Quick and simple tips for figuring out tax deductions for home office costs

For many small company owners, a home office has long been a crucial aspect of running the business, whether the firm is managed from home full-time or a home office gives a room to work from when you’re not “on-site,” which is typically at all hours of the day and night.

As a result of COVID-19, many small business owners increased the number of hours they spent working from their own four walls, forcing employed people across the nation to quickly transition to working from home.

While, in reality, there hasn’t been much change in what business owners are able to claim in regards to a home office; however, the last couple of years has undoubtedly raised awareness of claims that business owners and workers can make as a result of working from home. 

If you have been working from home, a portion of your house that is utilised to produce income for your business may qualify for tax deductions if you operate your own company.

Here’s how you can make full use of the provisions that are available.

Step 1: Determine the size of your home office.

Calculating the percentage of the property that is used for the business, including any work, office, and storage space, is the first step in determining home office deductions.

Total space / work-related space equals the work-related proportion.

For instance, if your home is 250 square metres and you utilise 45 square metres for your business, you would calculate as follows:

45/250 = 0.18 (or 18 percent)

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Step 2: Determine how much you may deduct.

You may be able to deduct some of the mortgage interest, rates, and some utilities you paid during the tax year, but not depreciation.

There are several methods for figuring out what you can write off.

You can figure out the percentage of mortgage interest, rates, and rent you can deduct using the percentage of floor space you’ve already determined, then add a percentage for phone and internet.

You must be moderate and keep records when using this technique.

If you use your house phone for both personal and business purposes, you can claim 50% of your phone bill back. For mobile phone and internet usage, you can claim a “clear and reasonable” commercial percentage.

That’s a bit of a tricky area because you might claim that you use your phone and the internet 75% for work, but you’d need to be able to back that up, according to Graeme.

Using the rate per square metre

IRD offers a tariff per square metre based on average utility expenditures for NZ households if you’d rather not keep track of all expenses and explain your internet use.

For the fiscal year 2020–2021, the fee was $44.75 per square metre.

When it becomes available, the rate for the most recent tax year will be posted on the IRD website.

The IRD rate is multiplied by the square footage (in square metres) of the home that is utilised for business.

The IRD square metre pricing, however, does not account for interest, taxes, or rental charges.

Using the percentage of area technique, you can add interest, rates, and rent to the IRD rate.

One area that businesses frequently overlook in their claims is house loan interest.

The square metre rate option’s equation is as follows:

(Total Mortgage Interest, Rates, and Rent times the percentage of Work-Related Use) Plus (total area used for business x square metre rate for the year)

If, for instance, the entire area of your property is 250 square metres and you use 45 square metres, or 18 percent, for your business, and your annual rent total is $36,450, the computation would have been as follows for the 2020–21 tax year:

($36,450 x 0.18) + (45 x 44.75) = $6,854.50

$6561 + $2013.75 = $8,574.75

Additional home office costs you can deduct

We go from “home office” expenses to “fixed assets” when it comes to office supplies.

Any new office item that costs less than $1,000 can be written off immediately; anything costing more must be depreciated, and anything already acquired but not yet claimed must be treated similarly.

Interestingly, your “home office” need not be a separate room; you can still deduct expenses for your home office even if you work at your dining room table. However, you must also figure out how much time you spend there each day.

There isn’t much that can be immediately claimed for home office use for employed people who have been working from home more frequently over the past two years.

The employer can reimburse the employee up to $20 per week for tax-free home office expenses, but nothing can be directly claimed for home office expenses.

Consult an Expert

Regardless of the approach you take, keeping track of your costs will be extremely helpful when it comes time to submit your claim.

Keep accurate records, perform tasks correctly, and consult experts where possible.

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