Running a small business from home comes with many challenges, especially when it comes to budgeting and managing resources. One of those challenges can be the cost of setting up a home office, whether it be as a sole-trader or as a business with multiple employees. Luckily, there are ways to reclaim some of your costs at tax time.
Here’s how you can maximise these deductions and boost your bottom line as a small-business owner.
Streamlining your home office expenses
For small business owners, home office expenses typically fall into three main categories:
- Essential furniture and equipment: Items like computers, desks, chairs, and phones that are critical for your operations.
- Office supplies: Necessary items such as paper, pens, printer ink, and other consumables.
- Utilities and services: The necessities that keep your office running, like electricity, internet, and heating/cooling.
First, categorise these expenses into two groups: those used exclusively for business and those shared with personal use. When you run your business from home, there are bound to be crossovers between personal and business expenses, as well as purchases that you only use for business reasons. Splitting them into two categories will make it simpler and easier to understand what and how much you can claim.
For the items in your ‘shared’ column, you will need to determine what portion of its use is for business and personal reasons. For example, if you use your laptop for 70 per cent work-related reasons and 30 per cent personal reasons, you can only claim 70 per cent of its value or depreciative value as a deductible. If you’re unsure how to determine the appropriate amount, make sure you consult a tax professional for help.
Expenses that are under $300 and used exclusively for running your home business can be fully claimed. Higher-cost items, however, are treated as depreciating assets, meaning you can only claim a portion of its depreciated value each year.
Choosing the right calculation method
Selecting the best method to calculate your home office deductions is crucial to ensuring you get the best outcome on your tax return. There are two options to choose from, and each one offers pros and cons depending on your circumstances:
- Fixed-rate method: This method allows you to claim 67 cents for every hour you worked from home throughout the financial year, covering everything from utilities to equipment. The benefit of this method is that it doesn’t require strict record-keeping and calculations like the second option, as most of your deductibles are accounted for in the fixed-rate calculation. This method may be ideal for those who don’t have many large deductibles and prefer a straightforward calculation without the hassle of itemising every expense.
- Actual expense method: This method lets you claim the exact amounts spent on business-related home office expenses. While it requires keeping detailed records throughout the year, it can be more beneficial for businesses with significant expenses that exceed the fixed rate’s coverage. Detailed logs, receipts, and precise calculations of business use percentages are essential, so it’s worth consulting a tax professional to ensure you understand the process.
Proactive preparation for tax season
Small-business owners can avoid the last-minute scramble and ensure they maximise their deductions by adopting a few smart practices:
- Plan ahead: Tax time can sneak up on the best of us, so it can be helpful to schedule an appointment with a tax advisor well before the deadline to ensure you’re claiming all possible deductions.
- Stay organised: Have a system in place for categorising and organising your receipts and invoices throughout the year, as this will save you the stress of compiling it all right before lodging your return.
- Keep updated: Stay informed about changes in tax laws and seek professional advice to ensure compliance and optimisation of your deductions.
By mastering these strategies, small-business owners can turn home office expenses into valuable tax savings, making their operations more cost-effective and financially sustainable.
Note: This article is general in nature and has been prepared for informational purposes only. It does not take into account individual circumstances and does not constitute financial advice. For personal financial advice, please consult a professional tax adviser.
