Renovating Your Home Office: Who Pays?

With the rise of remote work, many people have had to convert spaces in their homes into offices. This has led to questions about whether renovations for a home office can be paid for through a corporation. The answer is yes, but there are some important considerations to keep in mind, especially regarding tax relief.

In the UK, a garden office or a converted garage is typically classed as a structure, which means tax relief cannot be claimed on it. However, tax relief can be obtained through capital allowances on furniture or equipment installed in the building, such as desks, seating, and shelving. Services such as electrical wiring, thermal insulation, and plumbing also count as capital allowances. Running costs like electricity, gas, and water can be claimed as business expenses, as can repairs.

If the home office is part of your personal property, it is considered an improvement and can be paid for by your company, but it cannot be deducted from profits for tax purposes. This is known as an add back, where the cost is added back to any profits or losses to arrive at a taxable profit.

In Canada, office renovations that have a direct connection to business activities and contribute to their operation or productivity are tax-deductible. This includes construction costs, electrical and plumbing work, installation of fixtures, and improvements to the workspace.

Repairs vs. improvements

Renovations for a home office can be paid for through a corporation, but it's important to understand the distinction between repairs and improvements for tax purposes.

The difference between a repair and an improvement is significant when it comes to taxes. Repairs to business property are typically considered deductible business expenses, meaning you can deduct the entire amount in a single year. On the other hand, improvements are generally capitalised and written off over several years.

An improvement is defined as work that prolongs the life of the property, enhances its value, or adapts it for a different use. In contrast, a repair simply keeps the property in efficient operating condition.

For example, patching up cracks in the floor or repairing leaks in the roof would typically be considered repairs. On the other hand, replacing an entire roof or renovating an entire structure would be considered improvements.

It's worth noting that the line between repairs and improvements is not always clear-cut. In some cases, it may be advantageous to have work classified as a repair rather than an improvement for tax purposes.

Tax Implications

The tax implications of repairs and improvements differ. Repairs to a home office that is used exclusively for business can be fully deducted as a "direct" home office expense. However, if the repair benefits both the home office and personal space, it is considered an "indirect" expense, and only the portion that applies to the home office can be deducted.

Improvements to a home office, on the other hand, must be capitalised and depreciated over several years. This means that the cost of the improvement is spread out and deducted over the expected useful life of the asset.

It's important to consult with tax professionals and refer to the relevant tax guidelines to ensure compliance with tax regulations and optimise tax benefits.

Direct vs. indirect expenses

Renovations for a home office can be paid for through a corporation, but there are some important distinctions to be made regarding what can and cannot be deducted from profits for tax purposes.

In the UK, if you are converting a new room, such as an extension or loft conversion, you can claim tax relief through capital allowances on items such as insulation, electrical wiring, and plumbing. However, the build costs of these conversions are considered an improvement to your property and cannot be deducted from profits for tax purposes.

In the US, the IRS divides home office expenses into two categories: direct expenses, which benefit only the home office, and indirect expenses, which benefit both the office and the home. Direct expenses are fully deductible, whereas indirect expenses are proportionately deductible based on the percentage of business use of the home.

Direct expenses are costs linked to producing a specific good or service and are also referred to as the cost of goods sold. These expenses are directly connected to a cost object and have a clear and identifiable connection to business operations. Examples include manufacturing supplies, direct materials, and labour costs.

On the other hand, indirect expenses are not directly associated with a particular product or service and are often referred to as overhead costs. While these expenses are still necessary for the business to function successfully, they support multiple business operations instead of a specific business activity. Examples include office equipment rental, utilities, and administrative costs.

To summarise, direct expenses are costs directly linked to the production and sales of goods or services, while indirect expenses are general business expenses necessary for the smooth operation of the business.

Tax relief on furniture and equipment

The tax relief scheme allows employees and businesses to reclaim some of the costs of buying essential pieces of office furniture or equipment. This includes office chairs, desks, office supplies, stationery, computers, laptops, and similar devices.

You can also claim tax relief on the work-related portion of costs incurred to repair and insure office furniture and equipment.

If your employer does not reimburse you for the costs of your office furniture, you can still claim tax relief on your tax return or via a P87 form. You must keep the receipts for your purchases and ensure that the amount claimed is necessary for your job performance at home.

In the UK, you can claim back additional household expenses such as gas and electricity, but this claim is more complicated. You must prove that you need to work from home, either because you live too far away from the workplace to travel there every day or because the equipment you need is not at your workplace. The amount claimed must not exceed your actual household expenses.

In the US, the IRS offers a simplified alternative for the home office deduction: you can take $5 per square foot, up to $1,500. This eliminates the need for calculations, but it also blocks you from taking a depreciation write-off.

In Canada, the Canada Revenue Agency (CRA) has introduced temporary measures to simplify the process of claiming home office expenses. The temporary flat-rate method allows eligible employees and business owners to claim a flat rate for home office expenses without the need for detailed calculations.

Running costs and repairs

Firstly, it is important to differentiate between personal and business use when allocating expenses. Business use refers to the portion of an asset or expense that directly contributes to business operations. Personal use pertains to the portion used for personal purposes unrelated to the business.

Running costs that can be claimed as business expenses include:

• Heating and lighting costs proportionate to the workspace
• Metered water costs specific to the workspace
• Broadband, gas, electric, and water costs if dedicated services are provided to the workspace
• Repairs

If the company is VAT-registered, VAT can be claimed back on business expenses, such as shelving, equipment, plumbing, and wiring, as well as any running costs pertaining to the workspace.

For repairs, the IRS divides home office expenses into two categories: direct and indirect expenses. Direct expenses benefit only the home office and are fully deductible. Indirect expenses benefit both the office and the home, and only a portion of the expense (the home office percentage) can be deducted.

To be eligible for tax deductions, office renovations and repairs must have a direct connection to business activities and contribute to their operation or productivity.

Capital gains tax

Renovations for a home office can be paid for through a limited company, but there are tax implications to consider. For example, in the UK, a garden office is classed as a structure, so it's not usually possible to claim tax relief on it. However, tax relief can be obtained through capital allowances on any furniture or equipment installed in the building.

Now, here's some information on capital gains tax:

A capital gains tax is a tax imposed on the profit made from selling an asset. The tax rates vary depending on two factors: how long the asset was held and the income level of the taxpayer. If an asset was held for less than a year and then sold for a profit, it is classified as a short-term capital gain and is taxed as ordinary income. If an asset was held for more than a year and then sold for a profit, it is classified as a long-term capital gain. Long-term capital gains are taxed at 0%, 15%, or 20% depending on the income of the filer.

Calculating capital gains can be complex, especially when there are capital gains and capital losses on both short-term and long-term investments. First, short-term gains and losses are separated from long-term gains and losses. All short-term gains must be reconciled to yield a total short-term gain, and then the short-term losses are totalled. Finally, long-term gains and losses are tallied. The short-term gains are then netted against the short-term losses to produce a net short-term gain or loss, and the same is done with the long-term gains and losses.

There are some ways to minimize capital gains taxes. One strategy is to hold an investment for more than a year so that the profit is not treated as regular income, which is usually taxed at a higher rate. Another strategy is to use tax-advantaged accounts such as 401(k) plans, individual retirement accounts, and 529 college savings accounts, where investments grow tax-free or tax-deferred.

Frequently asked questions