Introduction
What is ‘entertainment’? Can you make a claim for your home office?
Welcome to the first instalment in our five-part series – tax tips with MHCo. The end of financial year (31 March 2016) has now come and gone and with that many business across New Zealand will be readying themselves for another round of financial statements and tax returns. If you don’t already have your information ready for your accountant, then you should be thinking about this very soon.
This series is aimed at small to medium businesses and is designed to increase understanding around some key tax topics that we often get asked about as well as educating businesses on a few common areas where they may be missing out on tax deductions that they are entitled to
Today’s topic is claiming home office as a business expense:
A large number of people who own a small/medium sized business complete work from home. The most common example is when a business owner has an office set aside at home for completing work-related tasks. If this is true then you can claim a portion of your home expenses as a business related expense.
If you don’t have an office or area dedicated to work use you can still make a claim for home office. To calculate this we would use different criteria such as time spent on income earning activities at home. For today’s example we are going to presume a dedicated office area has been set aside for work purposes.
Example
The first step is to work out the percentage of the work area compared to the total floor area of the house. Let’s say John, who owns his own company, has a dedicated work office at home which is 15m2 in total. The total floor area of the home is 100m2. So John has a work related office which is 15% of the total home. He can therefore claim 15% of certain home expenses.
John works out that his total home expenses over the last financial year were as follows:
Rates $3,000
Insurance $1,100
Power $1,800
Total (including GST) $5,900
GST $770
Total Excluding GST $5,130
If John is not GST registered, then he can claim 15% of the GST inclusive total being $885. If John is GST registered, then he can claim 15% of the GST exclusive amount being $769. He can also claim GST of $115 (15% of $770)
Example continued – Mortgage interest
John can also claim a portion of his mortgage interest (but not principal). There is no GST on mortgage interest so it’s best to calculate this separately.
John looks at his loan statements and works out he has paid interest of $20,000 during the year. He can therefore claim 15% of this being $3,000.
Example continued – Telephone costs
As John’s home acts as the center of operations for the business he is entitled to claim 50% of his home telephone costs. By looking at his phone bills John works out he has paid $1,080 during the year. This includes $141 of GST.
John can therefore claim $70 of GST (50% of the total GST) and $470 for income tax purposes (50% of the GST exclusive phone bill)
Adding up John’s entire home office claim (presuming he is GST registered) we get:
Home expenses $769
Mortgage interest $3,000
Telephone costs $470
Total claim $4,239
Based on the company tax rate of 28% this would result in tax savings of $1,187 plus GST to claim of $185 ($115 + $70).
Other considerations:
- Invoices
Claiming a home office expense requires the same record keeping as any other business expense. It is therefore required that you have and hold the invoices for the expenses you are claiming.
- Depreciation
You can no longer claim depreciation on your house as a part of your home office. You can however claim depreciation on capital items such as office furniture & fittings, shelving etc.
- Renting?
If you renting, we can still claim a portion of your rent for your home office claim using the same principles shown above.
Next week
Entertainment explained – what is it? What can you claim? And what can you only claim 50% off?
Thanks, the MHCO team