If you run your business from home there is a range of tax issues that you need to be aware of. Not only do you have tax responsibilities but there are also guidelines on what expenses you can claim and what you can’t. This can vary depending on the type of business and how you run it from home.
Running your business from home means your home is your principal place of business, and a room or other workspace is set aside exclusively for business activities. Examples of this would include a graphic designer whose office is at home, a jewellery maker who has their workshop in a converted rumpus room or an osteopath who has a consulting room at home. Where your home is also your place of business, you can claim deductions if you carry out income-producing work there and incur business running expenses. The tax office views running expenses as expenses incurred due to using facilities within your home because of that business activity. This includes utilities such as electricity and gas, business phone and internet costs and also the depreciation in value of office equipment.
With all these expenses you can claim a deduction if it is used exclusively for business or used for both business and private, but it must be apportioned between the two. You may also be entitled to claim deductions for other running expenses such as a computer, mobile phone or other electronic devices required for work purposes. Depreciation of office equipment like desks, chairs, computers etc can be claimed, but if this equipment is also used for non-business purposes, the claim once again must be apportioned between business and private use. To work out how much you may be eligible to claim you need to ascertain what a private expense is and what a legitimate business expense is, and then by calculating the floor area of the room used as a percentage of your entire home, apportion between business and private use.
According to the ATO occupancy expenses are expenses you pay to own, rent or use your home. You can claim a portion of occupancy expenses such as rent, mortgage interest, insurance and council rates that relate to the room or workshop as a place of business. If your employer has an office in the city or town where you live, your home office will not be considered a place of business.
If you do only some business or work from home, in either a designated work area or another part of your home, then you are ‘Working from Home’ and this is considered different from ‘Running your business from home’. However, you may be able to claim a deduction for some of your expenses relating to the area you use. In general, the deductions you can claim depends on whether you have a work area such as a study or spare room set aside primarily for this work activity, but your home isn’t your principal place of business.
If you own your home, and have an area exclusively set aside for work, you are still entitled to the main residence exemption from capital gains tax when you sell your home. This exemption is not affected so long as your home is not your principal place of business.
For more information about what you’re entitled to claim and your tax obligations visit The Australian Tax Office website. Determining what you can claim and even how much you can claim can be a daunting business. Understanding the different policies, obligations and calculations all take up time. If you’d like help with this please give us a call and we’d be only too happy to assist.