It didn't stop at the dog - the same (ex) client tried to convince us that his daughter's pony was required to entertain his clients' children. Other clients have asked to claim other day to day household items - the pot plant at the front door, Sky television, the weekly cleaner and even a new outfit for an important meeting.
Unfortunately for these clients, none of these items were able to be claimed as home office expenses. The rules are very clear regarding what you can and can't claim. However, making a home office claim if you conduct some or all of your business from home is still an effective and legitimate way to reduce your tax liability.
When and how can I claim home office expenses?
- When you run a small business or income generating activities and use an area in the family home for work purposes
- You do not have to have an area specifically set aside for example a dedicated office – you can still estimate the portion the house used
- Use the work area measurements or estimate compared to the total floor area of the house, then apply this percentage to the total claimable house expenses.
Which expenses can be included in a home office claim?
You can claim a portion of rates (this includes water), insurance, power and mortgage interest/rent based on the percentage calculated above.
You may claim a 50% deduction for telephone rental if you actually run your business from your home, as well as business-related toll calls. If you have a separate commercial and domestic line rental, you can claim the full cost of the commercial line for both income tax and GST, but none of the domestic rental. If you make any private calls on the business line and you are charged for them, you will have to make an adjustment for them.
Home internet costs will generally be a private expense of the household and not claimable. However, if you run your business from home you are likely to use the internet as part of carrying on your business. This portion may be claimable as a business expense. How this portion is claimed depends on the type of internet plan you have.
What records do I need to keep?
The responsibility for keeping invoices and records for a home office is the same as for any other business expenses you are claiming. Often clients tell us to claim their home office as per the previous year, without providing any documentation. This is not the best approach for several reasons.
Firstly, amounts charged for rates, utilities and mortgage interest or rent do change each year, often up. Not providing current year expenses means you are likely to be missing out on some of your home office claim and paying more tax than you need to.
Secondly, home office expenses are really no different to any other expenses and you will need proof should the IRD ask questions and request a full record of the expenses being claimed.
New square metre rate option
A new method for calculating the expenses you can claim for using your home as an office has been introduced by the IRD for the year ended 31 March 2018. This method uses rates set annually by the IRD based on the average cost of utilities per square metre of housing, but excluding mortgage interest, rates and rent.
The square metre rate for utilities for the 2017 - 2018 income year is $41.10 per square metre.
You can then claim a portion of the mortgage interest, rates and rental costs as well by the usual method - the percentage or estimate of floor area being used for business purposes.
For more information on how to make the most of your home office claim, please contact us to discuss further.