Small business owners may be able to claim deductions for the costs of using their home as a principal place of business when filing their income tax return.
Tax deductions may be claimed for the business portion of household expenses, however, it can be difficult to ensure you are claiming expenses you are entitled to. How you operate the business out of your home will determine the types of expenses that may be claimed. Your business structure will also affect your entitlements and obligations when claiming deductions on home-based business expenses.
Individuals that operate a business as a sole trader or partnership are entitled to claim a deduction for the costs of conducting business from home. There are two types of expenses that can be claimed, running expenses or occupancy expenses. Typically, those that are eligible to claim occupancy expenses can also claim running expenses.
Running expenses refer to the increased costs of using your home’s facilities for the running of your business, including:
- Repairs to your business equipment.
- Heating, cooling and lighting a room.
- Phone and internet.
- Depreciation of business furniture and equipment.
To calculate the running expenses of your home-based business, you must ensure that you exclude your private living costs and that you have records to show how you calculated the expense.
Occupancy expenses are those that you pay to own or rent your home, including:
- Mortgage interest or rent.
- Land taxes.
- Council rates.
Occupancy expenses are calculated based on the floor area of your home that is used for the business and the portion of the year that it was used.
Small business owners should note that capital gains tax (CGT) payments may be required for periods when your home was used for business. However, CGT won’t apply if you operated your business from a rented home, didn’t have an area specifically set aside for your business activities or the business was run through a company or trust.
Records that need to be kept include written evidence, tax invoices and receipts, and should substantiate your claims for all home-based business expenses.