COVID-19 has brought about the want (and need) for many business owners to work from home.
Business owners working from home can claim a portion of their household expenses in their business. The amount the business owner can claim is directly correlated to the portion of the home that is being used for the business, as well as the amount of time the office is in use (full-time or only for a few months).
There are two ways to calculate a Home Office claim, which are highlighted in the case study below.
Case Study Elliot’s Electronics Limited
Elliot is the sole Shareholder and Director of Elliot’s Electronics Limited.
Due to the financial impacts of COVID-19, Elliot has recently undergone a cost-cutting exercise in his business. Elliot has decided to leave his office rental in the city, in favour of the spare room in his family home in Akaroa. Elliot has now set up his home office and wants to know how to calculate the portion of office expenses he can claim under Elliot’s Electronics Limited.
Elliot has been advised there are two main ways he can calculate this. For either method, Elliot will be required to know the percentage of household costs attributable to the office.
This is typically done as follows:
- Spare Bedroom/Office Space – 10 m2
- Total House Size – 100 m2
- Percentage of Home Office = 10%
Option One: IRD Square Metre Rate
IRD have an annual square metre rate option for business owners to use to calculate their home office expenses. This rate is based on the average utility costs per m2 of housing. This option can be helpful if you do not have the time to calculate expenses individually. This calculation does not include interest on mortgages, rates, or rent, so these will need to be calculated in addition to the square metre rate method and will be based on the percentage of space the office occupies (as above).
Elliot decides that he does not have time to calculate his utilities individually and decides to use the IRD square metre rate option.
We know Elliot’s home office occupies 10% of his total home and that the office is used exclusively for business.
Elliot has advised that he pays $3000 in rates on the Akaroa property, and $10,000 in Mortgage Interest annually.
Total Expenses Calculation: (a x b) + (c x d)
- A = Total rates, mortgage interest, and rent ($13,000)
- B = C/total floor area (10/100) = (0.1)
- C = Total area (m2) of the house that is used primarily for the business (10)
- D = Square metre rate given by IRD ($42.75 for 2019-2020 year)
($13,000 x 0.1) + (10 x 42.75) = $1,727.50 in deductible expenses per year.
As Elliot is only using his spare room for business for part of the current year, he will need to apportion the annual costs based on how many months the room has been used for business. If Elliot continues to work at home in the future, he will be able to claim the full 12 months in the next financial year.
Option Two: Full Expense Calculation
Elliot believes that the IRD calculation does not accurately reflect his utility expenses and decides to calculate them individually.
The business has an exclusive phone line, which Elliot’s Electronics Limited can claim the full cost of (as they do not use it to make any private calls) - $600.
They also have an internet plan of $1,000, which has both private and business use. IRD allows the business owner to determine the portion of expenses to claim, provided it is fair and reasonable. Elliot calculates the internet cost based on the time he spends online for work - 30% business = $300.
Elliot still calculates his rates and mortgage interest based on the percentage of space the office occupies (as with option one).
$3000 rates + $10,000 mortgage interest = $13,000
$13,000 x 10% office space = $1,300
Elliot’s full home office claim can be summarised as follows:
$600 + $300 + $1300 = $2,200.00 total deductible expenses per year.
Elliot’s accountant mentions to him that he has not claimed the following expenses:
- Insurance (House & Contents)
- Repairs & Maintenance (where relevant to the house/office space)
- Depreciation of office fit-out
Elliot decides he is happy with his claim and will keep a better record of these costs for the following year.
As with all expenses, Elliot ensures he keeps full records of the costs claimed in respect of Elliot’s Electronics Limited.