Home Office Tax Deductions: Sars Guide

The South African Revenue Services (SARS) allows workers to claim for home office expenses, but only under specific circumstances. These circumstances are outlined in the Income Tax Act. To calculate home office expenses, you must first determine the total square meterage of your home office in relation to the total square meterage of your home. This is then converted to a percentage, which is then applied to your home office expenditure to calculate the deductible portion. For example, if your home office takes up 10% of your home's total area, you can claim 10% of your home office expenses as a tax deduction. It's important to note that this calculation is done on a pro-rata basis and that only expenses relating to the premises, such as rent, interest on bonds, repairs, and taxes, are apportioned based on floor area. Other expenses, such as wear and tear on equipment, do not need to be apportioned.

Home office expenses for sole proprietors or freelancers

As a sole proprietor or freelancer, you may be able to claim a tax deduction for home office expenses. This can help you reduce your taxable income and, ultimately, your tax liability. However, it's important to follow the specific requirements and calculations set out by your regional revenue service.

In South Africa, for example, the South African Revenue Service (SARS) allows a tax deduction for home office expenses under certain conditions. Firstly, the room must be used regularly and exclusively for the taxpayer's trade and be specifically equipped for that purpose. It should be set up solely as a home office, and the employee should perform more than 50% of their duties in this space.

If you are a sole proprietor, the IRS (in the US) allows you to deduct some business expenses related to your home office, provided you meet certain requirements and fill out the correct paperwork, such as IRS Form 8829. The IRS requires that your home office be used regularly and exclusively for business purposes and that it is your principal place of business.

Calculating your home office deduction is based on the percentage of your home dedicated to business use. You can calculate this by dividing your office's square footage by your home's total square footage. For instance, if your office is 150 square feet and your home is 2400 square feet, you can deduct 6.25% of the relevant expenses. Direct expenses, such as painting your office, are fully deductible, while indirect expenses, like rent or mortgage, phone service, and utilities, are calculated based on the percentage of home office space.

In Canada, you can deduct expenses for the business use of a workspace in your home if it is your principal place of business or if you use the space exclusively to earn your business income on a regular and ongoing basis. You can deduct a portion of your maintenance costs, such as heating, insurance, electricity, and cleaning materials, as well as property taxes, mortgage interest, and capital cost allowance (CCA). The calculation is similar to the US method, where you divide the area of the workspace by the total area of your home to determine the deductible amount.

Remember, it is essential to understand the specific requirements and calculations for your region, as they may differ from the examples provided.

Calculating the total square meterage of the home office

To calculate the total square meterage of your home office, you will need to follow a few simple steps. This will help you determine the amount of home office expenses you can claim in your tax return.

Firstly, you will need to measure the length and width of your home office. It is recommended to use a measuring tape or a ruler that measures in both metres and centimetres. Measure from one corner of the room to the other, and if you cannot measure the entire length at once, you can do it in stages by marking memorable spots. Once you have the measurement, round it up or down to the nearest centimetre.

Next, you will need to convert the centimetres into metres. To do this, simply move the decimal place two digits to the left and add this number to the total number of metres.

Finally, multiply the length and width measurements together to get the square meterage of your home office. For example, if your home office is 4 metres by 3 metres, the square meterage is 12 square metres.

If your home office is an oddly-shaped room, you can split it up into separate, more regular shapes and measure the square meterage of each of them separately. Then, add up the individually calculated areas to find the total square meterage of your home office.

It is important to note that to claim home office expenses, your home office must be regularly and exclusively used for work purposes and specifically equipped for that purpose. Additionally, you must perform more than 50% of your duties in your home office to be eligible for a tax deduction.

What constitutes home office expenditure

The South African Revenue Service (SARS) has provided guidelines on what constitutes home office expenditure. According to Interpretation Note Number 28, Issue 2, home office expenditure typically includes expenses directly linked to the premises, as outlined in Section 23(b) of the Income Tax Act. These expenses are:

• Rent of the premises
• Cost of repairs to the premises
• Other expenses in connection with the premises, such as rates and taxes, electricity, and cleaning

In addition to these premises-related expenses, other typical home office expenditures that may qualify for a separate deduction include:

• Office equipment
• Phones and internet
• Stationery
• Wear and tear on items used for trade purposes in the office

It is important to note that these lists do not reflect expenditures that are necessarily deductible. Instead, they indicate the types of expenses typically incurred in maintaining a home office.

