What portion of expenses should I claim for home office?
If you're a sole trader operating your business from home, good news—you may be able to claim a portion of your household running costs as business expenses. However, it's not quite as simple as claiming everything you spend on your home. Instead, you can only deduct costs that directly relate to your business activities.
Home office expenses often qualify, but you'll need to do a bit of calculation to determine exactly how much you can claim. Prosaic makes it straightforward to set your claim percentage, based on IRD's recommendations. Here's how you can calculate your home office claim percentage using Prosaic:
Option 1: Area-Based Method
This method works best if you've got a dedicated area at home specifically used for your business (such as a separate office or workspace).
Step 1: Measure the size of your dedicated workspace. Remember, the formula from high school maths: length × width = area.
Step 2: Divide the floor area of your workspace by the total floor area of your home, then multiply by 100. The result is your home office percentage.
For example, if your home is 100m² and your office space is 12m², you'd calculate:
12m² ÷ 100m² × 100 = 12%
This means you could claim 12% of eligible home expenses, such as:
- Power, gas, and heating
- Mortgage interest or rent
- Home insurance
- Household essentials like soap, toilet paper, and lightbulbs
Tip: Unsure of your home's total area? Check your address on homes.co.nz to find out!
Option 2: Time and Area-Based Method
This option suits those who don't have a dedicated home office—perhaps you're working from a multi-purpose space like your kitchen or laundry.
Step 1: First, calculate the area percentage of your workspace, just like Option 1.
Step 2: Next, track how many hours per week you use this area for business activities over a four-week period. Divide these hours by 168 (total hours per week), then multiply by 100 to find your business usage percentage.
For instance, if you work 25 hours a week:
25 ÷ 168 × 100 ≈ 15%
Step 3: Now, calculate the percentage of a percentage. This means multiplying your area percentage by your usage percentage. Using our previous numbers (12% area and 15% usage):
12% × 15% = 1.8%
Therefore, you'd claim 1.8% of your eligible home running costs.
Important Reminder: It's unusual for home office claims to exceed 25%. IRD frequently reviews home office expense claims, so make sure your calculations are accurate and justified!
What Expenses Can't Be Claimed?
Regardless of which calculation method you use, certain items can't be claimed as home office expenses, including:
- Food and drink
- Household furniture and electronics not exclusively used for business
- TV subscriptions unless they're strictly for business purposes
It's tempting to claim as much as possible, but honesty is essential. Even if your accountant checks your claims, the responsibility ultimately falls on you, and incorrect claims can result in hefty penalties from IRD.
With Prosaic, setting your home office expense percentage is quick and easy, helping ensure accuracy and compliance.