Employees working from home – What tax deductions can you claim?

Both employees and their employers should be familiar with the tax angles, in particular the opportunity to claim tax deductions. When and how do you qualify for deductions? What expenses can you deduct? We discuss the various ins and outs with a simple practical example to illustrate.

If you own your own home, read our tail-ender note on the possible impact of claiming for a home office on your Capital Gains Tax liability when you sell your house.

“We like to give people the freedom to work where they want, safe in the knowledge that they have the drive and expertise to perform excellently, whether they at their desk or in their kitchen. Yours truly has never worked out of an office, and never will” (Richard Branson)

Thousands of employees have had to work from home since the lockdown began at the end of March. This story has been one of the success stories of Covid-19, as companies have reportedly found that productivity has increased, travel costs are right down and the work is still being done.

Employees stand to reap a range of financial and health benefits from working at home and both they and their employers should know that they may also be able to claim certain home office expenses as tax deductions.

Normally only independent contractors and commission- earners would claim these expenses, but SARS has confirmed the relief is available to full-time employees as well – but only in the specific circumstances set out in the Income Tax Act.

HOW YOU CAN CLAIM TAX DEDUCTIONS FOR A HOME OFFICE

The Income Tax Act sets out basic requirements that must be met if this tax relief is to apply:

• You must practice a “trade” – which can be employment, so by being employed this criterion is fulfilled.
• The home office must be specifically equipped for you to do your job – usually, this would mean a computer, broadband, printer, desk and chair, etc.
• The home office is be regularly and exclusively used by you to do your job – you will not be able to use that space for any other purpose, such as a home office, or even to store non-job-related books or papers.
• More than 50% of your work needs to be performed in the home office – in other words you must work from home for at least six months of the tax year.

TAX DEDUCTIONS ALLOWED

If the above criteria have been met, then you may deduct:

1. A portion of rental, bond interest, and home repairs on your home,
2. A portion of municipal rates, electricity and water,
3. Wear and tear on office equipment that you own (SARS has differing depreciation rates on computer equipment and office furniture).

You will also incur numerous costs in running your home office such as cell phone, bandwidth, equipment repairs, stationery and cleaning. As these are not specified in the Income Tax Act, it is better that you be reimbursed by your employer for these expenses.

In terms of points 1 and 2, as a taxpayer you need to make an apportionment of those costs when claiming them in the income tax return. Typically, this is done on a floor space (i.e. square metre) basis of the home office in relation to the total area of the home – see the example below.

As noted above, one of the criteria is that you can only claim a home office allowance if more than 50% of your work (at least six months of the tax year) is done in your home office. This is not a problem during lockdown (as the home office is being used 100% of the time) but should you want to continue claiming for a home office after the lockdown, then you will need to spend more than 50% of your working hours in your home office.

These tax deductions effectively compensate you for your costs of equipping a home office. Both employers and employees benefit.

As an employee, make sure you get a letter from your employer to confirm that you are working from home, retain invoices and statements of these expenses, and keep a running spreadsheet of days worked at home for the tax year.

As an employer speak to your accountant when setting this up. SARS’s requirements are stringent and you don’t want your staff to be denied the deduction.

BEWARE THE CGT IMPACT!

Claiming for a home office as above may well have an adverse impact on the amount of Capital Gains Tax you have to pay when you eventually sell your home. This can become a complicated issue and calculation so it is essential to get professional advice on this aspect!

Author: Courtesy of CA(SA)