44. Key issues to look out for on home office tax deductions
Question: I am employed by a large company and have been working from home for most of the past year. Am I able to deduct home office expenses from my income tax?
Answer: I am always wary when it comes to answering income tax questions because there are so many factors that could have an impact on the answer.
With that health warning, let me sketch out the key issues that you should watch out for.
In the past, home office expenses were generally only claimed by those who earned more than 50% of their income from commission. Salaried people who worked at a company office did not spend enough time working from home to qualify for the allowance.
With Covid-19, most of us have spent a lot more time than usual working from home. We now have a situation where many salaried employees may qualify for this deduction for the first time. The question is: Should you do it?
There are a number of hoops you have to jump through to get this deduction:
- The part of your private home that is used for trade purposes must be specifically equipped for trade purposes. If you just haul out your laptop and work at the dining room table, you would not qualify for the deduction.
- You need to have a dedicated area with, say, a desk where you work from. This area must be regularly and exclusively used for trade purposes.
- You cannot, for example, use a spare room that has a bed in it and claim that it is a home office because it breaks the exclusivity rule. I have heard an anecdote about a home office claim being denied because there was an exercise bicycle in the office.
- You will probably be audited and asked to upload a 360° photo of the office. If you cannot show that it is a dedicated area that has been set up as an office for the exclusive use of the business, the deduction will not be allowed. If you are due any payouts from other claims, you should take into account the time delay that this audit may have on the potential payout.
- More than half of your employment services must be rendered in that part of the home that you are claiming for.
If, for example, you spend most of your time in meetings at the local coffee shop, then you would not be able to claim for the deduction.
What you can claim for:
If you pass the above tests, then you must determine the percentage of the floor area of your office and what percentage of the floor area of your house it represents. For example, if your home office is 30m2 and your house is 300m2, then you qualify for a 10% deduction of costs such as:
- Rental of the property or interest on the mortgage bond;
- Rates and taxes/levies;
- Electricity; and
- Cleaning costs.
This can be quite a saving.
What you cannot claim for:
You will not be able to claim for items that are not related to the premises. These would include:
- Contents insurance;
- Phone costs;
- Stationery;
- Furniture; and
- Computer equipment.
You would need to negotiate with your employer to have these costs reimbursed.
Insider tip
Your employer may need you to upgrade your access to data at home. This may require upgrading to a faster fibre connection. If your employer pays for it, it will be taxed as a fringe benefit. If, however, you pay for it, you can claim it back from your employer as a business expense.
Watch out for this potential pitfall:
When you sell your home, you are allowed an exclusion of R2-million on the capital gain. If, however, you have been granted a deduction for a home office, that percentage of the property would be excluded from the primary residence exclusion.
In the example above, where 10% of the house was a home office, then there would be a proportionate deduction in the capital gain exclusion.
As with most financial issues, there are several moving parts. You need to do a number of calculations to see which course of action will give you the best result in both the short and long term.
I have tried to give you a feel for the main issues that you should consider when looking at submitting a home office claim.
There are several sections of the Income Tax Act that impact on this, so I would recommend that you have a chat with an experienced tax practitioner to make sure you make the right decision.