Working from home deductions for sole traders and small business operators

Did you know sole traders and small business operators who have been working from home can claim a portion of their running costs and occupancy expenses on their tax? Find out how.

Given the impact of COVID-19, there are even more sole traders and small business owners working from home. This makes it essential for a growing number of taxpayers across the country to understand what they can and can’t claim when working from home (WFH).

Here are some tips for sole traders and small business operators when it comes to claiming running and occupancy expenses related to home-based businesses. They should help you get the most from your tax return without risking an audit from the ATO.

READ: How long does it take to get a tax return?

How to claim running expenses

If your home is your main place of business, then as a sole trader or small business operator you may be able to claim the business portion of certain business running expenses. Simply put, running expenses are costs from using your home’s facilities for your business, such as phone and internet costs as well as heating, cooling, lighting and cleaning costs.

When it comes to calculating how much you can claim related to your home-based business, you can use any method so long as it meets certain baseline requirements set by the ATO.

Here, you need to make sure that whatever you claim is reasonable in your circumstances, that you don’t include private living costs, and that you have records to back up your calculations in case the ATO wants to see proof.

Calculating your running expenses

In terms of methods to calculate your business running expenses, the ATO allows a couple of other approaches if you don’t want to take the above-mentioned ‘reasonableness’ route.

One such method is to claim using a set rate for running expenses of 52 cents an hour for each hour you operate your business from home. This approach covers expenses like cooling, cleaning, heating, lighting and the depreciation of furniture and furnishings. However, you have to separately figure out phone and internet expenses, consumables and some depreciation expenses.

Another option, implemented by the ATO in the wake of COVID-19, is to claim using a temporary shortcut method of 80 cents an hour. This can be used if you were running a home-based business from the start of March 2020. This so-called ‘shortcut method’ covers all the expenses normally included under the 52 cents rate, and all additional deductible running expenses.

READ: Sole trader tax: What you need to know

How to claim occupancy expenses

If you’re trading from home, you may also be able to claim expenses for occupancy, so long as you set aside part of your premises strictly for business purposes. On this point, the ATO will look at things such as whether your space is clearly identifiable as a place of business, is not easily suitable for other uses, is used most of the time for your business, and whether it’s a space you use regularly for client meetings.

Occupancy expenses refers to costs you pay to own or rent your residence. It includes things like home and contents insurance, council rates, land taxes, mortgage payments or rent.

A typical method to calculate occupancy expenses is to claim the percentage of costs that relates to the proportion of your home you use as a place of business. If you’re a tenant and your home office takes up 20 percent of your residence’s total area, then you can claim 20 percent off your rent. Sometimes this is not possible and ATO does allow other methods, so long as they’re reasonable and based on accurate records.

In these unusual times, with many of us working from home, claiming running and occupancy expenses will be top of mind at tax time. Ensure you’re playing by the ATO’s rules when you do the calculations.

This information is general in nature and does not constitute professional advice. For guidance specific to your situation, MYOB suggests engaging a specialist advisor near you ASAP.