Did you know…
If you run any kind of business or side hustle and you work on it at home, your home becomes a place of business.
This means all your home expenses – electricity, internet, rates, mortgage, insurance etc. can now be claimed as tax expenses.
You can see the guidance for home office expenses here on IRD’s website:
Most people’s heads explode when I tell them this, but it’s been standard tax law for as long as I can remember.
In fact, back when I worked as a Chartered Accountant, it used to be my job to calculate things like this for all our rich clients so we could put it in their tax returns (how fun).
So how can you make this work for you?
Step 1: Start A Home Business
Some people think “start a business” means they need to start a company and rent an office etc etc.
Anything that makes money is a business.
Yes, even if you start selling t-shirts on Trademe. Boom – you have a home business.
This website you’re reading right now is built from my bedroom. That means it’s a home business. Any money I make from it needs to be declared in my tax return. That means any expenses I incur can also be claimed in my tax return.
Of course, you need to be genuine here.
If you sell two t-shirts on Trademe one weekend and then claim you’re in business and start claiming a thousands of home expenses, this might land you in trouble with the IRD.
That’s because a couple of t-shirt sales can’t reasonably called a business.
However, let’s say you enrol in Wealth Builder to get access to my course Simple Flips.
You use the lessons in the course to source your first $500 of goods to flip.
You flip them for $1,000, making $500 profit.
You repeat this a few times until you’ve made $2,000 or $3,000 in profit.
Is this a business?
You are putting in hours of work, making a profit, and therefore can start claiming your expenses.
These expenses might include:
- Your home internet connection (you use it to browse suppliers, emails, manage your Trademe etc). If you’re working 20% of the time you’re online, you can claim 20%.
- Your phone plan (so you can answer Trademe questions and customer emails on the go). Again, probably you could claim 20% (if you’re working 20% of the time)
- The little study in your house where you store all your inventory and work on your laptop, let’s say it’s about 10% of your house area. You can now claim 10% of your home insurance, rates, rent, power etc.
- Car expenses (keep a logbook, if 10% of your trips are business related, such as going to the post office, picking up supplies etc, you can claim 10% of your rego, wof, petrol, insurance).
What exactly can you claim?
The IRD has some guidance on the things you can claim.
For example, it explicitly states you can claim a portion of your mortgage interest, rates, insurance and power:
To work out what portion you can claim, the IRD tells you to set aside a specific space of your house to be used only for your business and work that out as a portion of your house floor area, OR if you don’t have a specific area set aside, you can use an estimate of how much time you spend in the area you do use:
If you have capital items such as a computer or desk, you can depreciate them and claim a depreciation expense:
You can claim 50% of your home telephone line if you use it for both personal and business:
If you use your home internet connection, you can also claim a portion of it.
You can decide what a reasonable portion to claim will be, based on how much you use it for personal versus business:
You can also claim your vehicle expenses such as gas, rego, warrant, insurance etc.
You will need to keep a logbook to determine how many kilometres you spend on business activities versus personal activities. Otherwise, you can forgo a logbook and claim a flat 25% (although make sure this sounds reasonable, you may be asked to justify it. If in doubt, claim less or keep a logbook).
Step 2: Keep records!
Make sure you have good records of everything that you want to claim.
For example, if you buy some stationery, keep the receipts. Keep a logbook of all your car travel. Keep all your invoices for power, internet etc. IRD can ask for this at any time.
You should also keep records to justify the amount of expenses you are claiming. For example, if your home office is 10% of the floor space of your house, keep your calculations to show you actually worked this out.
Step 3: File Your Tax Return
In your tax return, you will need to include your business income in your tax return.
Usually this will be in “self-employed income”.
The figure you include will be your “net” self-employed income (in other words, your profit).
To work this out, take your total revenue, minus all your expenses, and work out your final profit figure.
Include this figure in the “Self-Employed Income” section of your tax return.
If you’re filing online, it will look like this:
Say you start a flipping business, and you manage to sell $5,000 in flips on Trademe.
Your expenses include things like internet, Trademe fees, postage, car expenses, home office etc.
Your accounts might look like this:
Wealth Builder/Simple Flips course: $49
Postage costs: $200
Internet (50%): $500
Phone bill (50%): $300
Trademe Fees: $375
Car expenses (20%): $1,000
Home Office (10%):
- Insurance: $150
- Mortgage interest: $1,700
- Rates: $80
- Power: $200
Total Expenses: $4,604
Total profit = $5,000 – $4,604 = $396
So, you would include $396 into your tax return as self-employed income.
By starting a home flipping business, you’ve made most of your household overheads a business expense, and can now (legally!) claim them in your tax return.
Caution: Always be “Fair And Reasonable”
The phrase “fair and reasonable” is used often by IRD to indicate how you should treat the preparation of your taxes.
For example, let’s say you want to maximise your claimable expenses. You have a four bedroom house, so you store all your flipping products in one bedroom, put your home office in another bedroom, and keep all your packaging and stationery in another bedroom. Then you say – Hah! Now I’m using three room for my business, which is 60% of my floor space, so I’m going to claim 60% of my expenses.
Perhaps this might be true, but it’s not fair or reasonable to say that three out of four bedrooms are required for your business.
In fact, it’s much better to err on the side of caution whenever dealing with taxes. A wiser move would be to use the smallest bedroom you have for business so it doesn’t look like you’re preparing your taxes in bad faith.
Even if you think your time on the internet is 80% business-related, it might be best to just claim 50% to be sure you’re not overclaiming.
Remember – always better to underclaim than to overclaim. Underclaiming is not an offense. Overclaiming is! And if you’re in doubt whether you can claim at all, don’t claim.
Starting a home business is one of the best things you can do for your finances. Not only will you increase your income and learn new skills, you will gain significant tax advantages. Things like claiming part of your mortgage interest as a tax expense can compound greatly over the long term!
Other businesses you can start from home:
- Niche sites
- Youtube Channel
- Graphic design
- Video editing
- Selling crafts on Etsy (anything)
- The options are endless…
Just one more reason to start hustling 😉
For more guidance on how to claim home office expenses, refer to the IRD guidance.
P.S. I cannot answer questions or give advice on your specific tax situations. If you need assistance in filing your return, you should seek the services of a tax accountant.