Home office tax traps
There’s a cute meme going round about designer handbags being tax deductible if you use them as a ruler. Apart from giving me a chuckle, it makes me wonder what on earth you’d measure with a handbag. About the only thing I ask my clients to measure is their home office and I can’t imagine the torture of doing that with a handbag.
Claiming home office is already torturous enough. Once upon a time, it was as simple as measuring your office (with a measuring tape, not a handbag) and claiming a percentage of home expenses. But things are a whole lot more complex now with an alternative method, onerous paperwork requirements and huge complexities if your home’s in Trust.
Square metre method
I’m a big fan of the square-metre method. It means you only need to add up what you’ve spent on home rates and interest (or Rent). Your accountant then claims your utilities using a rate set by the tax department. It often gives our clients a bigger claim and it saves them the agony of adding up utilities (power, gas, water, contents insurance etc).
Home owned by your Trust
If your home is in Trust, the Trust will often be legally liable for things like rates, loan interest and insurance. But many of you will have an agreement to live in the home ‘rent free’ if you pay the property outgoings. Here’s what you’ll do:
initially pay the outgoings yourself
recharge the Trust for the office outgoings
ensure the Trust reimburses you for those
have the company pay the Trust for it’s share
file a Trust tax return declaring the home income & expenses
That’s intense! An alternative is to simply have your company pay rent to the Trust, for the home office. The Trust returns the rental income and claims the rental expenses.
License to occupy
Unless you’re a sole trader owning your home personally, the tax department expects you to have a signed home office agreement. This is a license to occupy part of the home, as an office, and it shows which rooms are used, how much your company pays etc.
Rental properties
Claiming home office against residential rental income is rarely allowed because the IRD sees it as passive income (not an active business). To claim, you’ll need to build a war chest evidencing the extent of work managing your property portfolio is substantial. Having only one property or an agent managing your properties kills off any hope of a claim.
Internet
Yes, I know ... it’s completely unfair but the IRD has deemed home internet a personal expense. To safely claim a portion you’ll need to use a method, such as a logbook, to prove the number of hours it’s used purely for business.
Insurance
Claiming home insurance regularly catches people out. Generally, you can only claim the portion of the home contents insurance which is for business assets, not personal contents or building insurance. It’s crucial the home contents policy specifically covers business assets. Many policies don’t so have a good dig around, in that designer handbag (which you’re using as a filing cabinet), and see what your policy covers.
Bonus tip! If you run your business from commercial premises, claiming home office is dicey.
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