Knowing about the tax deductions for your home office expenses will certainly boost your small business tax return.
However, many small business owners miss out on these expense claims because they aren’t equipped with the knowledge presented by the Australian Tax Office (ATO).
Home-based businesses are a large part of the Australian business community, with nearly one million people running their business from home. And now, due to the COVID-19 pandemic, even more, Australian small business owners have opted to use their home as their principal place of business.
Suppose you’re one of these business owners now using your home as your primary business premises. In that case, you may be able to claim a deduction for some of your expenses relating to the area that you use.
We’ve put together this ultimate guide on what you can and can’t claim on home office expenses for small business owners.
- 1 Difference Between an Employee Working From Home and Home-Based Business Owners
- 2 What Home Office Expenses Can You Claim?
- 3 How Do You Calculate Home Office Deductions for Running Expenses?
- 4 The Actual Cost Method
- 5 What Home Office Expenses Can’t You Claim?
- 6 Key Takeaways
Difference Between an Employee Working From Home and Home-Based Business Owners
There is a difference between being an employee working from home and running your business at home.
If your home is not a place of business, in other words, you are merely acting as an employee working from home; then your tax deductions are generally limited to running expenses only, such as electricity or internet expenses.
If, however, you are using your home as a place of business and do most of your work at home, then the ATO allows you to claim further expenses such as rent and insurance, for instance.
Whether or not you can claim deductions for your home office expenses is dependent on these three scenarios:
- you have a work area such as a study or spare room which is used for work activities, but your home isn’t your principal place of business because you also have an office elsewhere;
- you don’t have a work area because you have an office elsewhere and you don’t have a room set aside for work, but you may work at the dining room table for a few hours a week; or
- your home is the principal place of business because you run your business from home and you have a space set aside exclusively to carry out your business activities. You can access examples of businesses that can be home-based on the ATO’s website.
What Home Office Expenses Can You Claim?
Based on the categories mentioned above, you can claim the following tax deductions for home office expenses:
|Deductions you may be able to claim||You do have a work area||You don’t have a work area||Your home is your principal place of business|
|Depreciation on office plant and equipment||Yes||Yes||Yes|
|Depreciation on capital works items||Yes||No||Yes|
Should your home qualify as your primary place of business, you may be able to claim occupancy expense tax deductions for your home-based business expenses.
Note: these expenses apply only to small business owners who work at home. Employees, who merely work from home on occasion, can’t use these expenses to claim tax deductions.
Occupancy expenses are the expenses that you pay to rent or own your home, such as:
- interest on your mortgage;
- water rates;
- land taxes; and
- home insurance premiums.
Suppose you are using your house to complete work activities. In that case, regardless of whether you have a work area or not, you incur an increase in the cost of your home facilities.
Accordingly, the ATO allows anyone who uses their home to do work (whether it’s the primary place of business or whether you have an office space or not), to claim tax deductions on these expenses:
- heating and cooling;
- work-related phone costs;
- lighting; and
- cleaning cost.
Property depreciation is the decrease in the value of various items in your home due to wear and tear. While this is considered a running expense, not all categories can claim home office deductions for depreciation.
Individuals in either category mentioned above can claim depreciation of plant and equipment items such as desks, chairs and computers.
On the other hand, depreciation of capital works items such as carpets, curtains and light fittings can only be claimed by individuals who either have a dedicated workspace at their home or who run their business from home (i.e. their home is their primary place of business).
How Do You Calculate Home Office Deductions for Running Expenses?
Generally, if you’re an employee and your principal place of business is not at home – that is you have a workstation in an office elsewhere – there are two ways of calculating deductions for home office expenses:
- the shortcut method (only available between 1 March and 31 December 2020);
- the fixed rate method; and
- the actual cost method.
The Shortcut Method
As there was an increase in people working from home this year, due to COVID-19, the ATO introduced the temporary shortcut method in an attempt to make it easier for people to claim deductions for home office expenses.
Claiming via this method is temporary and only available from 1 March 2020 until 31 December 2020.
This means that for the 2019-20 income year you can claim home office deductions between 1 March and 30 June 2020; and for the 2020-21 income year, you can claim deductions for your home office expenses incurred between 1 July and 31 December 2020.
The shortcut method allows individuals who worked at home as well as individuals who have home-based offices, to claim a rate of 80 cents per hour for all their running expenses.
You’ll have to keep a record of the number of hours you worked from home in the form of a roster, timesheet or a diary.
It’s not mandatory to use the shortcut method.
