As a home-based business owner, properly accounting for your business expenses is crucial for financial management and tax compliance. Let’s break down what qualifies as a legitimate business expense and how to track them effectively.
📊 Key Concept
The fundamental requirement for any business expense is that it must be both ordinary and necessary for operating your specific type of business.
What Qualifies as a Business Expense?
📝 Business Expense Definition
Ordinary Expense: Common and accepted in your industry or field
Necessary Expense: Helpful and appropriate for your business operations
Industry-Specific Examples
🍰 Catering Business
Ordinary & Necessary: Flour, baking ingredients, cooking equipment
Not Ordinary: Photography equipment, software licenses
📷 Photography Business
Ordinary & Necessary: Cameras, lenses, photo books, editing software
Not Ordinary: Baking ingredients, kitchen equipment
Comprehensive Business Expense Categories
Here are the most common business expense categories for home-based businesses:
🔄 Operating Expenses
- Business Promotions & Advertisements
- Bank charges and interest
- Charitable Donations (check local regulations)
- Depreciation on business assets
- Directors’ Remuneration
🏢 Business Operations
- Entertainment (typically 75% deductible)
- General Expenses
- Professional Fees – Accounting, auditing, legal
- Repairs & Maintenance – Building and computers
🛡️ Insurance & Protection
- Public liability insurance
- Workmen’s compensation
- Health insurance
- Home insurance (for home-based businesses)
- Motor vehicle insurance
🚗 Vehicle Expenses
- Gas and fuel
- Repairs and maintenance
- Vehicle insurance
- Registration and licensing
💼 Office & Staff
- Office Expenses: Stationery, printing, staff groceries
- Salaries: Gross salary, bonuses, commission
- Employers’ contribution (typically 2/3)
🔌 Utilities & Services
- Electricity
- Internet
- Water rates
- Cellular phone
- Cable TV (if relevant to your business)
👥 Staffing Budget Tip
Budget for 13 months of salary per employee to cover relief staff for vacations and sick leave when needed.
Two Methods for Calculating Home Office Expenses
Option 1: Square Footage Method (Recommended)
Calculate your home office space as a percentage of your total home area.
📐 Step-by-Step Calculation
- Measure workspace: 10 feet × 12 feet = 120 sq ft
- Total home area: 2,500 sq ft
- Calculate percentage: (120 ÷ 2,500) × 100 = 4.8%
💡 Practical Example
Electricity bill: $530.50
Business portion: $530.50 × 4.8% = $25.47
Apply this percentage to telephone, internet, water rates, and other shared utilities.
Option 2: Standard Percentage Method
Apply a flat 25% to eligible home expenses as business operating costs.
🔢 Simple Calculation
💡 Practical Example
Electricity bill: $530.50
Business portion: $530.50 × 25% = $132.63
This method is simpler but may not be as accurate for tax purposes.
💼 Professional Advice
Consult with a tax professional to determine which method works best for your specific situation and local tax regulations.
“A wealthy person is simply someone who has learned how to make money when they’re not working.” – Robert Kiyosaki
Need help tracking business expenses? Download our free planner designed specifically for home-based businesses.
Looking for professional accounting advice? Schedule a consultation with our small business accounting experts.
