For many small owned-managed businesses, a home office is a common feature of the business structure. Not surprisingly therefore, one of the most common questions that we are asked is what type of home office expenses are tax deductible against business profits. The following is a summary of some of the most common types of tax deductible home office expenses.
1. Rent/mortgage payments
Many people who use space in their home as an office enquire as to whether they can claim a portion of their personal mortgage or the rent as a rental expense in their business. For homeowners, this is usually not recommended from a tax perspective. There are two reasons for this:
(i) If the business receives a tax deduction for rent paid, it means that someone else must be treated as receiving rental income paid from the business. If you are a homeowner, the rent that the company is paying you will be treated as income in your hands. This will then be taxable income for you and you will pay tax at your marginal income tax rate, thus defeating any tax advantages. There is a common misconception that the homeowner may avail of the Rent-A-Roof relief scheme which would enable them to receive up to €10,000 per year in rental income tax free. This scheme is only available to persons renting a room in their home on a residential basis. If you are renting a room in your home to a business, the Rent-A-Room relief scheme does not apply.
(ii) There is a knock on affect on capital gains tax when you come to sell your home. There is an exemption from capital gains tax available for persons who sell their private home - this is known as Principal Private Residence relief (PPRR). i.e. if you sell your home at a higher price to that which you purchased it at, you are exempt from paying capital gains tax on the profit made.
If however you use a room or other space in your home for business purposes, the property is no longer considered to be 100% a private residence. You will therefore lose your PPRR on the portion of the house which is used for business purposes. It is possible therefore that you could have a capital gains tax liability on the sale of your private home.
Tenants do not have the same complications here as homeowners do. Tenants can claim rent payments as business expenses without worrying about any capital gains tax implications. In addition as the rent is payable to the landlord there are no issues regarding the need to pay tax on rental income received from the business.
Regardless of where your main office may be or where you mainly conduct your business activity, it is likely that a certain element of business related telephone calls may be made from your home phone. Therefore it is possible to claim the cost of these business related telephone calls as a tax deductible business expense.
In this digital age, few businesses can now function without some sort of internet or email access. Again, regardless of where your main office premises may be or where you normally conduct your business activity, it may be necessary to have the ability to connect to the internet for business purposes when you are at home. If you have arranged an internet/broadband connection at home to enable you to carry out business activities you may claim the cost of your broadband fees.
4. Heating and lighting costs
If you are working from a home office, it is possible to claim a portion of your home electricity and gas bills. The reason for this is because if you are working from home you will be using more electricity and gas than you would have had you been working from another location. As your utility bills will be higher as a direct consequence of your business activity, a portion of these bills may be allowable as a tax deduction.
5. Home insurance (where an additional premium has been paid due to cover for an home office)
This really speaks for itself as the additional premium has been incurred solely due to the fact that you are running a business from your home and it is therefore quite clearly a business expense. However, this is something that people often forget to consider. It is worth reviewing the terms of your home insurance policies when you are considering setting up a home office as many policies can be made void if you operate a business from your home without informing your insurance company.
The most important guideline to always work towards when trying to establish whether a home office expense would be allowable for tax purposes is:
Has the expense has been incurred "wholly and exclusively" for the purposes of your business?
In general terms, although allowing for some exceptions, provided the expense meets this definition, it is allowable as a tax deduction.