A South African View: Home Office Income Tax Deductions for Entrepreneurs

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Commission earners can claim the non-capital home office expenses they incur in the production of income as a tax deduction when submitting their annual tax returns.  There are however some factors to consider before claiming this deduction.  In this article we will briefly look at a few of the requirements to claim the deduction and the implications thereof.

Types of commission earners

It is important to distinguish between the types of commission earners as it affects what is allowed under the deduction formula.

Commission earners are classified as follows:

  1. Individuals who earn more than 50% commission or another variable form of remuneration which is based on work performance;
  1. Individuals who are normal salaried employees and who earn commission or another variable form of income constituting less than 50% of their total remuneration.

Qualifying criteria for the home office

The home office has to comply with the following criteria:

Individuals

who earn >50%

commission or variable income

Individuals

who earn <50%

commission or variable income

The employee must be permitted by his/her employer to work from home
The employee must not be provided with an office by his/her employer.
The employee must spend more than half of their normal working hours working from the home office.
The home office must be a dedicated, separate space used exclusively for work purposes and must be maintained as such.
The home office must be specifically equipped for the trade of the employee, fitted with the relevant instruments, tools and/or equipment required for the employee to perform his/her work.

Allowable deductions

The following home office expenses are allowed as deductions:

Individuals

who earn >50%

commission or variable income

Individuals

who earn <50%

commission or variable income

Property rent
Interest on a mortgage bond
Repairs and maintenance to the premises
Rates and taxes
Utilities
Depreciation on office equipment (the applicable write-off periods apply)
Cleaning expenses
Telephone costs
Stationery
Accounting & legal costs
Sales & marketing costs
Entertainment expenses
Travel expenses
Postage & couriers
Repairs to office equipment.

Sole proprietors and freelancers who work from home are not subjected to these limitations and can claim all the non-capital home office expenses they incurred during the production of income.

The deduction formula

As only a small section of the home is used as a home office, the taxpayer cannot claim the full expense incurred as a tax deduction but rather only a portion as it relates to the home office.  The portion of the claimable expense will depend on the ratio of the home office floorspace to the total floor space of the home.  Begin by dividing the total floorspace of the home office by the total floorspace of the home and convert this to a percentage by multiplying it by a factor of 100.  Apply this percentage to the allowable expenditure in order to calculate the portion which qualifies as an allowable tax deduction.

Example:

More than 50% of Jeff’s income constitutes commission.  His employer does not provide him with an office, he mainly works from home and his home office complies with the requirements of the act.  The following expenditure was incurred by Jeff during the tax year:

  • Property rental – R 100 000
  • Utilities (water and electricity) – R 10 000
  • Cleaning costs – R 5 000
  • Stationery (used solely for work purposes) – R 1 500
  • Telephone and internet (80% business use) – R 4 000
  • Entertaining clients – R 15 000
  • Travel expenses (business use) – R 25 000

If Jeff’s home office constitutes 25 sqm of his house of 200 sqm, the qualifying deduction is limited to 12.5% (25 / 200 x 100) of the relevant expenses.

The allowable deduction will look as follows:

  • Property rental – R 100 000 x 12.5% = R 12 500
  • Utilities (water and electricity) – R 10 000 x 12.5% = R 1 250
  • Cleaning – R 5 000 x 12.5% = R 625
  • Stationery – R 1 500 x 100% = R 1 500
  • Telephone and Internet – R 4 000 x 80% = R 3 200
  • Entertaining clients – R 15 000 x 100% = R 15 000
  • Travel expenses – R 25 000 x 100% = R 25 000

Total allowable deduction = R 59 075.

Supporting documents

When claiming deductions always ensure supporting documents in the form of schedules, invoices, receipts, statements of accounts, etc. are available and retained for five years.   Also prepare an apportionment calculation which reflects the ratio of the home office to the total home and show how this ratio was applied to the expenses claimed.

Home office deductions and Capital Gains Tax

It is important to note in the event the taxpayer is the property owner, claiming home office expenses as a tax deduction will impact the capital gains tax (CGT) when/if the taxpayer decides to sell the property.  This article does not deal with Capital Gains Tax in detail however we will briefly touch on the impact claiming this deduction will have on Capital Gains Tax.

Example:

Jeff purchased the property in our previous example for R 1.3 million on 1 March 2015.  He added a home-office to the property to the value of R 200 000 on 1 March 2018.  Jeff sells the property, which is his primary residence, for R 3.5 million on 1 March 2020.  Jeff owned the home for 5 years and claimed the home office deduction for 2 tax years.  Keep in mind 12.5% of the primary residence was utilised for business purposes, the first R 2 million in proceeds on the sale of the primary residence is exempt from Capital Gains Tax, the annual exemption for natural person is R 40 000 and the Capital Gains Tax inclusion rate for natural persons is 40%.

The calculation will look as follows:

Proceeds R3,500,000
less Base Cost R1,300,000 + R200,000 R1,500,000
= Capital Gain R3,500,000 – R1,500,000 R2,000,000
Amount Subject to Capital Gains Tax R2,000,000 x 12.5% x 2/5 R100,000
Primary Residence Exclusion R2,000,000 – R100,000 R1,900,000
less Annual Exemption R40,000
= Total Capital Gain R100,000 – R40,000 R60,000
= Capital Gains Tax Payable R60,000 x 40% R24,000

We cannot stress the importance of consulting with your tax advisor prior to claiming the home office expense as a tax deduction enough.  They will be able to determine if it would be a beneficial tax saving for you in the long run.

Home office deductions and employer reimbursements

The last aspect we would like to briefly cover in this article is employer reimbursements for work-related costs.  This can include stationary, telephone, internet, etc.  The reimbursement of actual costs is not regarded as income, does not have to be declared as income and does not attract a tax liability if:

  • the expense was incurred on instruction of the employer,
  • the expense was incurred for the trade of the employer,
  • the employee has to prove to the employer that the items purchased was only used for furthering the trade of the employer.

Keep in mind not to claim these reimbursed costs as a tax deduction as it will be an expense claimable by your employer.

Home office deductions and the Covid-19 lockdown

Many employees have been forced to work from home amid the outbreak of the Coronavirus pandemic resulting in additional expenditure being incurred by employees to setup a home office.  In some instances, employers assisted employees by contributing towards or bearing the costs of setting up these home offices.  The latter of which is regarded as a taxable fringe benefit in the hands of the employee.

The draft Disaster Management Tax Relief Bill has provided little to no tax relief for salaried individuals.  SAICA and SAIT have called for additional tax measures to alleviate the financial strain ordinary workers are experiencing during this unprecedented time.  SAICA has specifically requested some relaxation of the requirements for the home office deduction during the lockdown period in order to provide salaried employees with much needed tax relief.  But as things currently stand, the requirements to claim a home office deduction remain in effect and most salaried employees will find little relief under the current rules.

Closing

If you have any questions or comments on this article or if you require more information or assistance with your tax preparation, we would like to hear from you.

Need Help with your Accounting or Taxes? Click Here!

Sources:

  1. SARS Interpretation Note: 28 (Issue 2) – 15 March 2011
  2. Income Tax Act 58 of 1962
  3. Moneyweb: Renewed calls for tax relief for home office expenses – Amanda Visser (24 July 2020)

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