Claiming tax deductions for home-based business expenses can help you save money on business taxes. Get to know how to claim tax deductions for home-based business expenses.
What is a Home-Based Business?
As the name suggests, a home-based business is one where an area of the home is used as a place of business. The types of expenses you are liable to claim are based on how you run your business out of your home and the structure of your business. If you don’t have an area set aside as a place of business but you work from home, you can still claim a deduction for some of your expenses related to the area you use.
Home-Based Business Expenses – Sole Trader or Partnership
How to deduct occupancy and running expenses for the business use area of your home as a partnership or sole trader. You can claim both running expenses and occupancy expenses if you have an area of your home set aside as a ‘place of business’.
Occupancy expenses are what you pay to rent, own, or use your home. They include:
- mortgage interest or rent
- council rates
- land taxes
- house insurance premiums
Here the condition is that you can claim occupancy expenses if an area of your home is set aside as a ‘place of business’. If you qualify to claim occupancy expenses, you can also claim running expenses. However, if PSI rules apply to your business, you may not be able to claim occupancy expenses.
Running expenses are the extra costs associated with using your house for work-related activities. Even if you don’t have a specific portion of your house designated as a “place of business,” you can still claim these costs if you run your business from there. They include:
- electricity costs for cooling, heating, lighting and operating electronic items used for work
- gas costs for heating
- home telephone, mobile and internet expenses
- stationery and computer consumables
- cleaning charges
- the decline in value (depreciation) and expense of repairs of
- equipment, such as tools, computers and machinery
- furniture, for instance, chairs, bookcases, and desks
- furnishings, such as carpets, curtains, and light fittings.
Deductions for a Company or Trust Home-Based Business
If you run your home-based business as a trust or company, your business needs to have a market-rate rental contract with the owner of the property. The contract will determine the type of expenses the business pays for and can claim as a deduction.
If you don’t have a genuine rental agreement, there may be some tax implications for you and your business for offering benefits to you. If you earn personal services income, you may not be able to claim some occupancy expenses.
Implications when you are both the owner of the business and an employee
If you are both the owner of the business and an employee and the business pays for or refunds you for some of the expenses of operating your business from home, you may not be able to claim a deduction for the expenses in your individual income tax return. Your business will have to pay FBT if it pays you for the expenses as an employee. Certain concessions and exemptions may apply to minimise your FBT liability. You are required to maintain additional records for FBT purposes.
Home-Based Business and CGT Implications
Basically, when you sell your home, CGT doesn’t apply. However, if you used any portion of your home for business purposes, you are required to pay CGT. If any of the following happened with your home-based business, CGT won’t be applicable:
- You ran your company from a rented house.
- You didn’t have a space set aside just for your business operations.
- You used a company or trust to run your firm.
Only during those times, you have to pay CGT if you used your house as a place of business. For instance, you would only be required to pay tax on the capital gain from the last two years if you owned your property for 10 years but only used it for business purposes in the last two.
Most of the time, the portion of a capital gain that is taxable corresponds to the portion for which you are eligible to deduct mortgage interest. This is typically based on the percentage of your home’s floor area that you have designated for business, for instance, 10%.
Unless the primary purpose of the residence was to generate rental income, you might be able to apply one or more of the small business CGT concessions to lower your capital gain.
The blog shares types of home-based business expenses that can be claimed as tax deductions. For further help, you can seek help from Reliable Melbourne Accountants.
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