Business Mentor: Domestic offices offer some perks

Q. What are the tax implications of working from home? Can I write off part of my mortgage, phone bill etc?

A. Peter Taylor of BDS Chartered Accountants replies:

The key thing is keep all your receipts and have good record keeping either manual or computerised to support your claims, and of course do not be afraid to seek professional advice.

Remember, mistakes made in the claims area can cost you thousands in penalties and additional tax.

In general, a substantial claim for the costs of running your business from home can be made.

The normal rules are that where a part of the home is set aside exclusively for a business purpose then a portion of all the costs of the home can be claimed.

It is usual to account for these at the end of each year and your accountant can make the appropriate adjustment for tax purposes.

To assist you in preparing for year end it is useful to keep a record of monthly expenses items like insurances, power, rates, mortgage interest or rent.

A depreciation claim will also be allowed as part of your home office claim. This is based on your house cost (not the land) and can considerably increase your claims for tax purposes.

Other costs that may be claimed will be costs for running your fax, computer and other equipment.

In addition, part of the costs for purchasing new equipment can be claimed each year in the form of depreciation. That can be as high as 48 per cent on items like new computers.

You may claim 50 per cent of the rental of your home line and 100 per cent of all business-related tolls, but a good idea is to get a dedicated business phone/fax and internet line and claim for 100 per cent of that cost.

This is becoming more common with special packages directly aimed at the home business. Think of taking advantage of these and saving some tax dollars as well!

Other claims that can be made will depend on whether you are set up as a company or a sole trader.

With either structure the claim must satisfy the test that the costs were incurred with the intention of generating assessable income.

In addition there is a further test of whether the expenditure is of a capital or a revenue nature.

You should seek professional advice early on about what structure is appropriate for your home business. You should note that for a sole trader or a partnership, drawings are not a deduction for income tax. But a company may register as an employer and a tax-paid salary can be paid to the owner-operator, reducing the incidence of provisional tax.

Some care needs to be taken with this process and it should be done in conjunction with your adviser, to ensure no more tax is paid than would normally be the case. Finally, the costs of professional advice are also tax-deductible and should be a consideration for your business throughout the year and not just at tax time!

* Peter Taylor is managing director of BDS Chartered Accountants, a firm of chartered accountants specialising in business development working with small to medium sized businesses. You can contact Peter at 0800 829-627 or at petert@taxmaster.co.nz

* Send Mentor questions to: ellen_read@nzherald.co.nz Answers will be provided by Business in the Community's Business Mentor Programme.