Tax tips for home-based businesses
Starting a business from home can help you save on rent, the time and cost of commuting and having a wardrobe full of business clothes and flexibility in work hours, all of which provides valuable ‘breathing space’ while you grow your business.
If your business is home-based there are several allowable tax deductions for business-related portions of the following expenses you may be eligible to claim:
- electricity, gas and water
- home telephone and internet
- repairs and depreciation to your home office furniture, plant and equipment (computer, printer, etc)
- stationery and other consumables
In some cases you may be entitled to claim home occupancy costs such as, interest on your home loan (or rent, if you are renting), rates and taxes, insurance, etc. however, to be eligible, the area you use for running your business from home needs to meet the following criteria.
It must be:
- clearly identifiable as a place of business
- not readily suitable for private use
- exclusively used for business purposes
- regularly used for visits by your customers
For example, the partial conversion of a private home to accommodate a home-based hairdressing salon – the area used as the hair salon must be clearly identifiable as a salon and regularly visited by customers accessing the service.
But be warned! If you are eligible to claim the home occupancy costs you will most likely have to pay capital gains tax on the sale of your property, for the portion used to generate your business income.
To avoid paying more tax than necessary get a valuation of your home at the time you first use it as your place of business.
Use the following formula to calculate the percentage of floor space you can apply to your expenditure:
Floor area / total floor area x 100
Salon is 5m x 5m = 25sqm
Total house = 123sqm
The percentage that can be claimed is 25/123x100 = 20.33 per cent
Apply this percentage to your occupancy costs e.g. rates $2000 x 20.33% = $406.60
This amount is tax deductible.
For more information visit the ATO or for any other small business issue, contact us on 13 12 49.