This is a translation of the Japanese original. The Japanese version is authoritative; figures follow Japanese tax law.
Sole proprietors and freelancers who work from home may treat only the part used for the business as an expense, out of their rent, electricity and communication costs. This is apportionment between business and private use (家事按分). The National Tax Agency (NTA) has not fixed a single percentage that everyone may deduct. The standards it does show are the share of floor area and the number of days used, and the principle is to apportion by a reasonable method. In a 60 m² home with rent of 120,000 yen and a 15 m² work room, the share is 25%: 30,000 yen a month, 360,000 yen a year. This article sorts out how to build the evidence, the difference between blue and white returns, cases denied at the National Tax Tribunal, and the point homeowners miss most — the effect on the mortgage tax credit (it shrinks once the business share goes over 10%, and cannot be used at all at 50% or more) — using NTA circulars and materials.
The short answer: the basis is floor area or days. You build the case for the percentage yourself
| Expense | Standard shown by the NTA | Worked example (rent 120,000 yen, 60 m², 15 m² work room, 5 days a week) | Deductible per year |
|---|---|---|---|
| Rent | Floor area used for the business ÷ total floor area | 120,000 yen × 15 m² ÷ 60 m² ＝ 25% ＝ 30,000 yen a month | 360,000 yen |
| Electricity | Floor area share × days share (the NTA's worked example) | 12,000 yen × 15÷60 × 5÷7 ＝ about 2,100 yen a month | about 26,000 yen |
| Communication costs (broadband, mobile) | A reasonable method (hours of use, days of use and the like) | 8,000 yen × 50% ＝ 4,000 yen a month | 48,000 yen |
| Water and gas | Zero unless they are actually used for the business | 0 yen | 0 yen |
| Depreciation, property tax and loan interest on a home you own | Share of floor area used for the business | Each cost × 25% | See below |
In its material on the taxation of home-sharing businesses, the NTA explains that the amount "has to be apportioned and calculated by a reasonable method, such as on the basis of the share that the floor area used for the business bears to the total floor area, or the number of days guests were actually accommodated," and gives a worked example for utilities: "240,000 yen × 60 m²÷180 m² × 90 days÷365 days ＝ 19,727 yen"[NTA, taxation of home-sharing businesses]. Area multiplied by days is the pattern the NTA has set out. "Hours of use" and "distance driven" do not appear in the NTA's own wording, but they are widely used in practice as examples of a reasonable method.
25% or 40% are both fine if you can account for the share: a floor plan marking the work room, a work log, records of communication use. The reverse also holds. A "50% for now" with nothing behind it leaves you with nothing at all once it is denied in a tax audit.
The basis of the rule: more than 50% in principle, but 50% or less is fine if the part can be clearly separated
Article 45 of the Income Tax Act and Article 96 of its Enforcement Order allow mixed-use expenses to become deductible expenses only where "the main part is necessary for carrying out the business" and "that necessary part can be clearly separated." Income Tax Basic Circular 45-2 provides as follows[NTA, Income Tax Basic Circular 45-1 and 45-2].
- Whether something is the "main part" is judged by whether the part necessary for the business is more than 50% of the payment.
- However, even at 50% or less, where the necessary part can be clearly separated, that part may be included in deductible expenses.
This circular concerns a provision that applies whether you file a blue return or a white return (Enforcement Order Article 96, item 1), so even on a white return, 25% of the rent is deductible if you have evidence for the split. A blue return has a further route under item 2, "where the part directly necessary for the business can be made clear on the basis of records of transactions," and is more favourable to the extent that books make it easier to back up (the difference between blue and white returns).
Tax Answer says the same: "the part of mixed-use expenses that becomes a deductible expense is limited to the amount that can be clearly separated, on the basis of records of transactions and the like, as having been directly necessary for carrying out the business"[NTA, No.2210].
Building the evidence: a floor plan, a log and the bills are enough
- For rent and the costs of a home you own, use a floor plan. Mark the area stated in the lease and the area of the work room (or of the section where your desk sits) on a drawing. If the room doubles as a bedroom, multiply that room's area by a share of days or hours.
- For electricity, use "area × days," or hours. The NTA's pattern is area × days. If the work room holds an air conditioner or a lot of equipment, there is room to add to the share on the basis of hours, but that needs records.
