Working from home (WFH) is no longer for the lucky few. Thanks to the pandemic, many sole traders have realised just how doable it is, as well as the perks it offers.
Not only can you enjoy a better work/life balance, but you can save time and money on the daily commute plus have fewer overheads, such as paying rent and bills for a separate office space. You can also enjoy a range of tax benefits.
To help you make the financial most of your work from home set-up, we’ve pulled together everything you need to know about managing sole trader expenses, from understanding what you can claim to how to prepare a budget.
As well as saving money by avoiding paying for office space, as a sole trader or small business operator working from home, you may be entitled to claim a portion of your occupancy and running expenses.
Occupancy expenses you may be entitled to claim include:
To claim a sole trader tax deduction for occupancy, you must pass the interest deductibility test. To pass this test, you must have a space at home specifically set up and used predominantly for work purposes.
According to the ATO, examples of a space that would pass the test include a home hairdressing salon, photography studio or a home kitchen for catering.
Just bear in mind that if you sell your home, you may have to pay tax on any capital gains you make. Plus, you may not be eligible if personal service income rules (PSI) apply to your business.
You can claim a percentage of your occupancy expenses that relate to your home workspace and the proportion of the year you used it for.
The easiest way to work this out is to determine what percentage of your home your workspace occupies. For example, if your workspace is 10% of your home’s square footage, you can claim 10% of your rent or mortgage interest, council rates and insurance.
Other methods of working it out are accepted, as long as you can prove their accuracy.
If you pass the interest deductibility test, you may also be able to claim running expenses. This includes costs that have increased in your home due to you working from home.
Running expenses, you may be entitled to claim include:
You can use any method to calculate how much you can claim for your sole trader running costs as long as they’re reasonable, exclude your private living costs, and you have records to show how you calculated it.
For some running costs, you may be able to claim for use patterns. For example, record how much you use for four weeks and apply this to the whole year.
You can also work it out using the square footage of your space, as mentioned in occupancy expenses.
Other methods include:
You can count the number of business calls you made and received and divide it by the number of total calls made via landline. For internet, you can claim the proportion of data used.
For a decline in the value of assets (depreciation), you can immediately deduct the business portion of certain assets under temporary full expensing of the instant asset write off. Examples of depreciating assets include:
As well as knowing what tax deductions you can claim and how much, it’s essential to have an effective way of tracking your sole trader expenses.
At a minimum, this means having a separate bank account for business income and expenses. You must be disciplined in paying your costs out of this business account. If you forget, it will make it much more difficult to keep track.
Consider using bookkeeping software, such as Xero, MYOB, and Intuit QuickBooks. Not only does this type of software allow you to input and keep track of your sole trader expenses, but it can also help you better manage your cash flow and meet your tax and super obligations.
In addition, they allow you to keep your eye on the health of your business, helping you make better business decisions.
Once you’re tracking your sole trader income and costs, the next step is to prepare a budget for these costs. This can help you better manage your cash flow.
When preparing a budget, you need to:
Once you’ve prepared your budget – which tools like Xero can help you with – you can use it to make better business decisions. For example, if you’re spending too much, look for ways to cut costs or avoid spending on business non-essentials.
Alternatively, if you have additional funds, you could think about ways to reduce business debt or personal debt or create a financial safety net.
Managing sole trader expenses is never easy, but when you throw working from home into the mix, it can make things a little more complex.
However, if you know your entitlements, keep track of your finances, and prepare a budget, managing those costs should become second nature – and can help you take control of your business finances.
If you’re a work from home sole trader in need of financial or debt advice, complete our Instant Online Assessment to see what your options are. Alternatively, speak to one of the team now on 1800 861 247 for professional, non-judgemental support and advice.