Business deductions – Home office expenses: Tax basics for small business

If you operate your business from home you
may be able to claim deductions for occupancy expenses and running expenses. Occupancy expenses relate to owning or renting
your home, such as mortgage interest, house insurance, council rates and rent. Running expenses include additional electricity,
cooling, lighting and cleaning expenses, and depreciation of your office furniture and
equipment. GREG and FIONA’s home office is used exclusively
for their website design business. We meet clients here and we put a small sign
out the front so our clients know they’re at the correct address. GREG and FIONA can claim both running and
occupancy expenses. JASON, a landscaper, has an area set aside
for working at home but it’s not his place of business so he can claim a proportion of
his running expenses but not occupancy expenses such as the mortgage interest, home insurance
and council rates. MARY’s office is at the café where she runs
her café business. Although she doesn’t have a dedicated work area at home she does do
some of her work there, so she can also claim running expenses but not occupancy expenses. A common method of working out how much to
claim is to use the floor area you use as a proportion of the floor area of your whole
home. GREG has worked out that their home office is 20% of their home, so they can claim
20% of their occupancy costs. This might not always be the best method and
the ATO may accept an alternative method as long as it’s reasonable and based on accurate
information. I heard that if I use my house for my business,
then I might have to pay capital gains tax when I later sell it? If your home is your place of business, capital
gains tax, or CGT, may apply when you sell your home. CGT may apply even though you haven’t
claimed mortgage interest as a deduction. In broad terms, the amount of CGT you pay
is based on the proportion of your house you used for your business. So, if Greg can claim
20% occupancy expenses, 20% of the capital gain he makes when he sells the house will
be subject to CGT. As a small business, Greg may be eligible
for a range of concessions that could reduce the amount of CGT he has to pay. For more information on how CGT may affect
your home based business, visit the ATO’s website. Running expenses are the increased costs of
using your home for business activities and include, electricity, heating, cooling, lighting,
business phone calls, the decline in value of plant, equipment and furniture, repairs
and cleaning. As with calculating occupancy costs, you can
use a floorplan to allocate the proportion of items such as heating and cooling to private
and business use. But I don’t have an allocated area for work
so I can’t use a floor plan. If a floor plan isn’t appropriate other methods
may be appropriate. For example you might be able to compare your power bills from before
you began operating your business to after you commenced operation. There are some other methods the ATO will
accept as well. You can keep a diary showing your business
use for a representative 4 week period each financial year to work out a pattern of use.
When averaging this out remember to allow for holidays and illness. You can claim a deduction of the ATO’s rate
per hour based on actual use or an established pattern of use. To help you work out your expenses for a home
work area you can access the “Home office expenses calculator” available on the ATO’s
website. When working out your allowable deductions
focus on additional costs you incur because you conduct business activities from home,
excluding any part of an expense related to private use.

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