EXPENSES • 19 SEPTEMBER 2022 • 6 MIN READ

Home office expenses: a tax deduction guide for business owners

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SECTIONS

Which home office expenses can I claim?

How do I calculate home office expenses?

GST on home office expenses

Keeping records and seeking professional advice

FAQs on home office expenses

Key takeaways

Who are Beany?

Whether you are a business owner, freelancer, or contractor who works from home, you can claim tax deductions for business-related home office expenses.

There are a few things to keep in mind if you want to claim these expenses:

There’s a connection between home office expenses and income-generating business activities; AND
The space needs to be a separately identifiable part of the building. This means the area needs to be obvious and identifiable as being used for business purposes that are separate from any other purpose. For example, working from the kitchen table doesn’t make it an office because the kitchen is not ‘separately identifiable’.

In this guide, we are going to cover:

Which home office expenses are claimable
2 methods to calculate your home office expenses for tax deduction
How to calculate GST on home office expenses

Which home office expenses can I claim?

Interest on a mortgage or rental payments
Insurance (both home and contents)
Rates (water and land)
Power (Electricity and gas)
Security and alarms
Internet
Home phone line (50%)

Other more specific home office expenses can also be claimed:

Repairs and maintenance work on the areas designated for business can become full business expenses
Your mobile phone bill, if it’s used mainly for business
Depreciation on capital items such as computers and office furniture (you can claim 100% of capital items if they are under $1,000. If it’s over $1,000, it needs to be depreciated instead.)

How do I calculate home office expenses?

Perhaps you’ve turned a spare bedroom into an office, and it’s no longer used as a spare bedroom. Or, you could be storing stock in the garage.If you’re doing either of these, it’s likely that some of your household costs are overlapping with operational business costs.

*If you’re storing stock in your garage, you can’t claim the expenses on the entire garage. Only the area being used for storage is claimable.

The costs directly related to producing income for your business – which may include rent, mortgage interest, electricity, rates, insurance, and telecommunication bills – can all be recorded as business expenses. However, this depends on you setting things up the right way. You can find more about what business expenses you can claim at the end of the financial year in this downloadable checklist.

There are two methods to calculate home office expenses:

Method 1: The IRD Square Metre Rate
Method 2: The actual cost method

Method 1: Using IRD’s Square Metre Rate

Using IRD’s Square Metre Rate is the most straightforward method when calculating home office expenses as a business owner. It uses a flat rate set by IRD each year based on the average cost of utilities per square metre of housing for New Zealand households. However, home office expenses such as mortgage interest, rates, or rental payments are not covered in this flat rate. You will need to calculate those home office expenses additionally based on the percentage of floor area used for your business.

For the year 2021-2022, the square metre rate is set at $47.85 per square metre. This rate is updated each year on IRD’s website. When using this method, you are not required to keep records of these individual expenses.

Example:

The total house area is 150 square metres
The garage that is used exclusively for storing business assets is 36 square metres
A small room is used exclusively as a business office by the owners is 9 square metres
Total area for business use is: 36 + 9 = 45 square metres
Percentage of the home being used for business: 45 square metres/150 square metres = 30%
$2,000 in rates and $12,000 mortgage interest is paid every year.

In this case, a portion of 30% of home office expenses can be claimed against rates and mortgage interest paid yearly.

Total home office expenses = (total square metres used for business purposes) * square metre rate provided by IRD ($47.85 for the year 2021-2022) + (percentage of the home being used for business) * (total rates, mortgage interest, and rent)

Total home office expenses = (45*47.85) + (14,000*30%) = $6353.25

Method 2: The actual cost method

You can choose to use The Actual Cost Method if using Square Metre Rate Method doesn't accurately reflect your home office expenses. This means you will need to calculate each item individually and keep records of any costs you intend to claim.

Let’s use the previous example. In addition, you would like to add the following expenses and the costs are outlined below

Internet : $1,020 per year
Phone: $480 per year
Electricity and Gas:$1,200 per year

In this case, 30% of each home office expense can be claimed as relevant to the business.

Total home office expenses = (percentage of the home being used for business) * (a sum of total costs for home items used every year)

Total home office expenses = 30% * (1,020 + 480 + 1,200 + 2,000 + 12,000) = $5,010

GST on home office expenses

If you are GST registered, you will need to remove the GST proportion (15%) on each home office expense and claim it separately, either in each GST return and payment period, depending on your GST filing frequency, or at the end of the tax year. This means you can claim a portion of GST on home office expenses.

However, if you have a mortgage or rent to pay, GST will not be included in those expenses. Be aware that your mortgage principal can’t be claimed as a part of home office expenses. It is also worth knowing that the GST portion can only be claimed in the GST return rather than the income tax return at the end of the year.

If you are using IRD’s Square Metre Rate method, you won't be able to claim the GST portion on home office expenses.

Keeping records and seeking professional advice

It’s important to keep records of all the home office expenses you intend to claim, such as invoices, evidence of payment, and business bank statements. Using accounting software such as Xero not only helps reduce time spent on admin but creates an easy ‘paper trail’. Talk with your Beany accountant to find out more.

FAQs on home office expenses

We've gathered some of the most frequently asked questions from clients and here is what you need to know:

Key takeaways

If you’re a business owner that runs your business from home, you might be able to claim home office expenses for tax deductions. While the using IRD’s Square Metre Rate is relatively easy to use, the actual cost method can be tricky to calculate. It’s highly likely that working with an accountant will help you to save more tax. Contact Beany today and find out how.

Who are Beany?

We’re an online accounting firm that is always right here for you, your accounting pain relief. The most advanced technology lets us work way more closely with you than a normal accountant world.

We have a dedicated team of certified accountants and a support team to take care of your business no matter where you are, so you can focus on growing your business. We take out the ‘fluff’, break down the barriers and get things done. Looking out for you is what we are all about. Get started for free today.