Homebased Business Tax Hints and Tips

OK So it’s that time of year again…The time of year that can drive fear into the most business savvy of us. As a Homebased Business you want to save every penny you can and claiming tax relief is part of that, but knowing what you can and cannot claim means you have to read through a 20 + page tax guide written in the most complicated language.

The Homemade Company has spoken to our accountant and they have kindly put together some very simple hints and tips specifically for Homebased Companies.

 To save you time and make tax simple.

First thing you need to know is do you qualify as a Homebased Business.

WHAT IS A HOME-BASED BUSINESS?

A home-based business is one where you operate the business

  • Either at home; that is, you carry out most of the business’ work at your home. This is your place of work majority of the time.
  • Or from home; that is, the business does not own or rent any premises other than your home. But majority of your work is undertaken away from your home like a builder for example.

Running a business at or from your home is similar to running any other business. That is, if you operate a home-based business, you can generally claim similar expenses to a business that is not home-based.

WHAT CAN I CLAIM FOR, AS A HOMEBASED BUSINESS?

  • These can be broken down into three simple areas
    • Occupancy
    • Running costs
    • Vehicle expenses

Occupancy expenses

  •   Occupancy expenses include:
    • Rent or mortgage interest
    • Council rates
    • Land taxes
    • House insurance premiums

You must pass the interest deductibility test before you can claim occupancy expenses. This means you must have an area of your home set aside exclusively for your business activities, such as an office or workshop.

To claim a deduction for part of the interest you pay on money you borrowed to buy your home, the area you have set aside must have the character of a place of business your home is likely to have the character of a place of business if it is:

  • Clearly identifiable as a place of business – for example, you have a sign identifying your business at the front of your house
  • Not readily suitable or adaptable for private or domestic purposes

Running expenses

  • Running expenses include:
    • The cost of using a room, such as electricity and gas costs for heating, cooling and lighting
    • Business phone costs
    • The decline in value of plant and equipment, such as chairs, bookcases, computers, grinders
    • The decline in value of furniture and furnishings, such as curtains, carpets, light fittings
    • The cost of repairs to furniture and furnishings
    • Cleaning costs.

If you work at or from your home, you can claim a deduction for additional expenses you incur in running your business. This means you must often work out the portion of the expense that relates to business and private use to work out how much you can claim.

Motor Vehicle Expenses

You generally cannot claim the cost of trips between home and your workplace as this is a private expense. However, you can generally claim the cost of any business-related travel. For example, you could claim the cost of travel to:

  • A client’s premises if you are working there or delivering some documents
  • Purchase equipment or supplies
  • Do your banking
  • The post office to mail out invoices
  • See your tax adviser about a matter related to your business

HOW MUCH CAN I CLAIM?

Occupancy

You can claim the percentage of occupancy expenses that relates to the area of your home you use as a place of business.

You can do this by using the proportion of the floor area you use to work in

For example, if the floor area of your home office is 10% of the total area of your home, you can claim 10% of your rent or mortgage interest, council rates and insurance.

In some circumstances, using the floor area of your home as the basis of your claim may not be the best method of working out how much to claim. For example, the value of a large workshop near the house may be a small proportion of the overall value of the property. In these circumstances, we will accept an alternative method of working out how much of your home you use for business purposes, as long as the method you use is reasonable and based on accurate information.

Running Expenses.

How you work out these additional costs is up to you, but you should be able to provide enough information to show:

  • Your claim is reasonable
  • You have excluded the private (domestic) proportion of expenses associated with normal living costs.

Here are some ways you can work out how much you can claim.

Claim 10% of running costs

  • Using your floor area may also be an appropriate way of working out some running expenses. For example, if the floor area of your home office is 10% of the total area of your home, you can claim 10% of heating costs. (Where you do not have an area of your home set aside exclusively for business, you cannot claim on a floor area basis.)

Compare accounts before and after you started your business

  • You can compare utility accounts from before and after you started business to assess increased costs.

Keeping a diary

  • You can keep a diary that shows how you use your home work area for a representative four-week period each financial year to work out a pattern of use for your home work area for the entire year. You must allow for periods such as holidays and illnesses.
  • If there is no regular pattern to how you use your home work area, you must keep records of each time you use the area during the year and the purpose for which it is used. You must keep a diary for each financial year.

Claim 34 cents per hour

  • Instead of recording actual expenses for heating, cooling, lighting and furniture depreciation (such as desks and shelves), you can claim a deduction of 34 cents per hour based on actual use or an established pattern of use. . These rates are based on average energy costs and the value of common furniture items used in home work areas.

You must separately work out all other home work area expenses, such as phone expenses and depreciation on computers or other equipment.

Vehicle expenses

If you are carrying on a home-based business, you can claim the cost of trips between your home and other places if the travel is for business purposes.

For example, you could claim the cost of travel to:

  • A client’s premises if you are working there or delivering some documents
  • Purchase equipment or supplies
  • Do your banking
  • The post office to mail out invoices
  • See your tax adviser about a matter related to your business.

There are a number of approved methods available to sole traders and partners in a partnership to calculate motor vehicle expense claims. You can choose the method that suits your circumstances best.

  • If your vehicle has a special fit-out and very limited private use, you can claim a deduction for 100% of you  vehicles  running costs
  • You can complete a log book to keep track of your business travel for 12 weeks. The log book may show that you use your vehicle 40% for business use and 60% for private purposes. You can use this log book as a percentage to claim 40% of your total expenses for that car…

You can use simpler cents per kilometre method of working out your claim. Estimating your business use of his car averages around 3,600km – that is:

  • 80km per week visiting clients
  • 10km per week for other business use
  • 40 weeks in the year.

To work out your claim, multiply the business kilometres travelled by the cents per kilometre rate. The 2011 rate was 75 cents per kilometre. Therefore, calculates as follows: 3,600km × 75c = $2,700

These are all very basic facts and for further information please review the Guide for Homebased business operators on www.TheHomemadecompany.com.au or go to www.ato.gov.au/businesses.


We also always advise that you go to a professional accountant to ensure you are getting the most for your money. The Homemade Company recommends.


Supplied by The Homemade Company

ABOUT THE HOMEMADE COMPANY: We are a Marketing Support Company, who understands Home based Businesses. We understand sometimes you just need an extra pair of eyes, or a second professional opinion, and sometimes you need someone to go away and to do a great job marketing your company leaving you time to run your business. We promise to listen to you and deliver what you need.

Click here to find out more about The Homemade Company in our HireMyServices directory…

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