COVID-19 has brought about the want (and need) for many business owners to work from home.
Business owners can claim depreciation on assets used in their business, as well as any costs associated with the upkeep of those assets. This also includes assets that have been purchased for home offices.
Due to COVID-19, there has been changes to the low-value asset thresholds.
- Asset purchased before 17 March 2020 - cost $500 or less
- Asset purchased on or after 17 March 2020 and before 17 March 2021 - cost of $5,000 or less
- Asset purchased from 17 March 2021- cost of $1,000 or less
For assets under the above thresholds at the respective purchase date, businesses will be able to claim a deduction for the entire cost of the asset upfront. For assets over these thresholds, the assets should be depreciated annually in accordance with Inland Revenue’s prescribed rates. The annual depreciation will be an allowable deduction to the business.
The upfront deduction or annual depreciation will only be allowed to the extent the asset is used in the business. This means the claim will reduce if the asset has any private use.
For the purposes of the below example, we will assume the assets are used exclusively for business, and that Elliot’s Electronics Limited is not registered for Goods and Services Tax (GST).
Following on from our article BDO Working from Home: Home Office Expenses, we will now delve into an example about home office assets.
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. The rental in the city was furnished by the landlord, so Elliot had to purchase his own fit-out (assets) for his new office at home.
Elliot has now set up his home office and with BDO’s help, he has worked out most of the expenses he is able to claim. Elliot still isn’t sure how to calculate the amount he can claim for his office furnishings and equipment, so he has reached out to his local BDO advisor again for help.
Elliot’s Electronics Limited purchased the following items on 6 June 2020:
- Desk - $250
- Computer - $5500
- Chair - $150
- Phone - $65
As the desk, chair and phone are all below the low-value asset threshold of $5000, Elliot’s Electronics Limited will be able to claim a deduction for the entire cost of these assets at the time of purchase.
Elliot’s Electronics Limited may choose to record these:
- As an expense (low-value asset expense), or
- As an asset - but depreciated in full at the time of purchase
The accounting result will be the same, however Elliot’s Electronics Limited may prefer option 2, as this will retain a record of the assets on the company Fixed Asset Register. This might be helpful for insurance purposes and general record keeping.
The computer on the other hand, is above the low-value asset threshold. Elliot’s Electronics Limited will need to record the computer as an asset, and calculate the depreciation claim annually. Please see the link to the Inland Revenue depreciation rate finder. Elliot can use this search engine to select the appropriate method and rate to depreciate the computer.
Elliot ensures he keeps full records of the costs claimed in respect of Elliot’s Electronics Limited.