How to achieve the best tax deduction for your home office expenses
Employees who work from home may be entitled to claim a deduction for expenses in relation to their home office. These could include electricity, phone, internet, or depreciation on equipment. If you are running a business from home, there are separate rules and allowable deductions which we won't be focussing on in this article.
Occupancy v running costs
It is important to note the difference between occupancy costs and running costs. Occupancy costs including rent, mortgage interest, rates, and water are only deductible for taxpayers who run a business from home or have dedicated areas of the home for work. Employees who have an office at work are unable to claim occupancy costs, regardless of whether they choose to work from home. Employees who do not have an office at work need to think about the consequences of claiming occupancy costs, as there will be capital gains tax consequences on the sale of the property.
| Occupancy | Running |
|---|---|
| Rent | Electricity |
| Mortgage interest | Gas |
| Rates & Water | Cleaning |
Methods to use
There are three different methods that employees can claim home office expenses under. The method chosen will depend on each individual employee and their circumstances and should be what’s best for the employee as long as they meet the criteria for the deduction. The methods below only cover running costs.
1. Short cut method
During the start of COVID-19 lockdowns, a considerable number of employees were required to work from home. The government announced a short cut method to calculate expenses while working from home. This method only covers the period 1 March 2020 to 30 June 2021. All employees working from home during that period can use this method, even if you are not normally allowed to work from home.
This method allows employees to claim 80 cents per hour for each hour worked from home. Employees can choose to use this method if they have been working from home to fulfill employment duties and have incurred additional running expenses due to working from home.
This method covers all expenses including:
- Phone
- Internet
- Electricity
- Gas
- Depreciation on office equipment – such as phones, computers, and laptops
It's important to note that no other expenses can be claimed using this method e.g. phone or internet. Therefore, it will be important to consider whether this method will give the best result.
Employees are still required to keep records of the number of hours worked from home. This can include a timesheet, a spreadsheet, a roster, or a diary.
2. Fixed rate method
The fixed rate method allows employees to claim 52 cents per hour worked from home. This rate covers costs for:
- electricity and gas
- the cost of repairs to your home office equipment
- the decline in value of home office furniture and furnishings
To use the fixed rate method, employees need to have a dedicated work area, such as a home office. This method doesn't include the following, therefore these will need to separately calculated:
- Phone
- Internet
- Printing and stationery
- Depreciation on office equipment – such as phones, computers, and laptops
Because of the separate claim for the items listed above, the fixed rate method could result in a higher deduction, particularly when new equipment is purchased or the employee has a high work percentage for the phone and internet.
3. Actual cost method
The last method available is the actual cost method where the employee claims all the actual expenses they incur working from home.
This may include the following expenses:
- electricity and gas
- depreciation on office equipment – such as phones, computers, and laptops
- phone and internet expenses
- cleaning
- printing and stationery
This method requires the most record keeping. A record of the number of actual hours worked from home which may include a diary for a representative four-week period to show a pattern of use working at home.
To work out the decline in value of depreciating assets employees will need to keep all receipts showing the amount spent and the date purchased as well as the percentage of work use.
To work out the cost of your heating, cooling, and lighting employees can calculate:
- the cost per unit of power used
- the average units used per hour
- the total annual hours used for work-related purposes – refer to your record of hours worked or your diary
The actual cost method is going to be best for employees who have a lot of expenses and keep great records.
Contact Link Advisors if you need help determining which method is best for you to claim.