Home-Based Business Tax Deductions

The pandemic has seen a dramatic rise in small businesses operating from private home locations across the Macarthur region. Often these small one-person businesses have been started either as a side hustle that has grown or out of necessity to replace lost employment. Educating yourself on what deductions you can claim for this type of small business is critical. By claiming home-related expenses you can dramatically reduce your taxable income, therefore keeping more of your hard-earned income in your pocket. However, there are many traps for the uneducated.

Please note that the advice in this article specifically pertains to home-based businesses with no other fixed location, not people who have a fixed place of employment such as an office, warehouse, or factory and elect to do some work from home.

Expenses you can generally claim are broken down into three categories:-

  1. Occupancy expenses – These costs relate to owning or renting your home and include water rates, council rates, house insurance, rent, and mortgage interest.
  2. Running Expenses – These expenses include electricity and gas bills for providing light, power, and heating and cooling. Cleaning of your home is also a running cost and you may also be entitled to claim depreciation on items such as furniture and equipment used for the business.
  3. Phone and Internet expenses – This applies to home phones, internet usage, and also mobile phone costs.

All of these costs should be apportioned based on business usage as a percentage of the total usage. For example, if you are renting your home and use the garage as a hairdressing salon then you need to calculate the total floor space of the building and only claim the garage component. This may be 10% of the total space, so therefore you can only claim 10% of your rent.

WARNING

If you own your own home or are paying off a mortgage then read this next part carefully!

If you decide to claim part of your occupancy expenses against your home-based business then you will subject part of your home to Capital Gains Tax if and when you decide to sell your home. The part of your home you use for your business and the length of time you operate your business from home will dictate how much capital gains tax you will be subjected to when you sell your home. This can be a sizeable sum, and often, it is best to not claim the occupancy expenses due to the capital gains tax implications.

As if this wasn’t complex enough the rules are different again for those earning Personal Services Income (PSI). If you are a PSI earner then you CANNOT claim occupancy expenses.

For more specific information relating to your personal situation why not give us a call. We are based in Mount Annan, between Camden and Campbelltown in the Macarthur region of South-West Sydney.

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