From the development of communication and computer technology to the cultural shift in work standards due to the COVID-19 pandemic, more and more business owners and employees are working from home.
So, what tax deductions for home office expenses are available? What is considered an acceptable home office expense in New Zealand?
In this article, we’ll give you the tips you need to get started claiming home office expense-related tax deductions.
Please note that the content in this article is current as of the time of writing this and all advice is general in nature. We recommend you consult with a registered tax agent for personal financial advice.
What is a Home Office Expense?
In brief, business expenses that are considered legitimate include any costs that incur during the day to day running and operation of your business.
This can include anything from payroll to marketing and advertising expenses. Even investment in assets, such as computer technology or machinery, are called capital expenses (though in most cases assets of value in excess of $1,000 must be depreciated). Operational expenditure, by and large, is considered a business expense for tax purposes as well, including overheads.
However, when you’re working from home, some of the ongoing expenses can be a bit tricker to work out. In general, the following expenses can be considered legitimate home office expenses:
- Electricity and power costs
- Phone and internet costs
- Rates (council or municipality)
- Insurance for home and contents
- Mortgage interest costs or monthly rent
It is important to note, though, that it is not the entirety of the above costs that can be deducted from your tax.
When you work from home, the area of your house in which you work or run your business, like a study or a shed, dictates the proportion of the costs above you can deduct. If you split your time between the home office and an external worksite, you will need to factor in that percentage of split time as well.
How Does Tax Deduction Work?
When your income or business revenue is taxed, a specific percentage is owed. When you deduct work or home office expenses, this brings down the amount of income or revenue being taxed, thus reducing the amount of tax you owe Inland Revenue.
The basic formula is: Full income – legitimate tax deductions = Taxable income.
If, for example, you earn $100,000 and the tax rate is 20 percent, you will owe Inland Revenue $20,000. But if you claim $10,000 worth of home office and business expenditure deductions, the 20 per cent tax is only factored on the remaining $90,000, i.e., $18,0000 – saving you $2,000 in tax.
Tips On Tax Deductions For Home Office Expenses
1. Familiarise Yourself with the Details
We know that tax deductions and business expenses can be a confusing area of legislation. But it is crucial to familiarise yourself with what is and isn’t considered a legitimate home office expense so that you know what you can deduct and what you can’t.
2. Focus on Regular and Exclusive Use
The first ‘rule’, so to speak, when seeking tax deductions for home office expenses is to ask yourself two questions:
- Is this space in my home used regularly for business purposes?
- Is this space in my home used exclusively for business purposes?
If neither of these questions come with an answer of “yes”, then you may need to review whether or not the expense is tax deductible.
3. Focus on Your Principal Place of Work
Is your home office, study or desk space your principal place of business and work? Do you meet your clients and customers from there? What percentage of the work week takes place here?
Having a clear and honest understanding of where your principal place of work is will help you determine whether or not specific expenses can be claimed back through your tax.
4. Keep Records of Expenses
Maintaining detailed and accurate records, such as invoices and receipts, is crucially important when claiming any tax deductions.
The earlier you can get into the habit of archiving your utility bills, such as power, your mortgage interest or rent, and any other miscellaneous expenses, the easier time you will have working out what tax deductions you can claim. Moreover, it’s not just about making your life easier. If Inland Revenue comes knocking at your door, you may be required to demonstrate records of your claimed expenses.
5. Claim Deductions Correctly
There are actually two different ways to claim tax deductions on home office expenses. The first is a simplified way in which you world out the set dollar value of deductions based on the area of your home. The second, is working out your actual expenses and then calculating the percentage of those expenses that is claimable.
Each method has its pros and cons and what is best for one individual may not be best for you and your situation. It is always best to follow professional advice to ensure your deductions are claimed correctly.
Which leads us to…
6. Use A Tax Professional
All this talk about business expenses may leave you wanting to run away from more spending and not towards it, but navigating the complex world of tax is tricky–especially when you have a business to run,
Qualified tax accountants and professionals are not just versed, experienced and knowledgeable in tax laws, they are also able to tailor advice specifically to your circumstances. In fact, often by allowing you to maximise your deduction claims you can save money despite their fees.
Outsourcing the complex work to the right specialists will save you time, money and hassle.
7. Stay Up to Date
The reality is, for better or worse, that tax laws are subject to ongoing change, modifications and updates. This can make it even harder to know what the latest rules and guidelines are.
Of course, if you are using a professional accountant for your tax work they will have the most current laws in their back pocket and can guide you accordingly. Nevertheless, knowledge is power and having as much up to date and relevant knowledge about the current tax regulations will help empower and enable you to save more when it comes to inevitable tax time.
Let’s Fuel Your Business’s Success
Understanding how to maximise your tax deductions is an important way of ensuring your and your business’s financial wellbeing.
Here at ScotPac, our lending specialists may not be tax accountants, but we can help you find a tailored, flexible financial solution to fuel your ongoing growth. With the right tax practices and a financial facility that complements your business objectives, you’ll be best positioned to realise your full commercial potential.
