One of the advantages of operating a home-based business is that it allows you to claim many tax deductions.
The following categories apply to most home-based businesses.
Home Office Space: You can claim all expenses as income tax deduction in relation to the area set aside for a home office, so long as it is principally for business use.
You should however maintain a record of all expenses you wish to claim.
You may be able to claim GST input tax credits if you are GST registered.
These expenses may include a proportion of electricity, gas, insurance, repairs and contents insurance.
If you own your home, you may be able to claim a proportion of mortgage interest, rates, house insurance and repairs. If you rent, you can claim a proportion of the rent paid.
If the home is owned by a family trust, then you should get professional advice on expense claims.
You can claim only the expenses that relate to the area set aside for business (work out the percentage of the work area compared to the total floor area of the house and then apply this percentage to the total house expenses).
In general, you cannot claim home office expenses if you get passive income from rental properties or investments.
Automobile Expenses: If you use your own vehicle in the business, you can claim its running costs. There are generally three ways you can calculate the proportion of business use of your motor vehicle.
Mileage Rate: The Inland Revenue Department (IRD) mileage rate for motor vehicles is 74 cents per km, up to a maximum of 5000 kms of work-related travel per year. For distances greater than 5000 km, you must keep a record of actual vehicle expenses.
If you believe that your vehicle costs are higher than the 74c/km rate, you can claim deductions on your actual costs, including depreciation loss for the business use of your motor vehicle.
You must keep accurate records, including details of private and work-related expenses. The records must show the reasons for business travel and the distances covered.
You must keep a logbook of vehicle use for at least 90 consecutive days and work out the proportion of business to private use
The logbook term is up to three years, provided variance of business use is less than 20% of the logbook representation. You can use your logbook to calculate the deduction for costs incurred and the depreciation loss for the business use of your vehicle.
Services and Utilities: If your home is the centre of business operations or management, you may claim a deduction of 50% of the telephone rental and 100% of business-related toll calls.
If you have a separate commercial line rental telephone, you can claim all costs for both income tax and GST. You must make adjustment for any private calls made on the business line.
Expenses to heat and light the office can be deducted according to the percentage of the home’s square footage used for business.
Business Assets: A low-value asset (less than $500), may be deductible in the year it was acquired in certain cases.
In most cases, the assets must be capitalised and depreciated.
You may be able to claim 100% of the depreciation if the business assets are used exclusively for business purposes. If not, then the amount you can deduct would be proportionally related to the use in business.
Direct Expenses: These include office supplies, postage, mobile phones, ISP service, hosting and advertising. These are generally 100% deductible.
Travel Expenses: Travel that appears to be leisure will be questioned during an IRD audit. It is important to have documentation from meetings conducted.
Careful record keeping in all these areas will prevent problems when such audit takes place.
Jayesh Kumar is an Associate with William Buck (NZ) Limited, Chartered Accountants and Advisors based in Auckland. The above article should be taken only as a guideline and readers should consult their professional accountants for issues relating to their specific business. The management and staff of Will Buck (NZ) Limited and Indian Newslink including its Editor and Publisher absolve themselves of any liability or responsibility that may arise from the above article.
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