You can choose to use either of the other methods if they better suit your circumstances. If you opt to use this method, you can’t make separate claims for any additional expenses incurred while working at home.
Judy is a dressmaker at a small clothing boutique.
Due to COVID-19, the business was quiet between March and the end of June, while strict lockdown measures were in place.
As a result, she didn’t go into the clothing boutique shop to make any pieces. She did, however, work on some clothing pieces in her home studio for a new line that will launch at the boutique after lockdown.
She worked a total of 20 hours a week for about 15 weeks between March and end June: She decided to opt for the shortcut method to claim her deductions for the rest of the 2019-20 income year.
20 hours x 15 weeks = 300 hours
300 hours x 80c = $240
Using the shortcut method, Judy can claim a deduction on a total of $240 for her home office expenses for the 2019-20 income year.
The Fixed Rate Method
Under this method, the ATO allows you to claim a fixed rate of 52 cents per hour for each hour that you work from home to cover the costs of home office expenses such as:
- depreciation on office furniture such as your desk;
- electricity and gas; and
- the cost of repairs of your home office equipment, furniture and furnishings
You can’t claim the home office deductions using the fixed-rate method for following expenses, so they will have to be calculated separately:
- phone expenses;
- consumables such as printer ink;
- internet expenses; and
- depreciation of equipment such as laptops, computers and phones.
Leon is an engineer at a small engineering firm. He has a workstation at the firm’s office, but he also makes use of an office at his home.
He works an average of 40 hours a week. 10 of those hours, he is usually on-site, and about 20 of those hours, he works at the company’s office. So he incurs home office expenses for 10 hours a week.
He takes a three week holiday over Christmas time each.
Using the fixed-rate method for an entire financial year, Leon calculates his home office expense amount that can claim a deduction for as follows:
52 weeks – 3 weeks = 49 weeks
49 weeks x 10 hours per week = 490 hours
490 hours x 52 cents = $254.80
The Actual Cost Method
The actual cost method is used to calculate the actual expense you incur from your home office expenses if you are a small business operating from your home. This method of calculation is not used by employees who occasionally work from home.
Under this method, you’ll have to keep a log of how many hours you worked at home and what percentage of your expenses related to work activities and personal use.
For example, if you have added up your working hours and worked out that you work from your home-based office 40% of the time, you could claim 40% of the actual cost of your:
- electricity bill;
- internet bill;
- cleaning expenses;
- phone bill;
- depreciation; and
- stationary and other consumables.
If your business is home-based, you are also able to claim occupancy costs using the actual cost method. To calculate your occupancy costs, you have to work out the size of your workspace in comparison to the total building space of your home.
Lucy runs her recruitment business from her rented home.
The full size of her house is 100 square meters. She has converted her garage into her dedicated office area. Her garage totals 20 square metres:
20 SQM100 SQM x 100% = 20%
That means 20% of her home is used for her home-based business.
Lucy’s rent totals to $500 per week. She can claim 20% of her rent as a home office expense:
$500 x 20% = $100 per week
If she works 49 weeks of the year (so she takes 3 weeks of leave in total per year), she could claim a deduction on the rent cost of $4,900 per year.
For the 2020-21 financial year, that would entitle her to a deduction of:
$4,900 x 26% = $1,274
What Home Office Expenses Can’t You Claim?
You can’t claim home office deductions for:
- general household items such as coffee, tea and milk that you would usually get at an office; or
- your children and their education (if they are homeschooled or are set up for online learning).
If you run your business from your home, the ATO allows you to claim certain tax deductions for your home-office expenses.
You can claim deductions for two categories of expenses:
- running expenses; and
- occupancy costs.
While the shortcut and fixed-rate method are relatively simple to calculate, it can get a bit tricky when working out your home office deductions using the actual cost method. So, you may want to consult a registered tax agent.
At Box Advisory Services, our team of tax and accounting experts have helped hundreds of small businesses and contractors with navigating through changes brought by the global coronavirus pandemic and beyond.
Given that every cent counts in a distressed market, our focus is on ensuring that you’re maximising every dollar you can when completing your tax return.
To see how we can help you calculate your home office tax deductions, book a free consultation with us today.
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Please note that every effort has been made to ensure that the information provided in this guide is accurate. You should note, however, that the information is intended as a guide only, providing an overview of general information available to contractors and small businesses. This guide is not intended to be an exhaustive source of information and should not be seen to constitute legal or tax advice. You should, where necessary, seek a second professional opinion for any legal or tax issues raised in your business affairs.