especially sole-operators without staff, work from home. This article looks at claiming the costs of running a home that is also a place of business.
Business v Private Costs
The general rule is that you are entitled to a tax deduction for expenses to the extent they are incurred in deriving income or necessarily incurred in running a business. When running a business
from home, you have to determine whether your household costs are incurred for the business, for private purposes or both. Expenses incurred solely for business, such as your office stationery, are fully tax deductible. Private expenses, such as repairing your washing machine, are not deductible. Expenses that provide both a business and a private benefit, such as the power bill for the whole property, have to be apportioned between their business and private use with the business portion only being tax deductible. It is the splitting of these shared expenses that provides the challenge.
Such shared expenses often include:
- House and contents insurance
- Electricity and gas
- Repairs and maintenance on the property
Calculating the apportionment by floor area
IRD generally accept an apportionment based on the portion of floor area used for the business. If a part of your home is used exclusively or primarily for your business, you can calculate its percentage of the total house area and claim this percentage of the shared costs. For example, Bill is an IT Consultant working from his home. He uses his 8 sqm fourth bedroom as an office, and a 12 sqm room behind the internal garage for storage of computer equipment and parts. This gives a total of 20 sqm used solely for business. His total house area is 125 sqm, so he can claim 16% (20 / 125 x 100%) of his shared costs. However, while a floor area calculation is the default method of home office calculations, it is not always appropriate.
Expenses proportioned by other methods
Some costs that may require alternative methods are:
A separate business line is 100% deductible. However, if you use your home line for both private and business use, you should apportion the cost.
For the line rental, IRD will accept a 50:50 split, unless another split better reflects the actual use. For calls that incur a separate charge such as tolls and cell phone calls, you should separately analyse them and claim only the business calls.
Again, if used for both private and business, use a suitable split depending on the level used for each.
Electricity and Gas
This is especially relevant for businesses using power-hungry plant and machinery. Consultants often only power a laptop and a kettle, but you may feel your business use exceeds the floor area
apportionment. If so, a calculation that truly reflects the business use should be used to justify the higher claim. This could involve a separate meter for the business area or some other calculation.
Again, the floor area split is the default method for home and contents insurance. However, high value business assets may justify a higher claim based on their portion of the total value insured.
Alternatively, you could separately insure your business assets and claim 100% of those premiums.
Repairs and maintenance
Repairs and maintenance costs relating to the house generally, such as water blasting the exterior or maintaining grounds, will normally be split on the floor are basis. Internal maintenance usually relates to a particular area of the house. If you repaint the office, claim 100%. If you fix the laundry door, it will be private expenditure.
Sky Television and other media subscriptions
I have had a few clients keen to claim their Sky TV subscription. If you are genuinely paying for Sky for business purposes, you should be able to make a deduction. However, an allocation is needed between private and business use.
In 2009, IRD issued a ruling regarding agricultural and horticultural workers claiming the subscription costs of Country TV. To subscribe to the Country TV channel, you have to have the Basic Sky TV package then pay additionally for Country TV. IRD ruled that the Country TV subscription was tax deductible if used for business purposes, but the standard package remains a private cost. Costs of other
channels providing a business benefit should be treated in a similar way. Likewise, newspaper and magazine subscriptions are deductible to the extent they are incurred for business purposes. If you buy a trade magazine or a newspaper specifically for business purposes, you can claim 100% of the cost.
GST on home office costs
Where household costs include GST, the GST content of the business portion can be claimed in your GST returns. Such costs will include rates, insurance, telephone and power. Domestic rent and mortgage interest are exempt from GST however. You can either claim GST on your costs in each return, or leave it to your accountant to calculate at year end.
Making your claim
In summary, if you run your business substantially from home, you should be entitled to claim the cost of providing the business area. The default calculation for many costs is a floor area
percentage. Make sure you keep a record of your calculation in case IRD ever ask for it, and records of the actual costs. The business can either pay for the business portion directly or reimburse you for the cost. The easiest way is often to keep records and let your accountant make one calculation at year end.
If you feel a claim based on floor area is not appropriate for some costs, discuss it with your accountant.
Robb MacKinlay is an accountant and business advisor to professionals and consultants, helping them convert their expertise into profitable business.
Contact us with your business questions.