Today, working from home is becoming more common due to technological advances, convenience, efficiency and resource saving. During the COVID-19 quarantine, a very large number of salaried and self-employed workers operated from home. Moreover, many of our successful clients started their businesses as part-time jobs. They grew gradually, learning, exploring the potential of their market. Many did this as employees simultaneously, until their business grew large enough to generate a good income. And, as you know, no one rented a separate office for part-time work, they worked from home until the business expanded enough to rent a working area. When choosing this path of development, it is important to know that in addition to direct costs there are costs associated with your home that you can submit to the tax authorities as business expenses and thus reduce taxable income.
Let’s take a look at what a freelancer can classify as a business expense. According to the Income Tax Ordinance, business expenses are expenses necessary to generate income from an entrepreneur’s business. If the business did not exist, then the entrepreneur would not have these expenses. Perhaps the most universal and relevant examples for any business are advertising costs, the purchase of special equipment, raw materials, and the rental of production facilities.
Mixed costs are less obvious. These are expenses that the entrepreneur incurs, both for personal and business purposes, such as mobile communications or car expenses. In this case, the tax administration allows you to recognize only part of the relevant expenses.
If a businessman operates from home, then it can be asserted that he has a room in his apartment that serves as an office for the business. Consequently, “household” expenses become blended business expenses and some of these expenses can be included in the annual report. For example, part of utility bills, cleaning services, the Internet, telephone service.
Looks attractive, right? But how to determine the part that will be recognized as taxfree by the tax administration?
What percentage of miscellaneous expenses can be included in the tax report?
If we are talking about the expenses for an apartment, then this ratio can be determined by the number of rooms in your house. For example, in a three-room apartment with one room serving as a private office, 30-35% percent can be recognized as business expenses. Another approach is to measure the area of the entire apartment and of the room for business and to reckon up the ratio between personal and business floor space.
It is important to be careful with the percentage of the apartment that you attribute to business! Too high a percentage can change the classification from a private apartment to a commercial property. And this, in turn, can increase the municipal tax on real estate (arnona) or cancel the benefits for the sale of a residential apartment. To get the idea, The Arnona (municipal tax) on commercial real estate is about three times more expensive than on a residential apartment.
For more information about the costs of renting a residential apartment, as well as about the recognized costs of an apartment owned by the entrepreneur, see the article: “How to correctly attribute expenses on an apartment (rented and personal) to business expenses."
Experienced accountants recommend that no more than 25% of residential property be classified as commercial property. Utilities (water, electricity), council tax (arnona), house committee (waad ha-bayt), apartment and third party insurance, maintenance and cleaning – all these will be recognized in accordance with the selected share of business real estate (20-25%). Expenses will be recognized by both the income tax authority (mas ahnasa) and the VAT authority (MAAM), provided that the VAT has been paid. For example, VAT is not paid for municipal tax, house committee and insurance, so it cannot be returned.
A beginner entrepreneur can purchase a separate telephone line that will be used only for business, thus, all costs for it will be fully permitted. For VAT deduction, all telephone charges will also be allowed in full. If you use the “home" line, then telephone charges below 23,900 NIS per year will be allowed. Or 80% of expenses, i.e. part of the expenses exceeding 2400 shekels per month, whichever is less.
The cost of maintaining a mobile phone used to generate income is recognized in excess of 1,260 per year or half of the actual costs, whichever is less.
Expenses on light snacks, such as water, coffee, sugar, milk (BUT by no means total food expenses), will be recognized at 80% percent for income tax. But VAT deductions for snacks will not be recognized at all, either for an office at home or for a separate office area. All expenses for the Internet – infrastructure (tashtit) and provider (sapak) – will be fully permitted.
If the entrepreneur has a housekeeper, then part of her remuneration may be considered a business expense, but only if social security contributions are paid (Bituach Leumi). By the way, a reasonable amount of cleaning substances can also be fully recognized.
Another interesting point is that furniture and equipment, a computer, a printer, and the renovation of the business premises – all these will be fully recognized business expenses and depreciation will be written off from them. You can return all paid VAT for these investments. You can deduct 2/3 VAT on all current costs of cellular communications.
And now, it is important to stipulate that all expenses associated with a separate office, which is registered as commercial premises, will be fully recognized by all tax authorities.
Therefore, we wish you to quickly rise to the next level of your business development and move to your separate office.