Home office expenses for the self-employed in Israel

Working from home has become the default for a large share of Israeli freelancers, and the expenses that come with it are recognized. Not in full, and not automatically, but recognized. The deciding factor is the ratio between the space serving the business and the flat as a whole, and your ability to explain it.

Which expenses go into the ratio

Costs relating to the whole flat that divide by area: rent, municipal tax, electricity, water, building fees, and building or contents insurance.

The total is multiplied by the area ratio. Rent of 6,000 shekels a month at a ratio of 12% gives 720 shekels a month of recognized expense.

What does not go into the ratio is anything that is wholly business. A computer, an office chair, a monitor, a printer and software are recognized at 100% regardless of floor area, because they serve the business rather than the flat. The full breakdown by category is in the deductible expenses guide.

A dedicated room versus a corner of the living room

This is the distinction examined in an audit, and it is not purely formal.

A room that serves as an office and is not used for living is the clean case. You can point to it, measure it, and explain why it is not a bedroom.

A work corner in the living room is a weaker case. You can still claim a proportional share, but the ratio has to be modest and the explanation convincing. Claiming 25% of the flat for a desk in the corner of the lounge invites a question.

The practical rule: the ratio has to match what an inspector walking into the flat would see. If it does not, it will not hold.

What changes in a flat you own

Here is a point that is easy to miss and expensive to get wrong.

In a rented flat the calculation is simple: a proportional share of rent and household costs. In a flat you own there is no rent to deduct, and anyone wanting to claim depreciation on the business share enters different territory: claiming depreciation can affect the capital gains exemption when the flat is eventually sold.

In practice, for many people claiming depreciation on their own home is not worth a small current tax saving. It is a decision made with an accountant, once, not annually.

Running costs in an owned flat, such as municipal tax and electricity, do enter the ordinary proportional calculation.

VAT on household expenses

A licensed dealer can deduct input VAT on the business share, subject to the mixed-input rules.

There is also a technical obstacle: the electricity or municipal tax account is usually not in the business's name. Regulation 12c of the VAT Regulations addresses exactly that, allowing a deduction on inputs such as electricity, water, gas and telephone even when the invoice is not in the business's name, where it is shown that the input served the business.

Residential rent generally carries no VAT to begin with, so there is no input to deduct there.

Internet and phone

These do not divide by floor area but by use. Mobile phone and internet are recognized at a relatively high rate, around 80% for most self-employed people, on the assumption that use is mainly for business.

A separate line used exclusively for the business is a different case, and worth raising with your accountant.

Documentation is what decides it

The deduction does not fail on the calculation, it fails on the evidence. Worth keeping:

A drawing or measurement of the flat marking the room, with areas in square metres.

The lease, if the flat is rented.

Municipal tax, electricity and water bills across the year, not one sample.

Photographs of the room, which sound unnecessary right up until somebody asks.

The retention obligation is seven years, like any other document, and is covered in the document retention guide.

A full example

A self-employed woman working from home, a rented 90 sqm flat, an 11 sqm office. The ratio: 12.2%.

Monthly costs: rent 5,500 shekels, municipal tax 450, electricity 320, building fees 150. Total 6,420.

The recognized share: 12.2% of 6,420, about 783 shekels a month, roughly 9,400 a year.

Separately, and not by the ratio: internet at 120 shekels a month at 80%, and a new computer at 7,000 shekels at 100%.

When clients come to your home

This is a point people rarely consider until it arrives. A clinic, a studio or an office receiving the public in a residential flat may count as business use in the eyes of the local authority as well, not only for income tax.

That means a business municipal tax classification on the part serving the business, at a higher rate than the residential one. It does not happen automatically and not in every authority, but anyone publishing a home address as a business address and receiving clients there regularly should check their authority's policy in advance.

The other side of that coin: business municipal tax, where it is imposed, is a recognized business expense, and at a higher share than the proportional slice of residential rates.

When you move or change the space

The ratio is not locked for a year. Moving mid-year, or converting a room to another use, changes the calculation from the point of the change onwards.

The right approach is to split it: months 1 to 5 at the old ratio, months 6 to 12 at the new one, and document the date it happened. What does not work is applying the new ratio retroactively across the whole year, or leaving the old one in place because it is easier.

The same principle applies to anyone who started working from home mid-year. The deduction starts from the date the room became an office, not from January.

Where the deduction falls apart

The first is taking a round ratio "because it sounds reasonable". 20% without a measurement is a number you cannot defend.

The second is including rooms that served the business occasionally. An office is an office, not the lounge in the evening.

The third is claiming depreciation on an owned flat without checking the capital gains consequence.

The fourth is keeping a single bill. An audit looks at a full year.

How Slate keeps the ratio consistent

In Slate expenses are recorded against a category, and the income tax and VAT recognition rates come from that category rather than from an estimate. A recurring expense such as municipal tax or electricity is recorded once a month at the same ratio, so the annual total is already correct at year end instead of being reconstructed from bills in a drawer. A quick sanity check on the figures is available in the deductible expenses calculator.

This is general information, not tax advice. For a specific situation, talk to an accountant or tax adviser.

Common questions

How are home office expenses calculated?

By the ratio between the work room's area and the apartment's area. That ratio is applied to electricity, municipal tax, building fees, water and rent, and it decides how much of each bill is recognized.

Do I need a dedicated room, or is a corner enough?

A dedicated room gives a clear area ratio and a clean claim. A corner of the living room is possible, but you have to explain what share of the space served the business and at what rate, and it is examined less generously.

What about an apartment you own?

There is no rent to deduct, but the other costs still apply pro rata: electricity, municipal tax, building fees and water. Note that claiming depreciation on the business share can affect a future sale, so that is a decision to take with an accountant.

Can VAT on household bills be reclaimed?

A licensed dealer can deduct input VAT on the business share of bills such as electricity and water. Regulation 12c of the VAT Regulations allows that partial deduction even when the invoice is not in the business's name, where the input is shown to have served the business.

What has to be documented?

The apartment's area, the work room's area, original bills for the period, and the ratio calculation. A single page explaining how you reached the percentage is enough, as long as it is kept with the bills.

What happens if I move?

Recalculate the ratio from the date of the move and apply each ratio to its own period. There is no need to pick one ratio for the whole year.

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