Home-office expenses

("Thinking taxes" is intended for individuals such as employees, self-employed persons, and owners of small businesses (specifically sole proprietors and partnerships). As such, it will cover personal income and business taxes, personal exemptions, estate taxes, gift taxes, deductible expenses of small businesses as well as other topics such as dealing with examiners of the Bureau of Internal Revenue, maintaining books of accounts, and rights of taxpayers. Tax regulations and issuances that may cut across all businesses, depending on their importance or relevance at a given point in time, will also be discussed).

Q. I worked for a multinational advertising agency for eight years. After giving birth, I decided to give up my full-time office employment to have more time for my young daughter. Recently, I began taking small copywriting and graphic design jobs and am now considering setting up a small office in the comfort of my home to take on more projects. I would like to find out what tax deductions would qualify under my home-office expenses.

A.I have two adorable (but terrible) four- and five-year old kids myself and my wife has just opened a small bakery beside our house. Just like her, your business makes you a self-employed individual, which entitles you to deduct from your gross income certain business expenses.

In general, you can deduct all ordinary and necessary expenses incurred in the development and management of your business. These include supplies and raw materials, rentals, business related travel and representation expenses, salaries of staff, and marketing costs. Personal expenses that are not related to the business do not qualify as deductions. So, don’t even think of charging as business expense your purchases of diapers, feeding bottles, and baby milk!

To be deductible from gross income, an expense must not only be necessary, it must also be ordinary–meaning to say, that the expense should be reasonable in relation to your business and not unusually excessive. Moreover, expenses should always be substantiated or supported with sufficient evidence such as official receipts.

I suggest you keep all those official receipts in one place and have separate piles for personal and business-related expenses. This will make it a whole lot easier for you in preparing your year-end income tax return.

If you have difficulty determine the direct costs involved in your business, you need not knit your brow in confusion. You may signify in your tax return the intention to use the allowed standard deduction amounting to not more than 10% of your gross income. This simply means that you can claim 10% of your gross income as your business expense without the BIR breathing down your neck for details.

(Raymund S. Gallardo is tax partner of Laya Mananghaya & Co./KPMG. Questions and comments are welcome. Messages to the author can be sent by e-mail at manila@kpmg.com.ph).