In this blog, we’ll discuss how you can claim running and occupancy expenses for the business use area of your home as a sole trader or partnership.
Work out if your home has a ‘place of business’
You can claim the business portion of your running expenses and occupancy expenses if you set aside an area of your home as a place of business. Signs that an area of your home has the character of a place of business include:
- Clearly identifiable as a place of business, for instance, you have a sign indicating your business at the front of your house.
- Not readily ideal or adaptable for domestic or private purposes
- Used exclusively for carrying on your business
- Used daily for visits by your clients.
For instance, a home hair salon business that is in your home but separate from the family living areas and has a separate entry for clients. If you have an area of your home used as a place of business, you may need to pay tax on any capital gains you make when you sell your home, which applies even if you didn’t claim a deduction for mortgage interest as an occupancy expense. It would be worth choosing Melbourne accounting solutions to know what you are allowed to claim as a sole trader and how.
Occupancy expenses
Occupancy expenses are described as what you are liable to pay to own, use, or rent your home. They include:
- Council rates
- House insurance premiums
- Land taxes
- Mortgage interest or rent.
You are only allowed to claim occupancy expense if the portion of your home set aside for your business is indicated as a place of business. If you qualify to claim occupancy expenses, you might be able to claim running expenses. However, if the personal services income rules apply to your business, you won’t be able to claim occupancy expenses. You can use the PSI tool to determine whether you earned PSI, and if the PSI rules apply to that income.
Calculating occupancy expenses
You may usually calculate occupancy expenses depending on the percentage of the floor area of your home that indicates a place of business and the proportion of the year it was used for business. In some cases, you won’t be able to work out the floor area of your home that is being used for your business. The ATO will accept an alternative option of checking how much of your home you use for business if the method you use is based on accurate information. You need to maintain accurate records of how you calculated the occupancy expenses you claim as deductions.
Running Expenses
You might be able to claim the additional running expenses incurred due to running your business from home, even if you don’t have a portion of your home set aside as a place of business. Running expenses include:
- Cleaning costs
- Electricity charges for cooling, heating, lighting, and running electronic items used for work purposes.
- Gas charges for heating
- Home telephone, mobile, and internet expenses
- Stationery and computer consumables
- The decline in value and the cost of repairs of
- Equipment, such as tools, computers, and machinery
- Furniture, for instance, desks, chairs, and bookcases
- Furnishings, such as carpets, curtains, and light fittings (you are only allowed to claim furnishings if you have a separate or dedicated room).
Calculating running expenses
You are required to work out the portion of the expenses incurred for business purposes to claim a deduction for running expenses. Various ways can be used to check out the business portion of your running expenses. You can use any calculation method offered:
- It’s reasonable in your situations
- You don’t include the percentage of costs that are personal living expenses
- You have records to demonstrate how you calculated the expense.
Your business use of the home area should be substantial and not incidental. For instance, you are not allowed to claim electricity expenses 24 hours per day simply because your tax machine always remains on to receive business faxes.
Conclusion
As a sole trader, you need to stay on top of and updated regarding expenses that you are allowed to claim. For more information, you can seek help from Reliable Melbourne Accountants.