114: Computers & Cameras = Tax Deduction?

When you purchase a computer or camera for your business, are you unsure about how much you can deduct as a business expense since you use them for personal reasons as well?  The answer to that tax question awaits you below!

 

The Background

In Episode 107 we talked about Assets and Depreciation, and that information was the background information needed to help you understand this episode a little better.  Here's the cliff notes version.  An asset is something that provides benefit to your business for more than a year.  Computers and Cameras are assets, but paper and ink are not.

Normally when you purchase an asset, the IRS wants you to depreciate it, which means you record the expense over the period of time that you will be using the asset instead of recording the entire expense in the year you purchased it.  Splitting up the cost over several years is called depreciation.

Computers and Cameras

When it comes to some smaller "entertainment use" equipment, the IRS has some different rules.  These items - such as computers, cameras, and video recording equipment - are called  "listed property" by the IRS.

Business Use vs. Personal Use

The first thing you need to do is determine what percentage of the time you are using that equipment for business versus personal use.

Let's take the example of a camera that you purchase for your business.  You might use the camera for personal reasons such as taking pictures of your kids, but you also use that camera for product and blog photography.  The IRS wants you to create a log and track how much you use your camera for your business and how much you use the camera for personal purposes.

This splitting up of business and personal use for purchases was also discussed in our episode on Business Expenses for Bloggers, specifically materials and supplies.

Some Examples

As an example, let's say we purchase a camera for $2,000 and use it 75% of the time for the business.  Normally you would take 75% of the cost of the camera, $1,500, and depreciate that amount over the next several years.  The $500 is personal so that is not a tax deduction for your business.

But, if you use the camera over 50% of the time for your business, and in our example we did, the IRS has a rule where they will let you take that full business expense portion as a tax deduction in the year you purchased the item, instead of depreciating the cost over several years.  They call this a Section 179 Deduction.  All this basically means is that you can expense the business portion of the cost of the equipment all in one year, instead of spreading it out over several years through depreciation.

What if you don't use the equipment over 50% of the time for your business?  You can still depreciate the business portion, but you can't elect the Section 179 Deduction to take the expense all in the first year.

The Exception

If you have a computer that you keep exclusively in your IRS qualified home office, then 100% of that computer cost can be taken as a Section 179 deduction.  You can deduct the full cost of the computer as a business expense in the year you buy it, instead of depreciating it over the next 5-7 years.

A second example:  Let's say you buy a laptop for your business, but because it's mobile, you don't use it exclusively in your home office.  We'll say it cost $1,000, you keep a log, and you use it 90% of the time for business.  Because you use it over 50% of the time for business, you can elect the Section 179 deduction at the end of the year.  So 90% of the cost, or $900, can be deducted as a business expense on your tax return in the year you purchased the computer, instead of depreciating it and spreading out the cost over the next few years.  The 10%, $100, is just a personal expense, and is never a business tax deduction.

Don't Worry!

Electing Section 179 deductions takes place on Form 4562.  There is a maximum Section 179 deduction, but the maximum was $500,000 for 2014!

Don't get worried about all of these rules and forms.  If you use tax software (such as H&R Block or Turbo Tax) or use a tax professional, they will know what questions to ask you and what forms to fill out.

What you need to know is that when you buy equipment for your business, you need to determine how much you are using it for business purposes, and how much for personal reasons, so that you can take advantage of the tax rules.

I bet most of you are buying equipment, using it mostly for business, and not taking a deduction on your business taxes.  You are just eating that cost with your personal funds.  Don't do that now that you know you have a legitimate tax deduction!

Converting to Business Use

Let's say you bought an asset before you started your business.  You bought a $2,000 camera in 2014, but you didn't start your business until 2015.  Keep track of how you now use it for business and personal use.  The portion that you use for business, you can depreciate based upon the item's current fair market value (fmv).  So if the camera is now worth $1,000 in 2015, but you use it 75% of the time for your business, that's $750 you can depreciate over the next several years and get that tax deduction.

It will take time to track business and personal use of your equipment, but it is well worth it to legitimately save some money on your taxes.

Resources

The IRS Tax Guidance on Listed Property is found within Publication 587

What do you think?  Do you have any new deductions you can claim on your taxes this year?

-Sarah

In accordance with IRS Circular 230, we advise you that any discussion of a federal tax issue in this communication is not intended to be used, and cannot be used by any recipient for the purpose of avoiding penalties that may be imposed on the recipient under US federal tax laws.