You may be able to take a tax deduction on the cost of some of high-tech gadgets that help you streamline your work.
The article below is accurate for your 2017 taxes, the one that you file this year by the April 2018 deadline, including a few retroactive changes due to the passing of tax reform. Some tax information below will change next year for your 2018 taxes, but won’t impact you this year. Learn more about tax reform here.
The world of high-tech gadgetry and connectivity continued to evolve at a dizzying pace during the first decade of the 21st century. Cell phones, laptops, iPads and the Internet became more than ways for people to communicate or entertain themselves: For many, they are now required equipment for running a business. The Internal Revenue Service kept abreast of the changes, and it is possible to deduct the cost of some items used for business. This means the high-tech gadgets that help you streamline your work can pay for themselves come tax time.
"The IRS’s standard for a legitimate deduction requires the item to be a usual, necessary, customary and reasonable expense for your type of work. So, an iPad will most likely be viewed more as a legitimate deduction for a computer consultant than for someone who works on an assembly line."
—Michael Carney, owner and president of Chicago-based MWC Accounting
Your computer, cell phone, Internet service, software and even some cool tech gadgetry are possible tax deductions if you must use them to run your business. Michael Carney, owner and president of MWC Accounting in Chicago, said expensive tech hardware can qualify if it is an asset that retains its value over several years. The taxpayer has a choice on how to deduct the costs of those items.
“You can depreciate them, spreading the deduction over the number of years the IRS considers to be the shelf-life for this item, or you can write the entire cost off for the year of purchase," Carney said.
"Your choice between the two depends on your projected income and other expenses going forward. If you had a big year and want to reduce your profits to minimize the tax bite, it’s best to write the entire cost off."
Carney said this strategy means you will have less to deduct in the coming years.
Also, with most tech gadgets, you can claim a percentage of time that you used that device for business purposes. Most pros caution against claiming 100 percent.
“People will buy a computer and will use it exclusively for business,” said Illinois-based certified public accountant Neil Johnson—also known as "The Tax Dude"—“but, it might be a bit of red flag to the IRS to claim that. Most people will, at the very least, periodically check the news or their personal email account on their work laptop or desktop.”
Internet use and cell phone costs qualify too. “As far as Wi-Fi goes, when I am on a plane, I always buy the Internet package, because I am always working, and this is an expense that is easy to forget about come tax time," Johnson said. "As far as cable or satellite TV goes, it truly depends upon your profession. … If you’re in an ad agency, you can write that off for sure. If you work in construction, not so much. In the past, you would have to tally up the minutes you used (on cell phones) for personal versus business expenses. Now you can just write off a percentage of business use. Just do not say 100: That won’t fly.”
You may have some explaining to do if you claim a newer-generation tech-toy, such as an iPad, as a business expense. The experts say such devices tend to be viewed as perks rather than necessary business tools.
“The IRS’s standard for a legitimate deduction requires the item to be a usual, necessary, customary and reasonable expense for your type of work,” Carney said. “So, an iPad will most likely be viewed more as a legitimate deduction for a computer consultant than for someone who works on an assembly line.”
If you plan to take a tech deduction, Carney's No. 1 tip is that you keep good books all year.
"It makes your life so much easier when it comes to tax time," he said. "Keep reasons for purchasing things, where you traveled (and) why. Tech helps there, too: Use your cell-phone calendar or track the data in an Excel program. It absolutely should not produce angst."
Carney says you have to remember the bottom line with the IRS is any item or expense you write off has to make sense with your business.
John Topham, a CPA and founding partner of Damon, Topham & Co. in Boston, agrees with Carney's suggestion.
“It’s all about documentation, which means receipts, canceled checks, invoices and other backup," he said. "These are employee business expenses, which fall under the IRS contemporaneous records requirement.”
What does this mean to you? It means you must keep a log of activity, including date, business purpose or task, and the time spent on that task, Topham said. If you log 1,200 hours on a computer in a year, and 400 of them are business-related, one-third of the related expenses are deductible that year.
"If the expense is clearly business-related, such as industry-specific, a log is not necessary," Topham said. He said you should not deduct clearly personal expenses like gaming systems.
While personal computers for family use are not deductible, college students filing income taxes may qualify for the Lifetime Learning Credit, the Hope Scholarship Credit, or the American Opportunity Tax Credit. The student's personal computer may be deductible if her college or university includes the use of its computers in the cost of tuition, or bills students for computer software that students cannot obtain elsewhere.
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John Topham, founding partner of Damon, Topham & Co. of Boston, points out that employees who receive a Form W-2 report their business expenses on Form 2106. The reported expenses are subject to a 2 percent adjusted gross income limitation. This means if your adjusted gross income is $100,000, the limit or floor is $2,000. You would need $2,001 in expenses to deduct the first $1 in expense.
“To be deductible these must be an ordinary and necessary (expense) and paid or incurred in carrying out required employment activities and duties," Topham said. "Key deductions would be auto and travel, meals and entertainment and miscellaneous employee business expenses."
Miscellaneous employee business expenses, Topham noted, would "high-tech" items.
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