- For communication costs, use actual usage. For the broadband line, set the share from the hours or days of business use; for a mobile, from call statements or app usage records. If you keep a separate line or handset for the business, it is 100% deductible and no apportionment has to be explained at all.
- Apply the share you settle on with the same reasoning every year. Changing it from year to year for no stated reason makes it hard to explain in an audit.
For the overall picture of what is and is not deductible, see the list of expenses for sole proprietors; for payments that are hard to judge, see 10 grey-area expenses.
Cases denied and cases allowed: the facts come first
Among the rulings published by the National Tax Tribunal, there is no case that disputed the apportionment percentage of home rent itself. On nearby points, these three are worth reading.
| Ruling | Outcome | Point |
|---|---|---|
| 12 September 1984 (a home doubling as a dental clinic) | Allowed in full | The tax office treated part of the building as residential, but from the actual use the whole building was found to be the clinic, so the property tax and depreciation became deductible in full[National Tax Tribunal] |
| 30 March 2001 (membership fees and the like) | Denied | Even among mixed-use expenses, anything for which "the part directly necessary for carrying out the business cannot be made clear" does not become a deductible expense[National Tax Tribunal] |
| 1 September 2014 (writing and lectures by a university associate professor) | Denied | "Most" of the costs claimed were held to be mixed-use expenses, and the income itself was classified as miscellaneous income rather than business income[National Tax Tribunal] |
What they share is "the facts and the records." An apportionment you can account for with a drawing or a log is allowed; one you cannot account for is denied. The third case carries a further lesson: if you deduct most of your living costs against side-income-level revenue, it is not only the apportionment that goes — the standing of the income as business income can itself be denied (how the 3-million-yen side income question was settled).
The trap for homeowners: the mortgage tax credit shrinks once the business share goes over 10%
If you work in a home you own, you can deduct the building's depreciation, the interest on the mortgage and the property tax in proportion to the business share. The NTA states that "interest on borrowing for the business is a deductible expense" and that "property tax is a deductible expense only for the part used for the business"[NTA, a plain guide to deductible expenses]. Repayment of the loan principal is not deductible.
What deserves care here is the mortgage tax credit.
| Share used for the business | Mortgage tax credit | Basis |
|---|---|---|
| Roughly 10% or less (residential use roughly 90% or more) | The full amount, unchanged | Circular on the Act on Special Measures Concerning Taxation, 41-29[NTA] |
| Over 10% and under 50% | Calculated on the borrowing multiplied by the residential share (the credit shrinks) | NTA, taxation of home-sharing businesses, page 6 |
| 50% or more (residential use is less than half of the floor area) | The credit cannot be used at all | Tax Answer No.1213[NTA] |
On a 30 million yen loan at a credit rate of 0.7%, the credit is 210,000 yen of tax a year. Suppose you apportion the work room at 25% and deduct 200,000 yen of depreciation and interest a year. For someone on a 10% tax rate that saves about 20,000 yen. A 25% cut in the mortgage tax credit costs 50,000 yen, so for many people it pays to keep the business share within 10% while the credit lasts. For the detail, see the mortgage tax credit guide.
Frequently asked questions
Is 50% of the rent safe?
There is no upper figure. If you use 30 m² of a 60 m² home for the business, that is 50%; if you use 15 m², it is 25%. The test is whether you can show the basis for the share on a floor plan. A 50% claim with nothing behind it risks being denied.
Can I apportion on a white return too?
You can. Circular 45-2 says that even where the part necessary for the business is 50% or less, it may be included in deductible expenses if it can be clearly separated, and it draws no distinction between blue and white returns. A blue return simply makes the explanation easier, because the books back it up.
What share should I use for my mobile phone bill?
Set it from the hours you use it for work or the share of business calls. If your statement shows half the calls are for work, that is 50%. If nothing decides it, separating one line for business makes it 100% deductible and removes the need to explain any apportionment.
Can apportioned expenses also be used for the consumption tax input tax credit?
If you are a taxable business, you claim as an input tax credit only the consumption tax corresponding to the part you deducted. Where rent is residential and therefore exempt, no consumption tax was charged in the first place, so there is nothing to credit.
Reference links (sources)
This article is based on the materials below. Because the apportionment percentage turns on the facts of each case, consult the tax office or a tax accountant if you are unsure.
Note: this article is general information. The worked examples use assumed figures.
