This article is part of our “Tech Your Taxes” series, to help you get ready for Tax Day. Our first post was about managing all those pesky receipts, in case you missed it!
Deducting mileage, check! Writing off meals and entertainment, checky-check!
That’s the easier side of tax deductions. But what about tax deductions relating to tech purchases? In our fantasies, we get to write off the whole cost of Apple TV, the Samsung Galaxy S6, and that new digital micro coffee roaster we just splurged on. All are vital for work… ahem. But if you’re self employed or running a small business, you can indeed deduct some tech gear without raising any red flags.
Side note: If you’re an employee, it’s best to have your employer reimburse you for tech expenses. You can take deductions if the expenses aren’t reimbursed by your employer AND exceed 2 percent of your adjusted gross income.
If you work for yourself, read on…
Can I Deduct This [Insert Cool Item Here]?
A lot of that will come down to your line of work. The IRS defines a legitimate business deduction for tech as “a usual, necessary, customary and reasonable expense for your type of work”. So a person employed as a food server will have a harder time justifying a tablet and the latest smartphone than someone who works in the tech sector. In general, the newer and fancier the tech, the harder it is to claim it as a necessary expense, so be prepared to document your tush off. You’ll need invoices and well-managed receipts. Also, unless you are a professional video game player or developer, that new X-Box 360 is a no go.
Computers used by the whole family are another no-no. To avoid this problem in the future, designate one computer that’s strictly for the kids to use for their homework and games, so the work-related devices can be reserved to be claimed by Mom and Dad as business assets.
Handy tip: If you’re running a small business, consider creating a written policy that covers the way you invest in technology. That way, if the IRS ever gives you the stink eye, you can provide the policy as context for your purchases, such as: “We replace our laptops every two years because we use software X and need to keep up with it.” But remember, even when tech equipment is deductible, the tax savings won’t cover the whole cost, so buy only what you need. It’s not worth it to shop like crazy in search of a write-off.
When to Claim
Hardware, such as computers, monitors and scanners, are seen as assets by the IRS; that is, they retain value over the course of their lives. So you have a choice between depreciating them—spreading the deduction over the number of years the IRS considers reasonable for the life of this item—or writing them off in one year.
You may quickly find that you and the IRS have different concepts on what is a “reasonable lifespan.” For the category it calls “information systems,” such as laptops, the IRS clocks it at five years. (Interestingly, cattle are also considered fully depreciated after five years—who knew?) Cell phones, however, seem to depreciate over a seven-year schedule, which seems insanely unreasonable— I mean, have any of those IRS guys heard of “new every two?”
Your second option is to write off your big-ticket item in the same year it was paid for and placed into service; this is called a Section 179 deduction, and there’s tons of info on that over here. Doing this can be helpful if you’ve made some serious cashola in a year and want to lower your tax bill, but remember, you’ll have less deductions to claim in the future.
How Much to Write Off
By all means, write off a nasty ex—the full 100 percent. But when it comes to fully writing off technology assets, it’s not advisable. You might think you use that laptop 100 percent for work, but are you really saying you never, ever check your personal email or place an order for Thai food? It’s better to claim a percentage instead. Let’s say you’re a freelancer and use your mobile phone for business 60 percent of the time, so you can claim 60 percent of the data mobile plan. An itemized phone bill can help you gauge your pattern of use. Speaking of phones, if you have a landline, the first line going into your house is not deductible, even if you do talk shop on it. The cost of a second line, if it’s used exclusively for business, is deductible.
If you’re in a media profession, such as advertising, film, writing or public relations, you may also be able to write off a percentage of the cost of your TV/cable viewing as a business expense. Again, don’t say 100 percent was for work, as this would raise a red flag with the IRS. They know you watched out Grease: Live!
Other tax deductions…
Did you know that you can expense software and annual subscriptions, such as to Dropbox, and small hardware such as inexpensive digital cameras. Deduct Internet access as an office expense, or, as a utility (like your landline), and don’t forget to add in all those times you had to buy WiFi access on a plane, airport or hotel. The costs of web hosting and web advertising can also go under office expenses.
Random Tech Deductions
Don’t forget these other potential deductions when it comes time to file your taxes:
- The fees you may have paid a consultant. Did you hire a graphic designer to redo your website, for example?
- Any costs involved in creating and maintaining databases and lists of your customers.
- Swag, if you bought gifts or goodies for a launch party or promotion.
- The costs associated with obtaining a domain name.
- Insurance (such as renter’s insurance) purchased to protect important business-related assets like a computer.
- Business services, such as PayPal, if you handle transactions that way.
Again, do talk to an accountant about your particular situation. But hopefully I’ve gotten you off to a good start. And stay tuned! We’ll be covering more on taxes in the coming weeks.