Home-based businesses: what you can and can’t claim

Date: 4th September 2019

Running a business from home? Did you know that your business can foot part of your heating and electrical bills? Or that it can cover a portion of your rent or mortgage interest payment? Believe it or not, you can even chalk up a percentage of the cost of toilet paper and handsoap as a business expense! But before you go running to the shop to throw more toilet tissue on the company card, let’s break down how claiming business expenses works.

person working at desk with dog

Household and vehicle expenses

If you use an area of your home for your business (eg. the study or garage), whether you operate as a sole trader, partnership or company, you may claim a portion of your home expenses as business expenses. These expenses may include:

  • rates
  • power
  • house and contents insurance
  • mortgage interest if you own the home
  • rent if you are renting the home

You must keep invoices for these expenses.

The portion of an eligible expense that you can claim is directly proportional to the percentage of your home that is used for business purposes.

If you own a vehicle and us the vehicle solely for business purposes, you may claim 100% of the running costs. If you use a vehicle for both personal and business use, you may claim a portion of the running costs proportional to your business use of the vehicle. Find out more about calculating what you can claim for business vehicle expenses here.

While you might run a trades business, beauty salon, or online retail shop from home, you should be able to work out what you can claim fairly simply. To make it easy, we’re going to consider a couple of (fictional) scenarios that may be similar to your own home-based business:

Scenario 1 –  How to claim monthly household expenses

Tom (fictional character) owns and runs Aspiring Lighting (not a real company), an electrical trades business, from his own home in Northlake, Wanaka. Tom’s home has power, gas, a mortgage, a security system and alarm, a landline, wifi Internet and a TV.

Percentage of home used for business:

Tom runs his company from a home office. His house in Northlake is 100 square metres, and the office is 10 square metres, or 10% of the home.

What can Tom claim?

Tom can claim 10% of his monthly expenses for the home as a business expense. He can claim:

  • 10% of the power bill
  • 10% of the heating bill
  • 10% of his mortgage interest and rates
  • 10% of house and contents insurance
  • 10% of the security alarm bill
  • 10% of the landline bill
  • 10% of the expense of lightbulbs, toilet paper and handsoap.

Tom tracks his household’s internet usage and knows that half of the wifi usage is for his business use. He can claim:

  • 50% of the Internet bill

Tom uses his TV to watch the rugby, news and weather. He does not use it for his business. Tom cannot claim a portion of the TV bill as a business expense.

  • 0% of the TV bill

Scenario 2 – How to claim a new home office and entertainment expenses

Rachel (fictional character) has recently moved to Queenstown and is renting a small home in Jack’s Point. She sets up a home office with new office furniture and begins working as a freelance architect in the area. She is a sole trader and owns and runs Remarkable Architecture (not a real business). She meets clients often. They either get takeaway coffee and bring it back to her home office, or she meets them in town for dinner.

Percentage of home used for business:

Rachel runs her business from her new home office. Her house in Jack’s Point is 80 square metres, and the office is 20 square metres, or 25% of the home.

What can Rachel claim?

Rachel can claim similar expenses to Tom (25% of power, heating, etc). She does not have a mortgage, but she can claim her rent instead. In addition to claiming monthly household expenses like Tom, Rachel also claims:

  • 25% of her rent
  • 100% of the cost of furniture for her new business office under $500 per item (items >$500 must be depreciated instead)
  • 0% of the cost of new furniture for her bedroom (non business-related home expense)
  • 100% of the cost of takeaway coffee for her and a client if they have it at her home office
  • 50% of the cost of dinner for her and a client if they have it away from her home office

Scenario 3 – How to claim expenses for your personal vehicle

Check out this link for more information on how to claim vehicle expenses for your business. Here are a couple of scenarios to help you understand your own personal situation:

Tom from Aspiring Lighting has two vehicles, a small personal car for grocery runs and personal travel and a ute for Aspiring Lighting. Tom only uses the ute for company-related travel. Tom can claim 100% of the running expenses for his work truck.

Rachel from Remarkable Architecture only has one car. She chooses to keep a logbook to understand what percentage of her use of the car is business related. She then uses kilometre rates from IRD to calculate how much she can claim.

Here are a few examples of tricky situations in Rachel’s logbook:

Rachel does some contract work for a large architecture firm in town for 3 months. She drives to and from work at the same place every day. The daily trip to work costs her $10 petrol per day. Rachel cannot mark this trip as business related.

Rachel drives to meet a client for dinner in town. Rachel can mark this as a business-related trip.

Get more help

Now that you have a better idea of what you can and can’t claim for your home-based business, here are a few more resources to help you out:

Claiming business expenses video from IRD

Information from IRD on claiming vehicle expenses

To see the above information depicted visually, check out this awesome infographic from business.govt.nz

Seek professional help. At Findlay Sidekick we know the ins-and-outs of everything you can possibly claim to help keep your bill down at tax time, and we love working with local small businesses. Reach out to us here.

Posted in: accounting, home based business, Latest News, small business, Wanaka