Explaining "Household Expense Apportionment," a common concern for everyone.

Are you familiar with the concept of "household expense apportionment"?

This is an expense accounting concept applied when you operate a business in a way where the line between business and private life is easily blurred, such as running a business from home. You can record a portion of expenses, such as rent, as business expenses if they were used for business purposes. However, you cannot record the full amount.

For many new entrepreneurs, there are quite a few who say,
"Oh, I've been recording the full amount."
"I didn't know there was a rule about household expense apportionment."
"Actually, I'm not confident about what percentage is appropriate."
So, I will explain household expense apportionment for those people this time.

What is household expense apportionment?

For individuals working for themselves, expenses are sometimes used for both business and private purposes. Recording the full amount as an expense would be "over-recording," but on the other hand, not recording any of it would be "under-recording." Therefore, the National Tax Agency allows you to record only the portion of expenses related to your business. That is "household expense apportionment."

Some people might feel, "Why not just make a rule that doesn't allow ambiguous expense recording?"

However, the purpose of tax law is"tax equity."If household expense apportionment were not allowed, individuals working for themselves would have fewer deductible expenses, resulting in a higher tax burden compared to other business operators. In tax law, "both over-taxing and under-taxing are problems," and household expense apportionment exists to eliminate unfair situations.

Target expenses and apportionment methods for household expense apportionment

The following are expenses that are often subject to household expense apportionment. I will introduce examples of apportionment methods, but since they vary depending on the actual state of your business, I recommend consulting with a local tax accountant.

Rent

If you operate your business from home, you can make it subject to household expense apportionment. There are mainly two types of apportionment methods: one based on floor area ratio and one based on time ratio.

The method based on floor area ratio uses the ratio of the floor area used for business, such as a study or desk, divided by the total floor area.

The method based on time ratio is often adopted when the space used for work is not clearly separated. The percentage of time you use your home for work is adopted as the apportionment ratio.

Utilities

Since it is difficult to clearly distinguish utility costs like floor area ratios, the time ratio method is often adopted. However, depending on the type of business, you may need to adjust the calculation results of the time ratio somewhat.

For example, in the case of a tax accountant's office, suppose the apportionment ratio based on time is 40%.
Electricity costs can be said to be essential for a tax accounting business. This is because electrical equipment such as lighting, air conditioning, and computers are all indispensable for proper business execution.
Then what about gas and water bills? Since most gas and water are used for bathing or laundry, the tax office might point out that "40% is too high a ratio."

Communication expenses

Communication expenses are apportioned by time ratio, such as the number of days or hours used.
However, since it is difficult to explain the time used for business, it is easily pointed out by the tax office and is often not recognized as an expense. Buying a smartphone for business use is the most reliable way to separate it from private use.

Clothing expenses

Clothing expenses, such as suit costs, can also be treated as business expenses through household expense apportionment in some cases. However, since this is also an item that is easily pointed out by the tax office, you need to be prepared to explain it thoroughly, and if it is difficult to explain in the first place, you should probably not use household expense apportionment.

This is a topic I am often consulted about by clients, so I have explained it in detail in a separate article. Please be sure to check it out.

Automobile-related expenses

Many business owners try to save on taxes by recording automobile purchase costs and similar expenses as business expenses. There are methods for calculating the allocation ratio based on time or distance.
I recommend keeping a usage log so that you can provide a solid explanation to external parties. Purchasing the vehicle under the corporate name as a company car is also one option.

Since I am also frequently asked about how to record automobile-related expenses, I have explained it in a separate article. Please take a look if you are interested.

Conclusion: It's not just about the ratio

In discussions about proportional allocation of household expenses, the conversation often tends to focus on "what percentage is acceptable." However, what is important before that is "whether it is necessary for the execution of business."

Even if you think hard and prepare supporting documents so that you can explain it if pointed out by the tax office, if you are told, "That expense is not necessary for your business, is it?", your efforts will have been in vain.

As a tax accountant, what I often explain to my clients is that"the 'Articles of Incorporation' and 'actual circumstances' are what link the necessity for business execution to the expenditure."If your Articles of Incorporation clearly reflect the actual state of your business, there are expenses necessary for the business, and those records are properly organized as evidence, there will be no problem.

If the actual state of your business does not align with your Articles of Incorporation, or if your records explaining the expenses are insufficient, please consult a tax accountant near you.

Hashimoto Mina Tax Accountant Office supports those who take on challenges with the missions of:
"Being a financial partner that creates time for the president."
"Being a companion that supports the growth of the president."
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