Many people are unaware of the meaning of running a home based business. Moreover, many mistakenly believe that it is not possible to run a home based business. The purpose of this guide is to help clarify the main points and main considerations that must be taken into account when starting a home based business.
2. Introduction to Expenditure Recognition:
An expense recognized for income tax purposes reduces the taxable income, thereby reducing the tax payable by the business owner. Hence it is important to know and understand what expenses are allowed while working from home.
The most common key to recognizing house expenses is by room ratio. Thus, if the apartment consists of 5 rooms, and one room is used as clinic or office – we will recognize 20% of house expenses (see details of the permitted expenses below).
It should be noted that one must be cautious of demanding that a relative portion be too high for household expenses, as this may cause the classification of the asset to be a business asset (for property tax purposes and for income tax purposes and land betterment tax). The accepted interpretation is that as long as most of the apartment is used for residential purposes, it will not be considered a business asset.
3. Expenses that are Recognized When Working from Home:
A) Property Taxes and Other Municipal Taxes
A proportionate part of the property tax can be claimed, and the additional municipal taxes imposed on the property (for example, security expenses of the community, etc.). As stated – a relative share should be claimed only, according to the part used in the business in the apartment.
Electricity expenses will be allowed to be deducted on a pro rata basis.
C) Office Furniture, Equipment for Business, Computing Used by the Business
Expenses for the purchase of furniture and equipment for a business, including computer equipment, will be recognized in full, since these are expenses that are used exclusively by the business, and they do not have any private use. The relevant depreciation rates are: computers 33%, electronic equipment 15%, air conditioners 10% and office furniture 7% per year.
Repair expenses for office equipment and computer/machine accessories will be recognized in full.
As far as the general renovation of the apartment is concerned – a relative part of the expenditure can be recognized. On the other hand, as far as the specific renovation attributed to the business segment in the apartment is concerned, the expenditure will be fully permitted. It should be noted that most of the expense will be recognized through depreciation, not immediately.
F) Cleaning and Maintenance
Cleaning and maintenance expenses, including house allowance or payment for a domestic help, will be deducted at a relative rate. Please keep in mind that you must pay National Insurance contributions for the housekeeper.
In addition, it is possible to recognize a relative share of the purchase of cleaning materials.
G) Insurance for an Apartment
Home insurance – such as building insurance, third party insurance, contents insurance etc. will be recognized pro rata.
H) Home Phone
Telephone expenses for calls in Israel shall be permitted only insofar as the main business of the taxpayer is from his place of residence, as follows: If the annual expenditure does not exceed 2,400 a year, it shall not be allowed to be deducted at all. If the expenditure exceeds NIS 2,400 per year, but does not exceed NIS 12,000 a year, the amount of the expenditure is less than NIS 2,400 (for example, if the annual expenditure is NIS 3,000, it will be allowed less NIS 600).
Home phone expenses for overseas calls: If they are performed as part of the business, they are fully permitted, but the call must be recorded (date and time, call purpose, call parties, call duration, estimated price, etc.).
As a rule, Internet connection costs will be allowed relatively. However, as long as the use of the Internet is strictly or almost completely business (for example, connection expenses for ongoing trading on the Internet). It is possible to deviate from this and recognize the entire expense.
Not all food purchased is known as refreshments, but only hot or cold drinks, cookies, etc. are also recognized as income tax breaks, and only refreshments used for business purposes (for example, for meetings with customers in the business) are deductible at the rate of 80% of the expenses.
K) Rental fee
It is possible to claim as an expense the rent of a residential apartment only if the rental contract confirms that the owner of the property part of the property is rented for business purposes. If the landlord agrees to this, he will of course have to report part of the rental income as income from renting a non-residential apartment. In addition, it is necessary to obtain from the landlord a certificate of deduction at source from the rent (and if the landlord does not have an exemption – the tenant will have to transfer the amount deducted at source to the tax assessor).
L) Interest Expenses and Linkage Differentials on the Mortgage
If we are dealing with an apartment that we own, and for which we purchased a mortgage, it will be possible to recognize a proportionate part of the interest expenses. However, it is important to remember that when selling the apartment, and calculating the praise for the apartment – it will not be possible to demand the interest rate which we have known over the years on an ongoing basis.
M) Depreciation on Residential Dwelling
If the apartment is owned by you, it is possible to recognize depreciation expenses (usually 4%), according to the relative part of the apartment, but this should be done cautiously and judiciously, as this may result in classification of the property as a business asset.
4. A Business License and the “Permit for Exceptional Use” in the Residential Apartment:
A) Business License:
A business from the residential apartment may require a business license. The Business Licensing Law provides a list of businesses that require a business license, when a business operating without a license is subject to sanctions.
It should be noted that business owners from certain fields (such as professionals) are exempt from licensing requirements, and that you can contact the local authority in your area to determine whether a license is required, and what is the process of producing it.
B) Permission for Exceptional Use:
In order to operate a home based business, it will be necessary to obtain a “permit for exceptional use” from the local planning and building committee, particularly as the business is concerned with a license-laden business and/or a business that receives customers.