Love Those Tech Tax Deductions
By Elizabeth Wasserman
Using technology makes filling in and shipping out your tax forms easier. Now, your use of gadgets can help you even more by reducing the amount of tax dollars you owe. Computers, iPhones, GPS devices, and other gadgets may be tax deductible if you use them for work. Congress recently added recession-era provisions to the tax code to allow small businesses to write off purchases of tech assets up to $250,000.
To Qualify for Tech Deductions
You can deduct your computers, software, gadgets, and other technology purchases on your income taxes if you’re using those items for business, tax experts say. “When you’re in business, virtually anything you buy for your business is deductible one way or the other,” says Stephen Fishman, author of several books for Nolo, the San Francisco-based legal publisher, including Tax Deductions for Professionals, Deduct It! Lower Your Small Business Taxes, and Home Business Tax Deductions: Keep What You Earn. If you own a small business, you can expense or depreciate the cost of all your business computers, software, smartphones, and GPS devices for employees who are on the road a lot, as well as Internet service and telecommunications service.
Here are other ways you may qualify to take some tech deductions:
- You are self-employed or have a home-based business The IRS allows you to claim deductions and depreciation for technology assets that are used at least 50 percent of the time for business, according to Michael D. Jenkins, a tax attorney and author of the Starting and Operating a Business series of small-business guidebooks. “They’ve drawn a pretty bright line around this category,” Jenkins says. “You want to make sure at least 50 percent of the time you are using these for business and not just for games and surfing the Web.”
- You have a hobby that generates income If you’re not in business, but you have a hobby that you use technology to support, you can deduct or depreciate tech purchases against any money you earn from the hobby, Fishman says. You can’t do this if your hobby doesn’t bring in income.
- Your company won’t cover business expenses If you work for an employer but wind up using your home computer or personal smartphone or other device for business, you may qualify to depreciate these devices for your work portion on your personal income taxes, under a category called “Unreimbursed Business Expenses,” Fishman says. The IRS has two stipulations for this deduction: You must have the equipment “for the convenience of your employer,” and it must be “required as a condition of your employment.” But those expenses are limited to the amount above 2 percent of your adjusted gross income -- meaning that if your adjusted gross income is $100,000, you can only claim expenses above $2,000.
Tax Write-offs for Techies
Before claiming any tech tax deductions, it’s a good idea to do your homework or consult an accountant, experts say. That said, there are two main types of tax deductions for business technology. One is called depreciation, which allows you to recover the cost of certain property over the course of several years. The other type of deduction is a straight business expense, which you can deduct wholly in the year you incur the expense. But some of these lines have blurred recently as Congress has sought to stimulate the economy and get businesses to spend more, and at the same time, the IRS issued opinions on how its rules apply to new types of technologies.
Here’s how some of these new rules impact your tech write-offs:
- Computers and software In the past, if you bought business equipment -- such as a computer -- that has a useful life of longer than one year, you had to depreciate and recoup that cost over several tax years, Jenkins notes. However, the IRS has a relatively new provision of the tax code called Section 179 that lets a sole proprietor, partnership, or corporation expense this type of property in the year it’s purchased -- as long as that property was put into use in that tax year. The maximum Section 179 deduction was increased this year to its highest level ever -- $250,000. And if you make tech purchases that exceeded $250,000 last year, you may qualify for yet another benefit: Under the Economic Stimulus Act of 2008, Congress added a special 50 percent depreciation allowance (usually only 20 percent) for qualifying purchases put in service in 2008, including computers and software. “Say you acquire something for $600,000, like a lot of computers. You could take up to $250,000 by expensing,” Jenkins says. “Then, on the balance you have left, $350,000, you could take the 50 percent bonus depreciation of $175,000. Then just take the regular depreciation on the rest, which is typically 20 percent. That would be another $35,000. On that $600,000 investment, you’ve deducted $460,000 in that first year. That’s quite a write-off.”
- Cell or smartphones The IRS put out a notice last year that indicates they will enforce a 1989-era rule requiring employers that give their workers cell phones to consider that a taxable benefit. The key distinction here is if the employees use those cell phones for personal as well as business use, they may have to keep logs detailing which calls are for business and which calls were personal. “It’s sort of like how they want you to keep a log of how many miles you drive for business,” Jenkins says. “If you don’t have the log, they may tell you that you don’t have the deduction.”
Tips on Using Tax-prep Software
Ever since the new U.S. Treasury Secretary Timothy Geithner admitted to Congress in early 2009 that he used a commercial tax-preparation software package to file his personal income taxes, in which he underpaid federal taxes, there have been questions raised about tax software. But experts say not to worry. Geithner’s case was an anomaly; his tax problems stemmed from his work at the International Monetary Fund, which has highly unusual tax arrangements for its workers that aren’t likely to be covered in any tax program.
Tax-preparation software for personal and small business use can help most people decipher and keep updated with the ever-changing tax laws, including technology-related write-offs. But you do have to be careful. “You definitely have to buy a new version every year,” Jenkins says. “Congress guarantees that. They’re constantly dishing out all kinds of new rules.”
Elizabeth Wasserman is a freelance writer and editor based in Fairfax, Va. She writes for a variety of publications, including Congressional Quarterly and Inc. magazine, and she edits the online publication CIO Strategy Center.
next article archive