A guide to work from home tax deductions

Understanding business tax deduction eligibility criteria 

First things first, let's demystify the eligibility criteria for claiming business tax deductions related to your home office expenses. According to the Australian Taxation Office (ATO), you can potentially claim deductions for your home office expenses if you meet the following conditions: 

1. You must be running a business: To claim home tax deductions, you must be operating a legitimate business, even if it's small. This could encompass freelancing, consulting, or any other entrepreneurial endeavour. 
2. Regular use of your home office: Your office space should be exclusively dedicated to business activities. It should be where you regularly conduct business tasks such as client meetings, administrative work, or creative brainstorming. 
3. Incurred expenses: You can only claim deductions for expenses incurred while running your business from home. This includes costs related to utilities, office supplies, depreciation of assets, and more.   

Got a small business in Australia? Discover the tax deductions you can claim to boost your bottom line.

How to run a business from home

Running a business from home can be a rewarding experience, offering flexibility and convenience. However, ensuring that your home office space meets the criteria for claiming deductions is crucial. Here are some tips to make the most of your home office: 

• Designate a specific workspace: Dedicate a specific area in your home solely for business-related activities. This will help you maintain a clear distinction between work and personal life. 
• Keep detailed records: Maintaining accurate records of your business-related expenses is crucial. This includes invoices, receipts, and any other relevant documentation. 
• Calculate your workspace's proportion: You can only claim deductions for the proportion of your home used for business purposes. Calculate this by dividing your office's square footage by your home's total area.

To know how to maintain accurate records of your business-related expenses, read our blog.

Work from home tax deduction claims

The Australian Taxation Office offers different options to calculate these deductions. The fixed rate method, available until June 30, 2024, allows you to claim 67 cents per hour for each hour worked from home, covering running expenses like electricity and internet. Alternatively, the Actual Cost Method lets you claim the exact costs incurred, provided you keep detailed records and receipts.

Understanding the benefits and requirements of each method is crucial to making an informed decision about which method to choose.

There are two primary methods to claim work-from-home tax expenses:

• The fixed-rate method: This simpler option allows you to claim a flat rate of $0.67 per hour for eligible expenses like energy, internet, phone, stationery, and computer consumables.
• The actual cost method: This method requires more detailed record-keeping. You can claim deductions for specific expenses such as utilities, office supplies, asset depreciation, and home occupancy expenses (subject to strict conditions).

Here's a breakdown of the eligibility criteria and requirements for each method:

The fixed-rate method (Available until June 30, 2024)

Under the fixed rate method, eligible taxpayers can claim work-from-home expenses at 67 cents per hour. This rate simplifies the process and covers specific running expenses without keeping detailed records for each expense.

Who qualifies?

To qualify for the fixed rate method, individuals must perform work from home and incur expenses directly related to work activities. This method is suitable for employees and self-employed individuals who consistently use a designated space within their home for business purposes. The work area does not have to be a separate room but should be used exclusively or almost exclusively for work.

Employees who work from home occasionally do not qualify if their home office is also used for personal activities. Accurate records of the hours worked from home must be maintained to substantiate the claim.

What can you claim?

The fixed rate of 67 cents per hour covers multiple running expenses incurred while working from home. These include:

• Energy expenses: Heating, cooling, lighting, and electricity.
• Phone and internet expenses: Costs associated with phone usage, internet, and data.
• Stationery and computer consumables: Items such as printer ink and paper.

These expenses are consolidated into the fixed rate, so separate deductions cannot be claimed for these costs elsewhere. While this method covers a broad range of expenses, it does not include costs related to remote office equipment, such as computers or office furniture, which must be claimed using actual cost methods.

Here's the catch

While the fixed rate method simplifies the calculation of deductions, it has limitations. This rate does not account for every possible expense of working from home. Costs not covered by the 67 cents per hour rate, such as office equipment and furniture, must be claimed separately under other allowable deduction methods.

Moreover, individuals must retain thorough records indicating the hours worked from home. Failure to keep accurate records can lead to denied claims. The fixed-rate method's broad coverage of expenses means some specific costs may not be fully compensated, requiring careful consideration of whether this method maximises the tax benefits for each taxpayer's unique situation.

For more information, visit the Australian Taxation Office's page on the fixed rate method.

The actual cost method

The Actual Cost Method allows individuals to claim precise expenses incurred while working from home, provided they meet specific qualifications. Eligible claims include various categories, from utilities to equipment depreciation, but taxpayers must maintain detailed records to support their claims.

Who qualifies?

To qualify for the actual cost method, individuals must work from home and incur additional expenses directly related to their work. This method is suitable for those who have a dedicated home office setup. It's crucial to differentiate between personal and work-related use of assets and services. For instance, only the work-related portion can be claimed if a laptop or mobile phone is used for both work and personal purposes.

