Following the covid pandemic, many businesses have moved to outsourcing their jobs to freelancers working from home. As a home-based freelancer, you’re effectively running a business from your home. Whilst most people switch off their lights and air conditioning whilst they’re out at the office during the day, you’re keeping yours on. So, it’s only fair that you can claim your working from home expenses as a tax deductibles.
The purpose of this guide is to help clarify the key points and major considerations to consider when running a home-based business.
Introduction to the recognition of expenses:
A deductible expense reduces the ‘taxable profit’ which then reduces the amount of tax payable. So, it’s important to know what working from home expenses are deductible.
– Property taxes
– Electricity
– Furniture, equipment, computers
– Repairs and renewals
– Renovations
– Cleaning and maintenance
– Insurance
– Telephone and cellphone
– Internet
– Refreshments
– Rent
– Depreciation
How much of my home expenses are tax deductible?
The most common key to recognizing household expenses is according to the ratio of rooms. Thus, if the apartment has 5 rooms, and one room is used as a office – you will recognize 20% of the house expenses (see details of the types of expenses below).
NOTE: Caution should be exercised in claiming a proportionately too high proportion of household expenses, as this may result in the classification of the property as a business property (both for property tax and income tax purposes). The accepted interpretation is that as long as most of the apartment is used for residence – it will not be considered a business property.
Recognized expenses when working from home:
1. Property taxes and other municipal taxes:
- A proportionate part of the property tax, and the additional municipal taxes imposed on the property (for example – arnona) can be claimed.
2. Electricity:
Electricity expenses are allowed relatively proportionally.
3. Office furniture, business equipment, computers:
Expenses for the purchase of furniture and equipment for the business, including computer equipment, can be recognized in full because these are expenses that are used by the business.
It should be noted that these expenses may not be recognized immediately, but over a period of time via depreciation (the relevant depreciation rates are: computers 33%, electronic equipment 15%, air conditioners 10%, office furniture 7% per year).
4. Repairs and renewals:
Expenses for repairs and renewals of office equipment, for computers, machines and accessories – can be recognized in full.
5. Renovations:
As far as a general renovation of the overall residential apartment is concerned – a relative part of the expense can be recognized, provided it also benefits the area used for the business.
On the other hand, as far as a renovation attributed to the business area of the apartment is concerned, the expense can be allowed in full. It should be noted that the majority of these expenses will be recognized via depreciation, and not immediately.
6. Cleaning and Maintenance:
Cleaning and maintenance expenses, including Vaad Bayit fees are deductible according to a proportionate share. (Keep in mind that if you employ individual cleaners, Social Security contributions must be paid for them by the contractor).
It is also possible to recognize a relative share of the expenses of buying the cleaning materials.
7. Home insurance:
Home insurance – such as building insurance, third party insurance, contents insurance, etc. can be recognized proportionately.
8. Telephone and Cellphone:
Telephone and cellphone expenses for calls in Israel can be deducted but there are some limitations to take into consideration.
Telephone expenses at home for calls abroad: As long as they are made as part of the business, they are allowed in full, but the call must be recorded and documented (date and time, purpose of the call, parties to the call, duration of the call, estimated price, etc.).
9. Internet:
In general, as long as the use of the Internet is completely or almost completely business.
10. Refreshments:
Not all food purchased is recognized as refreshments, but only hot or cold drinks, cookies, etc. are recognized as refreshments for income tax purposes. Also, only refreshments used for business purposes (for example, for meetings with customers in the business) are more deductible, at a rate of 80% of the expense.
11. Rent:
- It is possible to claim a portion of your rental payments as a business expense provided the lease allows you to use the property for business purposes. If the landlord does agree to this – he will of course have to report some of the rental income as income from renting a non-residential apartment. It is also necessary to obtain from the landlord a certificate of withholding tax (and to the extent that the landlord is not exempt – the tenant will have to transfer the amount originally deducted to the assessed).
13. Depreciation on the residential apartment:
- If the apartment is owned by you – depreciation expenses can be recognized (usually at a rate of 4%), according to the relative share of the apartment. However, this must be done carefully and with discretion, as this may lead to the classification of the property as a business property for property tax and praise tax purposes.
