In this guide, we will discuss how you can claim deductions for home-based business expenses if you run some or all of your business from home.
What is a home-based business in Australia?
As the name indicates, a home-based business is where you set up a business in your home in a specific area of your home, which is primarily used as a place of business. The type of expenses you are eligible to claim depends on how you run your business from home and the structure of your business. You can only claim deductions for the business part of your expenses. If you don’t have an area for your business and use part of your home as a place of business, but you have some work from home, you may still be allowed to claim a deduction for some of your expenses associated with the area you use. Remember that when you run a home-based business, you may have capital gains tax obligations when you sell your home.
Keep in mind that if your business is liable for goods and services tax credits, you can only claim a deduction for the GST-exclusive amount of your expenses. To ensure you are claiming the right deductions, you can choose Melbourne accounting services.
Home-based business expenses
If you run some or all of your business from home, you may be allowed to claim tax deductions for expenses incurred for business purposes, including:
- Occupancy expenses, such as council rates, mortgage interest or rent, land taxes, house insurance premiums.
- Running expenses include phone, electricity, decline in value of plant and equipment, cleaning, furniture and furnishing repairs.
- The expenses incurred for motor vehicle trips between your home and other locations, if the trip is for business purposes.
Running expenses
Running expenses include the use of facilities within your home. You may be eligible to claim additional running expenses incurred as a direct result of running your business from home, such as in a separate study or a desk in a lounge room.
Calculating your claim
There are various ways to work out the business portion of your running expenses. You can use any calculation method, provided:
- It is reasonable in your situation
- You don’t include your normal living costs
- You have records to show the way you calculated the business portion of the expenses.
Actual cost method
- Where you solely claim the actual costs you incur because of running your business from home. To use this method, you must keep all written proof of your expenses, such as receipts and bills.
Fixed rate method
- Enables you to claim a fixed rate for each hour you run your business from home. This amount covers your deduction for energy expenses, internet and phone usage, stationery, and computer consumables.
- To use this method, you need to have accurate records of all the hours worked from home for the whole year, using a spreadsheet, diary, or similar document. Also, keep one record or document for each additional running expense you incurred during the year.
- You may also be eligible to claim a deduction for any other running expenses not covered by the rate.
Floor area method
- If you set aside one area of your home as a place of business, you can use the floor area method. The floor area method is the right method to work out the business portion of your running expenses,
- In addition, you can also claim a deduction for a decline in value of the business-related portion of depreciating assets and equipment.
Occupancy expenses
Occupancy expenses that you pay to own or rent your home. You are only allowed to claim occupancy expenses if you set aside an area of your house for your business as a place of business. Signs that the area of your home that you have set aside is a place of business:
- Clearly recognised as a place of business.
- Not easily suitable for domestic or private use.
- Used exclusively or almost exclusively for business purposes.
- Used daily for business visits by your clients.
If you qualify to claim occupancy expenses, you can also claim running expenses.
Conclusion
If you set aside an area of your house for business, you must know what deductions you can claim. You can also reach out to Reliable Melbourne Accountants.