When calculating home office expenses, SARS accepts the apportionment method based on floor area. This involves determining the proportion of the premises occupied for trade purposes by calculating the ratio of the area of the home office to the total area of the residence (including any outbuildings and the area used for trade). This percentage is then applied to the total costs incurred in the acquisition and upkeep of the property to determine the deductible portion of home office expenses.

Requirements to deduct home office expenditure

To deduct home office expenses, you must meet the requirements outlined by the South African Revenue Service (SARS) and the Internal Revenue Service (IRS). Here are the key requirements to keep in mind:

Regular and Exclusive Use:

The space used for your home office must be exclusively dedicated to business or employment purposes. It should not serve any other functions, such as a playroom or personal storage. This room should be set up solely for work-related activities.

Principal Place of Business:

Your home office must be the primary location where you conduct your business or employment duties. This means that you perform most of your work tasks (more than 50%) within this designated space. If you have a separate office provided by your employer, you cannot claim home office expenses.

Administrative or Management Activities:

Even if you conduct business outside of your home, you may still qualify for a home office deduction if you use your home office for administrative or management tasks. This includes activities such as billing customers, setting up appointments, and maintaining records.

Direct and Indirect Expenses:

There are two methods for calculating your home office expenses: the simplified method and the actual expenses method. The simplified method multiplies the square footage of your home office by a prescribed rate (e.g., $5 per square foot for up to 300 square feet). The actual expenses method considers the percentage of your home devoted to business activities and allows you to deduct direct and indirect expenses accordingly. Direct expenses are those solely incurred in the home office (e.g., painting), while indirect expenses are shared across the entire residence (e.g., mortgage interest, insurance, utilities).

Separate Structures:

If you have a separate structure on your property, such as an unattached garage or studio, that is used exclusively and regularly for business, you may be able to claim a home office deduction for that space.

It is important to note that employees are generally not eligible for the home office deduction, and this deduction may have implications for capital gains tax when you dispose of your property. Always refer to the latest guidelines provided by SARS or IRS, and consider consulting a tax advisor or using appropriate tax software for more tailored guidance.

How to add home office expenses to your tax return

If you've been working from home, you may be able to claim a tax deduction for home office expenses. Here's a guide on how to add these expenses to your tax return:

Eligibility

Firstly, ensure that you meet the eligibility criteria to claim home office expenses. According to the South African Revenue Services (SARS), you must fulfil the following conditions:

• Your employer must allow you to work from home.
• You must spend more than half of your total working hours in your home office.
• You must have a separate area in your home that is used exclusively for work. This area must be specifically equipped with the relevant tools and equipment required for your job.
• If you are a salaried employee, you must perform the majority of your duties in your home office.
• If you earn commission or variable payments based on performance, these must make up more than 50% of your total remuneration, and more than 50% of your duties must be performed outside of an office provided by your employer.

Calculating the Deduction

If you are eligible, you can calculate your home office deduction using the following steps:

• Calculate the total square meterage of your home office.
• Calculate the total square meterage of your entire home, including any outbuildings.
• Divide the square meterage of your home office by the total square meterage of your home to get a percentage.
• Multiply this percentage by your total household costs for the year. This will give you the amount you can claim as a deduction.

Expenses

The types of expenses you can include in your calculation vary depending on your remuneration structure. If you are a salaried employee:

You can claim pro-rated deductions based on rent, interest on a mortgage bond, repairs, rates, taxes, cleaning, wear and tear, water, electricity, data usage, and other household expenses.

If you earn commission or variable payments:

In addition to the above, you can also claim for other business expenses such as phone bills, internet, stationery, and printer repairs.

Submitting Your Claim

When submitting your tax return, make sure to include your home office deduction in the "`Other deductions`" section of the ITR12 form. You will need to provide supporting documents such as scanned copies of invoices and calculations to substantiate your claim. Keep in mind that these claims will not be listed on the SARS auto-assessment, so you must add them manually to your tax return.

Frequently asked questions