Computer-Related Tax Deductions: Deducting Computers Used for Work

Computer-Related Tax Deductions: Deducting Computers Used for Work
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No matter what type of business you’re in, electronic equipment is essential. At the very least, you’ll need it to handle bookkeeping and communicate with customers. If you purchase a computer that you use at least partly for a self-employment venture, part or all of the expenses may be tax-deductible.

Who Can Deduct Computer Purchases?

The IRS allows certain taxpayers to deduct the cost of computer equipment and software on their taxes. The primary of these are students, who can deduct computers used for getting an education at an academic institution. This is allowed through the American Opportunity Tax Credit, which covers certain educational expenses during a student’s first four years of higher education.

But perhaps the best-known tax deduction for computers comes to sole proprietors and corporations. Computers and associated technology expenses can be claimed as long as they’re used for business purchases. But as with all tax deductions, there are rules you’ll need to follow as you’re claiming computer-related purchases.

Business-Related Computer Purchases

If you work for an employer, your equipment is likely provided by that employer. You can’t claim work-related purchases on your taxes if it isn’t. If your employer reimburses you for work-related purchases, you don’t have to claim that amount on your taxes.

For the self-employed, though, computer equipment is part of the tax deductions you’ll claim this year. This applies whether you’re a freelancer or you run your own small business. All computer equipment used for your business can be deducted to the degree you use it for your business.

Deducting Computer Purchases

Computers can be deducted as business expenses as long as you work for yourself or as an independent contractor. If you’re employed, either full- or part-time, you can’t deduct equipment. However, if you’re a contractor whose taxes aren’t taken out of your paycheck, you’re considered self-employed and therefore qualify to deduct your business-related expenses.

To qualify as a deduction, any computer-related purchases must pass the IRS’s test as ordinary and necessary to your specific business type. This simply means that the equipment is widely seen as common, accepted, helpful and appropriate to your business. The best question to ask yourself is whether an IRS auditor would see the computer as relevant to the type of work you do.

Depreciation Versus Whole Deduction

Once you’ve determined that your computer is deductible, you have to decide how to take the write-off. You have two options: depreciation and whole deduction. With depreciation, you divide the cost of the asset over its useful life. The IRS defines the useful life of computer equipment as five years.

If you use the computer for business more than 50 percent of the time, you can opt to take something called a Section 179 deduction. This lets you deduct the full cost of the purchase in the tax year in which you bought it. This could be a good option if you will have other deductions in later years or if the first year was one where your income was higher than it will be in later years.

If your income is steady or stands to increase, though, you’ll need more deductions to offset the taxes you’ll owe on it. That’s where depreciation can come in handy. You can depreciate the cost of your computer equipment over five years or deduct a larger portion under Section 179 in the first year, then depreciate the rest over the remaining four years.

Business Use of Personal Equipment

Things get a little more complicated if you split your equipment between personal and business use. First, you’ll need to figure up what percentage of the time you use it for each purpose. You’ll only be able to deduct the cost of the equipment to the extent that you use it for business. If your computer costs $600, and you use it for business 60 percent of the time, you can only deduct $360.

You’ll also have to use your computer 100 percent for business use for it to qualify for a full deduction. That means, for a computer that cost $600 that you only use 60 percent of the time, you’ll have to spread that $360 over five years.

Computers as Listed Property

At one time, computers were considered “listed property,” which meant you were expected to keep detailed records of their business use if you planned to tax deduct them. Listed property is not eligible for the Section 179 depreciation, which means you have to depreciate it over multiple years.

But this was one of the income tax laws that changed under the Tax Cuts and Jobs Act. If you have a computer that was put in use before 2018, it still qualifies as listed property. Otherwise, you don’t have to keep meticulous records and you can take the full amount in the first year if it qualifies.

Deducting Software Purchases

In addition to a computer, you’ll also need software to perform various tasks. Some computer software is also tax-deductible, but there are a few requirements. Only software that is available to the general public is eligible. In other words, software that is custom-designed for your business cannot be deducted.

In addition to custom-coded software, you also can’t claim database software, unless it’s available for sale to the general public, or website builders like Squarespace or Wix. The software has to have a useful life of more than a year and must be used by your business in income-generating activities.

Deducting Mobile Devices

If you’re like many business owners, you use your cell phone as much, if not more, than you use a computer. You can claim the cost of your cell phone and tablet on your tax return the same way you would a piece of computer equipment. If you use it for both personal and business, you’ll need to calculate the percentage and deduct only the portion of the purchase price that relates to your business.

As with computer equipment, you’ll have to depreciate the cost over five years unless you use the phone solely for business use. If you purchase a phone that is 100 percent dedicated to your business, you have the option of claiming the full cost in the first year.

Deducting Technology Costs

You’ll need a connection to make use of your computers and mobile devices. If you work from home, you can claim the cost of your internet and cell phone service. Since you’ll no doubt use your Wi-Fi for both personal and business purposes, you must figure the percentage you use for business purposes and claim only that.

This same principle applies to your monthly cell phone bill. You can claim it on your taxes, but you’ll need to claim only business-related use. If you claim 100 percent use, you’ll have to be able to prove to the IRS, if audited, that you don’t use the phone for personal calls, texts or other activities.

You can also claim the cost of any business-related apps you download to your smartphone. Only claim those apps that are used specifically for your business. Invoicing software and tools you use to communicate with customers are two examples of that.

Although deducting computer-related purchases can help reduce your taxable income, it’s important to pay close attention to the tax code. Rules can change from one year to the next, so make sure you keep records and follow the requirements when it comes to depreciation.