Do you know what deductions you are eligible to claim as a home-based business owner? Are you getting the maximum tax return due to you? Expand your knowledge and maximise your tax return with these tax deduction tips.
Running a business from home can yield many rewards. Home-based business owners can not only experience positive shifts in their work-life balance and improved motivation through being their own boss and working on something they are passionate about, but also financial rewards. Among these is the eligibility to claim certain tax deductions.
Knowing what you are able to claim as a deduction can potentially reduce the amount of tax that you are liable to pay. In general, deductible expenses that are particular to home-based businesses are occupancy expenses, running expenses and motor vehicles expenses.
Occupancy expenses are expenses that are incurred in relation to owning, renting or using a home, not necessarily related to a home-based business. Such expenses include rental payments, mortgage interest, council rates and house insurance premiums.
If your home-based workspace passes the “interest deductibility test” then you are able to claim occupancy expenses as tax deductions. To pass this test, generally the space must be clearly identifiable as a place of business (for example, a sign identifying your business at the front of the house), is unsuitable for private or domestic purposes, is used exclusively or almost exclusively for carrying on your business and is used regularly by your clients. However, you need to be careful when claiming some of these expenses as the claiming of mortgage interest and rates may subject the property to Capital Gains Tax.
Running expenses are any increased costs that result from you using facilities within your home as part of your business activities and can include expenses such as the electricity and gas cost of using a room, phone bills and cleaning costs.
These additional expenses incurred as a result of running your business from your home are usually able to be claimed as deductions, although the amount must only be the usage from the business, not general house expenses.
There are various methods of calculating proportions and deduction amounts. One way includes finding the percentage of floor space used for the business compared with the entire home. This percentage can then be applied to calculate the cost of utilities used for the business. Another way to calculate the cost of utilities is to compare costs before and after setting up the business at home – the different being that used for the business.
You should be able to provide information to support that your claim is reasonable and that the private or domestic proportion of the expense has been excluded.
Motor vehicle expenses
Many home-based business owners aren’t aware of what can be claimed as motor vehicle expenses. Unlike most workers, home-based businesses can generally claim a deduction for any travel costs incurred in business-related travel. This means that if you are carrying on a home-based business you may be able to claim a deduction for travel expenses such as going to a client’s premises, purchasing equipment or supplies and doing your banking, mailing or visiting your tax advisor.
The most vital thing to remember when running your business from home is to document everything. You should keep all receipts and tax invoices. Even though they may seem insignificant, together they may just add up to help you deduct a substantial amount from your gross income and thereby significantly reduce the amount of tax that you are liable to pay.
The optimal way for you to achieve the best tax rewards for your home business is to substantiate everything you think will be deductible, but to also have a proactive accountant. A proactive accountant will not only do the number crunching, but will look at your records and advise for, and against, deductible areas in your business. This way you will ensure you get the most from your home business.
What are some tax deductions you’re claiming as a home-based business owner?
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For more from Michael Quinn, head to www.flyingsolo.com.au, Australia's community for solo and micro business owners.