Running a business from home can offer flexibility and convenience, but many small business owners overlook a key financial benefit: claiming home office expenses. If you're not fully utilizing the tax deductions available to you, you could be leaving money on the table. In this post, we’ll break down what home office expenses are, what you can claim, and how to maximize your deductions.
What Are Home Office Expenses?
Home office expenses are costs associated with using part of your home for business purposes. If you run your business from home or work remotely, you may be able to deduct a portion of your household expenses from your taxable income. These deductions can significantly reduce the amount of tax you owe, leaving more money in your pocket.
Who Can Claim Home Office Expenses?
To claim home office expenses, you must:
Operate a business from home or use part of your home for work.
Have a dedicated space in your home for business activities (it doesn’t have to be a separate room, but it should be identifiable as your workspace).
Be self-employed, a sole trader, or a small business owner.
Employees who work from home can also claim expenses, but the rules may vary, so it’s important to check with your tax authority for specific guidelines.
What Expenses Can You Claim?
The types of expenses you can claim vary depending on the portion of your home that’s used for business purposes. Here are some common expenses that may be deductible:
Rent or Mortgage Interest: You can claim a portion of your rent or mortgage interest based on the size of your home office relative to your total home.
Utilities: Electricity, water, and gas costs can be partially claimed, again based on the space used for business.
Internet and Phone: If you use your home phone or internet connection for business, a portion of these bills can be deductible.
Home Insurance and Council Rates: You can also claim a percentage of your home insurance premiums and council rates.
Maintenance and Repairs: Any repairs directly related to your home office are fully deductible, while general repairs to your home may be partially deductible.
How to Calculate Your Deductions
The amount you can claim depends on the size of your home office compared to the total area of your home. For example, if your home office takes up 10% of your home’s total area, you can claim 10% of your rent, utilities, and other eligible expenses.
Here’s a simple formula to calculate your deduction:
Measure the area of your home office.
Divide it by the total area of your home to get a percentage.
Apply that percentage to each of your home-related expenses to determine how much you can claim.
For example, if your home office is 15 square meters and your home is 150 square meters, your office is 10% of your home’s area. You can then claim 10% of your rent or mortgage interest, utilities, and other eligible costs.
Maximizing Your Home Office Deduction
To make the most of your home office deduction, keep detailed records of all eligible expenses. It’s a good idea to:
Track receipts and invoices for all relevant household expenses.
Use accounting software (like Xero) to track your expenses and calculate your deductions accurately.
Consult with a tax professional if you’re unsure about any part of the process. Missing out on deductions could cost you thousands of dollars each year!
Common Mistakes to Avoid
Claiming the entire home: You can only claim the portion of your home that is used exclusively for business, not areas that are used for personal purposes.
Failing to keep records: Without proper documentation, you may struggle to justify your claims if the tax authority audits your return.
Overlooking smaller expenses: While things like internet and phone bills may seem minor, they can add up to significant deductions over time.
Conclusion
Home office expenses can lead to substantial tax savings if you know how to claim them correctly. Whether you're a small business owner or a sole trader, taking the time to understand and apply these deductions can help you keep more of your hard-earned money.
At Sorted Out we help small business owners maximize their deductions and ensure they’re getting the most out of their home office expenses.Â
Contact us https://www.sortedout.co.nz/contact and we’ll email our free guide on how to calculate your home office deductions.
Let’s make sure you’re claiming every dollar you’re entitled to!
If you would like to discuss this please contact Fiona Tate on 0226 739638
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