Your computers, your cell phone, Internet services, Web hosting–your business depends on technology to run, so at tax time it’s natural to want to deduct all your tech expenditures.
If you do your own taxes, even good tax-prep software (desktop or Web-based) can’t make all the decisions for you (although it should save you from serious math errors). We talked to some accountants about key issues to consider when filling out this year’s forms, as well as when planning for next year.
PCs, printers, and other expensive tech hardware are considered assets that retain value over several years, but the IRS gives you a choice on how to deduct their costs. You can either depreciate them, meaning that you spread the deduction over the number of years the IRS considers to be the useful life of the item (this may not agree with your opinion), or you can write the entire cost off in one fell swoop as a Section 179 deduction.
To demonstrate that you are spending at least some money on a phone for personal use. For example, If you have a cell phone and a landline, you might be able to write off all of the cell phone and part of the landline. Similarly, if you have four computers in your home and also have a spouse and kids, the IRS is not going to believe that all of those computers are exclusively used for business. Better to designate at least one or two for family use and not try to deduct them as business assets.
A variation of this issue arises when you seek to deduct the costs of expensive gadgets that the IRS might view as perks or toys as opposed to necessary business tools (an iPad might be an example of this). Again, recognize that if you’re buying cutting-edge technology, superfast tech items, the smaller the business, the closer you are to having a personal benefit–and the more likely the IRS is to challenge the expense.
Ask yourself if the item meets the IRS’s standards for a legitimate deduction, which are that it should be a usual, necessary, customary, and reasonable expense for your type of business. A computer consultant, for example, might reasonably write off more high-end computer and smartphone purchases than, say, a machinist.
Small businesses should consider creating a technology-purchase policy document. Written guidelines are useful if the IRS is questioning whether, for example, you replace laptops every year for business reasons or as a perk.
The IRS doesn’t really care how you categorize business expenses, so you can list Internet access as either an office expense or a utility (like a telephone). But again, if you work at home–especially if you have a spouse or kids who go online–you can’t expect to get away with deducting the full cost of your DSL or cable service as a business expense.
As for Web hosting, you can certainly deduct the cost of a business site, either as advertising or an office expense or a miscellaneous expense. You should also deduct the cost of your mobile data plan, especially if you have landline Internet access.