Technology and gadgets that are designed to make tasks easier and more efficient are in almost every business now. It’s an expense that keeps on growing every year as new technologies are invented, and others evolve and grow. Moreover, small business owners utilize technology to do business across the globe. You should be deducting these as business expenses even if you plan to use them occasionally for personal use.
Technology Expenses
Think about all the technologies that you use on a daily basis. Are they used in your business as well as your personal life? Listed below are just some examples of the things we might need for our business but also have personal uses.
- Laptops, computers and printers;
- iPads, reading devices and tablets;
- Cameras, video cameras, lighting and studio equipment;
- Microphones, speakers and audio equipment;
- T.V.s, monitors, projectors and screens;
- Bluetooth devices, smart watches, and Google glasses;
- Coffee makers and appliances;
- Internet service, fiber or related data needs..etc…
If you are using these types of items in your business to make money, then they are deductible! So, you might ask what do I need to do now? Track all of these items, keep receipts and consult with your tax professional at the end of the year.
When you go out looking for that new phone or laptop you should be thinking; what is my business reason for this purchase? I don’t want to sound like I am pushing for expenses just for the write off though. There is no reason to spend money on the next new gadget just for the deduction.
Cellphone Deduction
You are allowed to deduct the full amount of your cellphone costs if you meet the following criteria.
- It can be shown that a cellphone is critical to the operation of the business.
- The service expense isn’t extravagant and reasonable for your type of business.
- You maintain a separate cellphone or home phone for personal use.
This broad allowance came about due to an excessive number of legal battles where taxpayers were trying to prove the amount of business use their cellphones were being used for. In other words, the IRS was finding it too costly to fight these determinations out in court and decided the time and money were better used elsewhere.
If you don’t meet the criteria listed though, that does not mean you cannot claim the portion of your cellphone bill as a business expense. All you need to do is figure out the business portion of your cellphone bill. Simply take the average time you use your cellphone for personal calls or shopping on Amazon for personal items and figure the percentage of personal use. You then take that amount and subtract it from the total and the remaining is your business use of that phone. It doesn’t have to be precise just in a reasonable ballpark.
Computer/Laptop Deduction
Computer and laptop deduction works a little differently in comparison to a deduction for a cellphone. The main difference is that depending on the cost and way in which it was invoiced it could either be fully deductible in the year of purchase or a computer could be depreciated. So, let’s go over the reasons and some of the strategies to go along with them.
Fully Deductible
The IRS allows taxpayers to write off a piece of equipment in full that cost less than $2500 in its first year by electing to use the de minimis safe harbor election. Please be aware that this is for the business portion only. Just like with the cellphone you may need to calculate the business use percentage.
This election does need to be claimed when you use it, and it does not carry forward to the next year so you will need to make the election again if you want to take advantage of it for another piece of equipment purchased in the next year.
Using Bonus Depreciation
With the extension of 100% bonus depreciation, you can fully deduct the business use portion of your new computer or laptop. The deduction is capped at $1.22 million and the amount if phased out dollar for dollar by the amount of expenses about $3.05 million. So, you can really go crazy with this in most circumstances.
There is however a caveat to this. It’s probably not going to deter many self-employed people but it’s worth mentioning. If you take bonus depreciation you have to apply it to everything in that asset class. This means that they are in the same class as cars and trucks of five years. You can still opt out of the seven- and ten-year classes though.
Why Depreciate Your Computer
The main reason you might choose not to fully deduct your computer is that you don’t need the deduction this year. You can also use this as part of your tax strategy to offset your income in the following years.
In most cases Section 179 does not make sense as you can’t claim it if you have a loss year, and the equipment must be used for business purposes 50% or more of the time. Additionally due to the NOL (Net Operating Loss) rules change that eliminated the 20-year life span of carryover using that depreciation might not be as important, but in certain cases it might.
In Summary
When it comes to purchasing new technology, we should be thinking about how this will be used in my business. You should also be looking for ways to use the technology products you are already using in your personal life and find a business role they can be used in. For example, you can take a new drone you wanted to purchase and use it to take aerial video for your advertising or vlog. All you have to do is find a reasonable business use.
Talk with your CPA or Tax Advisor for more ideas on how to deduct the technology devices that you are purchasing or book a consultation with Cash Coach Consulting.