Electronic equipment is essential no matter what type of business you’re in. At the very least, you’ll need it to handle bookkeeping and to communicate with customers. Part or all of the expenses may be tax-deductible if you purchase a computer that you use at least partly for a self-employment venture.
Who Can Deduct Computer Purchases?
The IRS allows certain taxpayers to deduct the cost of computer equipment and software on their tax returns. Students can deduct computers they use for education at an academic institution. The American Opportunity Tax Credit provides this deduction. The credit 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 there are rules you must follow if you’re claiming computer-related purchases.
Read more: Education Credit Vs. Tuition Deduction
Business-Related Computer Purchases
Your equipment is likely provided by your employer if you work for someone else. You can’t claim work-related purchases on your tax return if this is the case. But you don’t have to claim that amount as part of your taxable income if your employer reimburses you for work-related purchases.
Purchasing computer equipment can result in a tax deduction for the self-employed, however. This is the case whether you’re a freelancer or you run your own small business. All computer equipment used for your business can be deducted to the extent that you use it for your business.
Deducting Computer Purchases
Computers can be deducted as business expenses if you’re an independent contractor who doesn't have taxes withheld from any amounts that are paid to you by clients and customers. You’re considered self-employed.
Any computer-related purchases must pass the IRS’s test as ordinary and necessary to your specific business type in order to qualify as a deduction. This means that the equipment is widely seen as common, accepted, helpful and appropriate to your business.
Read more: Tax Rate for Self-Employment
Depreciation vs. Whole Deduction
You must decide how to take the write-off after you’ve determined that the cost of your computer is deductible. You have two options: depreciation and whole deduction.
Depreciation involves dividing the cost of the asset over its useful life. The IRS defines the useful life of computer equipment as five years.
You can take a Section 179 deduction if you use the computer for business purposes more than 50 percent of the time. This allows you to deduct the full cost of the purchase in the tax year in which you bought it. This could be a good option if the first year is one where your income is higher than it will be in subsequent years.
But you might need more deductions in future years to offset the taxes you’ll owe if your income is steady or is likely to increase. Depreciation can be a useful tactic in this situation. You can depreciate the cost of your computer equipment by dividing it over five years rather than deduct the entire value under Section 179 in the first year.
Business Use of Personal Equipment
Things get a bit more complicated if you use your equipment for both personal and business purposes. You must figure out 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. You can only deduct $840 if your computer cost you $1,400 and you use it for business 60 percent of the time: $1,400 times .60.
You must use your computer 100 percent for business reasons for it to qualify for a full deduction. You'll have to spread that $840 deduction out over five years if you elect to depreciate the expense.
Computers as Listed Property
Computers were considered “listed property" at one point in time before the Tax Cuts and Jobs Act went into effect in 2018. You were expected to keep detailed records of their business use if you planned to deduct their cost. Listed property wasn't eligible for Section 179 depreciation. You would have had to depreciate the cost over multiple years.
Your computer still qualifies as listed property if you put it into use before 2018. 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
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's available to the general public is eligible. The cost of software that's custom-designed for your business can't be claimed.
You can't claim database software, either, 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 it must be used by your business in income-generating activities.
Read more: A List of Items That Can Be Claimed on Income Taxes
Deducting Mobile Devices
You use your cell phone as much, if not more, than you use a computer if you're like many business owners. You can claim the cost of your cell phone and/or tablet just as you would a piece of computer equipment. You must calculate the percentages of personal versus business use 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. You have the option of claiming the full cost in the first year if you purchase a phone that is 100 percent dedicated to your business.
Deducting Technology Costs
You’ll need a connection to make use of your computers and mobile devices. You can claim the cost of your internet and cell phone service if you work from home. You’ll no doubt use your Wi-Fi for both personal and business purposes, so you must figure the percentage you use for business purposes and claim only that in this case as well.
This same principle applies to your monthly cell phone bill. You can claim it as a deduction, but only for its business-related use. You might have to prove to the IRS that you don’t use the phone for personal calls, texts or other activities if you claim 100 percent use and you're audited.
You can also claim the cost of any business-related apps you download to your smartphone. Only claim those that are used specifically for your business. Invoicing software and tools you use to communicate with customers are two examples.
Deducting computer-related purchases can help reduce your taxable income, but 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.
Stephanie Faris has written about finance for entrepreneurs and marketing firms since 2013. She spent nearly a year as a ghostwriter for a credit card processing service and has ghostwritten about finance for numerous marketing firms and entrepreneurs. Her work has appeared on The Motley Fool, MoneyGeek, Ecommerce Insiders, GoBankingRates, and ThriveBy30.