Tax deductions for your small business


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Do you run a business from home? Running a home-based business offers a number of advantages including convenience, flexibility, freedom and cost savings.

It's great for looking after the kids, and also for starting out your business when you can't afford separate premises. And when it comes to your tax return, you may be eligible for a number of tax deductions.

So, if you run your business at or from home, and have a room or space set aside exclusively for business activities, read on.

run a business from home tax deductions

What is a home-based business?

A home-based business can be run:

  • at home - that is, you do most of the work at your home, for example, a hairdresser who uses a room as a salon.
  • from home - that is, your business doesn't own or rent separate premises, e.g. an electrician who works at the customer's premises but stores tools at home and has an office to handle the paperwork.

Claiming deductions

If you have a home-based business, you may be able to claim tax deductions for the following expenses:

  • occupancy expenses (such as mortgage interest or rent, council rates, land taxes, house insurance premiums)
  • running expenses (such as electricity, phone, decline in value of plant and equipment, furniture and furnishing repairs, cleaning)
  • the cost of business-related motor vehicle trips between your home and other locations, for example to clients' or suppliers' premises.

You can claim a percentage of all these costs if you run a home-based business. To be eligible to claim, the area set aside in your home for your business must have the character of a place of business, for example:

  • it's clearly identifiable as a place of business. You might have a sign identifying your business at the front of your house, for instance.
  • it's not readily suitable or adaptable for private or domestic purposes
  • it's used exclusively or almost exclusively for carrying on your business (a room that's used for private purposes occasionally won't qualify but a room that is used incidentally as an entrance to your home will be OK)
  • it's used regularly for visits by your clients.

Examples of businesses that could qualify include:

  • A bed and breakfast establishment
  • A hairdresser's home salon
  • A caterer's home kitchen
  • A photographer's home studio.

If can claim occupancy expenses, you will also be able to claim running expenses.

You can claim the percentage of occupancy expenses that relates to the area of your home you use as a place of business and the proportion of the year it was used for business.

A common method of working out how much to claim is to work out the floor area you use for your business as a percentage of the total floor area of your whole home.

For example, if the floor area of your home office is 10% of the total area of your home, you can claim 10% of your rent or mortgage interest, council rates and insurance assuming the home office is available for use in your business 100% of the time.

Make sure you keep accurate records of how you worked out the occupancy expenses you claim as deductions, including details of the methodology you have used and the justification for it, copies of mortgage statements, rental payments, home insurance policies and council tax statements.

Beware CGT

There's a potential snag to be aware of before you start deducting a portion of your occupation costs; you might have to pay capital gains tax (CGT) on the sale of your home when you ultimately sell.

Normally your home is exempt from CGT because of the "main residence exemption" but this doesn't apply to any part of your home that is used to derive income.

So, if you claim deductions for 10% of your home as a place of business, this means that you'll need to pay CGT on 10% of the profit when you sell.

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Mark Chapman is director of tax communications at H&R Block, Australia's largest firm of tax accountants, and is a regular contributor to Money. Mark is a Chartered Accountant, CPA and Chartered Tax Adviser and holds a Masters of Tax Law from the University of New South Wales. Previously, he was a tax adviser for over 20 years, specialising in individual and small business tax, in both the UK and Australia. As well as operating his own private practice, Mark spent seven years as a Senior Director with the Australian Taxation Office. He is the author of Life and Taxes: A Look at Life Through Tax.