Utility bills (i.e. power, gas and heating)
Mortgage interest (if you own the property)
Rent (if you’re renting, obv)
Toilet paper, stationery, etc.
Business subscription magazines
Computers and office furniture
Food and drink
Furniture & electronics that aren’t solely used for work (e.g. if you work from the kitchen table)
TV or streaming subscriptions
There’s a lot to think about if you want to keep the Inland Revenue Department happy - they’re the ones running the show. This tax return guide for small businesses should fill you with some more confidence you’re doing things right. Go check it out and then come back to learn about claiming home office expenses. The fun never ends, am I right?!
Short on time or just really don’t feel like calculating expenses individually? This method could be for you.
The annual square metre rate is based on the average utility costs per m2 of housing. It doesn’t include interest on mortgages, rates or rent, so you’ll need to calculate those in addition to the square metre rate method. They should be based on the percentage of space your home office occupies.
Let’s use a real-life scenario to explain. Meet Joe of Joe Bloggs Limited.
Joe doesn’t have time to calculate his utilities individually so opts for the IRD square metre rate option. We know Joe’s home office occupies 10% of his total home and that it’s used exclusively for business purposes. Joe owns the property. He pays $3000 in rates on it and $11,000 in mortgage interest every year.
Total expenses calculation: (a x b) + (c x d)
A = Total rates, mortgage interest and rent ($14,000)
B = C/total floor area (10/100) = (0.1)
C = Total area (m2) of the house that’s primarily used for the business (10)
D = Square metre rate provided by the IRD ($44.75 for the year 2020-2021)
($14,000 x 0.1) + (10 x $44.75) = $1,847.50 in deductible expenses per year.
Our friend Joe is only using his spare room for business for part of the current year. That means he’ll need to apportion the annual costs based on how many months the room has been used for business. If Joe continues to work at home in the future, he’ll be able to claim the full 12 months in the next financial year.
You might feel as though the IRD calculation doesn’t accurately reflect your utility expenses. If this is the case, grab your calculator again. We’re going to learn how to calculate them individually. Let’s bring Joe back.
Joe has an internet plan that costs $1500 per year; he uses it for both private and business use. The IRD allows business owners to determine the portion of expenses to claim, as long as it’s fair and reasonable. Joe calculates the internet cost based on the time he spends online for work, which is about 30%. So $450.
His power bills add up to $3000 for the year and since his office takes up 10% of the space, he can claim $300 for this.
Joe still calculates his rates and mortgage interest based on the percentage of space the office occupies (like with option one).
$3000 rates + $10,000 mortgage interest = $13,000
$13,000 x 10% office space = $1300
Now we can summarise Joe’s full home office claim as: $450 + $1300 + $300 = $2050 total deductible expenses per year.
Joe’s accountant mentions to him that he hasn’t claimed his Insurance (House & Contents) and Depreciation of office fit-out. Joe decides he’s happy with his claim and makes a mental note to keep a better record of these costs for the following year. As with all expenses, he keeps full records of the costs claimed in respect of Joe Bloggs Limited, making his (and his accountant’s) life way easier.
What if you haven’t got an area of your house solely dedicated to your business? Say, for example, you work from the kitchen table?
Then you’ll need to keep a record of the times you work from home over a 4-week period. This will give you a clear indication of how much you use your home for business vs personal use.
The simple formula is: (Total work hours / total week hours) x 100.
E.g. Over a 4-week period, Joe works an average of 20 hours a week from home.
There are 168 hours a week in total, so: (20 hours / 168 total hours) x 100 = 11.9%
Joe would be eligible to claim 11.9% of his home running costs as business expenses.
A quick word of warning: IRD regularly checks with customers about their home office expense claims. They might ask you to verify how you calculated the home office percentage you’re claiming for, so it’s important to be reasonable! Resist the temptation to embellish your expenses for a friendlier-looking tax bill.
The GST on home office expenses can be claimed as they’re being paid, in each GST return period or at the end of your tax year. Remember mortgage interest and rent don’t include GST, so you might find working it out at the end of the tax year means less admin. And that’s a win in our (tax) books.
We know you’ve got a million other things on your to-do list, but keeping records makes doing your tax return much easier - and it’ll save you a bunch of time, too. Completely separating business from home life can be hard. As with any other business expenses you’re claiming, keep invoices and other records for all of these expenses. Keep written workings of all your calculations and store records of your outgoings somewhere safe.
When it comes to tax returns, you don’t have to go it alone. Bring on Monday offers a tax returns and support service from just $49 a month. We can help you determine the best way to claim home expenses so you’re paying the right amount of tax and won’t get a slap on the wrist (or worse) from the IRD.
Don’t be shy - let’s jump on a call!