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Common tax deductible items for home based businesses

A home-based business is a business whose primary office is in the owner’s home. Basically it is a small business that works from the business owner’s home office. It can be like the works are done from home – for example where the business does not own or rent any properties other than your home.

A tax deduction is a facility that reduces taxable income. Home businesses have some unique expenditures, including costs for the space where you are doing business at home. You can save on taxes by deducting many of these expenses, and for that it’s important to know what they are and how much you can deduct.

What are the tax deduction types available to home-based businesses?

There are three types of tax deductions that are only available to home-based businesses. These are-

  • Occupancy expenses (relating to your home-based area)
  • Running expenses (relating to your home-based area)
  • Motor vehicle expenses (for certain types of travel).

Any home-based business can prerogative types 2 and 3 mentioned above if those types of expenses were gained in the relevant tax year, but only those home-based businesses that pass the ‘interest deductibility test’ can claim type 1 (above).

  1. Occupancy Expenses:

Claiming occupancy expenses type of deduction involves a two-step procedure:

A home-based business meets the ‘interest deductibility test’ if the home business area meets the following criteria:

  1. It is clearly identifiable as a place of business (e.g. signage at the front of the house)
  2. It is unsuitable for private or domestic purposes
  3. It is used exclusively or almost exclusively for carrying on your business, and
  4. It is used regularly by your clients

If your home-based business passes this test, then you will have-

  • The advantage is that your home-based business can claim a percentage of occupancy expenses as a tax deduction, and
  • The disadvantage is that your home will now attract Capital Gains Tax.

Occupancy expenses are those that you pay to own, rent or use your home. Examples include:

  • Rent
  • Mortgage interest
  • Council rates, and
  • House insurance premiums.

Alternatively, you can simply choose a method that is reasonable and based on accurate information.

2. Running expenses:

Running expenses include:

  • The cost of using a room – for example, electricity and costs for heating, cooling and lighting
  • Business phone costs
  • Cleaning costs
  • the decline in value of plant and equipment – for example, chairs, bookcases, computers and
  • Tools
  • The decline in value of furniture and furnishings, and
  • The cost of repair to furniture and furnishings.

How do I work out how much is business related?

There is no method you have to track to work out this percentage. A commonly used method is that outlined above. Otherwise, you can just pick a method that is rational and grounded on precise information, and eliminates normal living costs.

The ATO has released details of different procedures that are acceptable to them to help people out there. These are-

  • To record actual use of the business home area: by keeping a diary
  • For electricity and gas costs: claiming 26 cents per hour, and
  • For phone costs: if you do not use a phone exclusively for business then you can claim a percentage by using the following formula: [Number of business calls made and received] x 100 / [Number of total calls made and received].

3. Travelling expenses (for certain types of travel):

The general rule about travelling expenses (for all business owners) is that the cost of trips between home and work cannot be claimed as a tax deduction.

The exception for home-based businesses

The owner of a home-based business lives at the place where s/he works, thus any business-related travel can be claimed as a tax deduction.

Examples include travelling to:

  • A client’s premises (if you are working there or delivering some documents)
  • Purchase equipment or supplies
  • Do your banking
  • the post office to post invoices, or
  • Meet your tax adviser.

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