Also, take note:

• Your employer did not reimburse you for these costs.
• You have contemporary records (timesheet, diary) showing the number of actual hours worked from home for the year ended June 30, 2024. Alternatively, you can maintain a continuous 4-week diary demonstrating your usual work-from-home pattern.
• You have evidence (invoices, receipts, bills) to prove you paid for the expenses.
• You have evidence to support the calculation of the deduction claimed (especially for depreciation of assets).

What can you claim?

This method allows for claiming deductions for a wider range of expenses, including:

• Utilities (electricity, gas) are apportioned based on the dedicated work area compared to the whole house (if the entire house is cleaned).
• Phone, data, and internet expenses were apportioned based on a work-related percentage from a sample continuous 4-week period.
• Stationery and office supplies are apportioned if partly used for private purposes.
• Decline in value (depreciation) of work-related assets like furniture, computers, and software (requires depreciation calculations).
• Repairs and maintenance to work-related depreciating assets.

Keep in mind

Accurate and comprehensive record-keeping is essential when using the Actual Cost Method. Maintain receipts, invoices, and documents that substantiate your claims. If claiming the decline in value of assets, detailed records of the cost, date of purchase, and work-related usage must be kept. Regular updates to these records will ensure a smooth tax return process. Be aware that incorrect or unsupported claims can lead to penalties or audits by the Australian Taxation Office.

For more detailed information and specific guidelines, visit the Australian Taxation Office's page on the Actual Cost Method.

Which method should you choose?

The fixed-rate method is simpler, but you might miss some deductions. If you have a dedicated home office and keep detailed records, the actual cost method could be more beneficial. Consider the complexity of your situation and the potential deductions you might be eligible for.

Disclaimer: This information is for general guidance only and doesn't constitute tax advice. It's recommended to consult a registered tax agent for personalised advice on your specific circumstances.

Which method should you choose?

When deciding how to claim work-from-home deductions, it's vital to understand the two methods available.

Introduced on 1 July 2022, the fixed rate method allows taxpayers to claim 67 cents per hour. This covers energy expenses, phone usage, internet, and other general expenses. It's straightforward and requires minimal calculation. For those who prefer more personalised deductions, the actual cost method might be suitable. This requires keeping detailed records and receipts for each work-related expense. It can be cumbersome but could potentially result in higher deductions.

The fixed rate method simplifies record-keeping, while the actual costs method demands detailed documentation.

Tired of juggling complex finances and missed tax deductions? Discover how one small business owner overcame these challenges and transformed their financial future. Read the full story here: https://www.thriday.com.au/blog-posts/what-deductions-can-a-small-business-claim

Why Thriday is the best accounting tool for tax deductions 

Here's the exciting part: introducing Thriday, the game-changer for your tax planning and preparation! Thriday is an innovative AI-powered tool designed to simplify determining eligible tax deductions when you run your business from home. Here's why Thriday stands out: 

• Smart AI technology: Thriday employs cutting-edge AI technology to analyse your financial data and business activities, instantly identifying potential tax deductions you might have missed. 
• Accurate calculations: Thriday's algorithms ensure that your deductions are accurately calculated, minimising the risk of errors or discrepancies. 
• Time and money saver: Say goodbye to hours spent poring over receipts and trying to make sense of complex tax regulations. Thriday streamlines the process, saving you valuable time and potentially increasing your tax refund.

Discover how Thriday can transform your tax season.

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Home tax deduction FAQs 

Let's address some frequently asked questions about home tax deductions: 

When do I need to keep records for work-from-home expenses?

‍It's crucial to keep records for as long as you need them for potential tax audits. This generally means keeping records for five years.

Can I switch between the fixed rate and actual cost methods?

‍Yes, you can choose a different method each tax year.

Can I claim deductions if I'm a sole trader? 

A: Absolutely! As a sole trader, you can claim deductions for your home office expenses if you meet the criteria. 

Is there a limit to the deductions I can claim? 

A: While there's no set limit, your deductions should accurately reflect the proportion of your home used for business purposes. 

Is Thriday safe to use for sensitive financial data? 

Thriday prioritises data security. Your information is encrypted and stored securely, ensuring your financial data remains confidential. 

What does Thriday do for accounting and tax?

‍Thriday is a financial management platform designed to simplify accounting and tax for small businesses. It automates expense categorisation, helps manage receipts, provides tax deduction insights, and offers a streamlined tax return lodgment process.

In conclusion

Maximising your work-from-home tax deductions is essential for service-based businesses to boost profitability. By effectively claiming eligible expenses like utilities, office supplies, and equipment depreciation, you can offset business costs and increase your bottom line. While the fixed-rate method offers simplicity, the actual cost method can potentially yield higher deductions if you maintain meticulous records.

Leveraging tools like Thriday can streamline the process, helping you identify potential deductions and accurately calculate your claims. Remember, every dollar saved is a dollar reinvested into your business. Consistent record-keeping and understanding the specific deductions available to service-based businesses are key to optimizing your tax returns.

Can you afford to leave money on the table? Optimize your work-from-home tax deductions today and give your business the financial boost it deserves. Sign up for free with Thriday now and get to experience the ease of tax management.