A simple guide to calculating tax deductions for home office expenses
At a glance
- Small business owners may be able to claim tax deductions for the costs of running a home office.
- The percentage you can claim is based on the percentage of your home that is used as an office.
- For homeowners with a mortgage, a percentage of mortgage interest can be claimed too.
- You can include business storage space in the home as part of your home office measurement.
A home office has long been a vital component for many small business owners, whether the business is run full-time from home or a home office provides a space to work from when you’re not ‘on-site’ – usually at all hours of the day and night.
The pandemic threw home offices into the spotlight as employed people across the country had to quickly shift to working from home, and many small business owners upped their hours working from their own four walls.
“There’s been little change in what you can claim in regards to a home office, but what the past couple of years probably has done is raise awareness of claims that can be made for having a home office,” says Graeme Conning, of Conning Barraclough Chartered Accountants in Takapuna, Auckland.
If you’re running your own business, you may be able to claim tax deductions for the portion of your home that’s used to generate income for your business.
“Small business owners that should have been claiming for home office expenses may have been missing out on a really good tax claim,” Graeme says. “It’s one of the few things you get as a small business owner that you don’t get as an employed worker.”
Step one: Calculate your home office size
The first step in calculating home office deductions is to work out the proportion of the property that’s used for the business, including any work, office and storage space.
Work-related space / total space = work-related proportion
For example, if your home is 150sq.m, and you use 30sq.m for your business, your calculation would be:
30/150 = 0.2 (or 20%)
Step two: Calculate your deduction
You can potentially claim a proportion of the mortgage interest you’ve paid during the tax year, rates and some utilities – but not depreciation.
There’s a couple of ways to calculate what you can deduct. You can use the proportion of floor space you have already calculated to work out the proportion of the mortgage interest, rates and rent you can claim, then add a proportion of the phone and internet.
In this method, you must keep records and be reasonable. You can claim 50 per cent back for your home phone line if you use this line for business, too, while you can claim a ‘clear and reasonable’ business proportion for cell phone and internet usage.
“That’s a bit of a grey area, as you may say, ‘I use the internet and cell phone 75 per cent for business, but you’ve got to be able to prove that,” Graeme says.
Using the square metre rate
If you prefer not to keep records of all costs and justify your internet use, IRD provides a rate per square metre based on average utility costs for NZ households. The rate for the 2020-21 tax year was $44.75 per square metre. The rate for this latest tax year will be published o the IRD site when it is available.
“Your annual expense to claim is the IRD rate multiplied by the area (in square metres) of the home that is used for business,” says Graeme.
“However, the IRD square metre rate does not include interest and rates or rent costs. You can claim interest, rates and rent on top of the IRD rate using the percentage of area method.”
And claiming home loan interest is a big one that Graeme says is often overlooked.
“That can be a very worthwhile claim,” he says.
The equation for the square metre rate option is:
(total amount of mortgage interest, rates and rent x work-related proportion) + (total area used for business x square metre rate for the year)
For example, if your total property size is 150sq.m, you use 30sq.m or 20% for your business, and your total rent for the year is $27,560, the calculation using the 2020-21 tax year would have been:
($27,560 x 0.2) + (30 x 44.75) = $6,854.50
Other home office expenses you can claim
When it comes to office equipment, we move from ‘home office’ expenses into ‘fixed assets’. For any new asset for the office that costs under $1,000, you can write it off straight away – anything over $1,000 has to be depreciated, while anything you’ve already purchased and not claimed has to be treated similarly.
Interestingly, your ‘home office’ doesn’t have to be a dedicated space – if you work from your dining table you can still claim home office expenses, but with the added complication of calculating the time for which it is used as a work space.
“There’s a really good precedent for this, as a lawyer many years ago was working from his kitchen bench and had his claim turned down by the IRD,” explains Graeme. “He argued the case and won, and as a consequence you can use a kitchen bench or a dining table on the basis that the area is being used as an office.”
For the employed who’ve been working from home more and more over the past two years, there’s little that can be claimed directly for home office use.
“The employer can pay the employee up to $20 per week for home office expenses, which isn’t taxable, but nothing can be directly claimed for home office expenses,” says Graeme.
The importance of keeping records and getting professional advice
Whichever method you choose, keeping records of expenses along the way is hugely valuable when the time comes to lodge your claim.
“Whether you’re using a spreadsheet, or a program such as Xero, it’s important to keep accurate records that you can refer back to if need be,” says Graeme.
As with many things in business, it’s important to do things thoroughly and well, and seek professional advice.
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