Tax Considerations for Technology Purchases
By Eric E. Santa María
Many businesses and consumers often look to buy the top tech gadgets and electronics equipment to take advantage of sales and discounted prices during the holiday season. Depending on the use of these electronics, purchases made before end of year may be eligible for a direct tax write-off. There are a several considerations that businesses and consumers should keep in mind.
- The Internal Revenue Service does not allow tax deductions of personal, living, and family expenses.
Accordingly, it is important that purchases of electronics and tech gadgets be both ordinary and necessary for a business purpose to be tax deductible. An ordinary business expense is one that is common and accepted in your trade or business. A necessary expense is one that is helpful and appropriate for the business.
- Televisions, laptops, desktop computers, printers, iPads, smart phones and other tech gadgets. The Internal Revenue Service classifies most of these electronics in asset class 00.12 subject to a 5 year depreciation recovery period.
- Tax write-off now or spread over five years. Tech equipment purchases can be deducted immediately or spread over the depreciation recovery period. In 2017 businesses can take Internal Revenue Service Section §179 to expense (i.e. deduct immediately) the entire cost of the equipment to a maximum of $510,000 for the first $2,030,000 million of equipment placed in service by December 31, 2017. Businesses can also take advantage of the Section §179 expense immediately for “off-the-shelf” software. If 2017 has been good year and the goal is to minimize tax liability before end of year, the Internal Revenue Service §179 is ideal. If a business had a difficult year, they may elect to spread the depreciation deduction over the five-year recovery period.
- Listed Property. The Internal Revenue Service classifies electronics such as iPads, computers, tablets, and smart phones under a special classification for tax purposes called Listed Property because they all lend themselves for both business and personal use. It is important to track the usage of Listed Property by keeping a log of personal and business use. The Internal Revenue Service will request written documentation to substantiate business deductions. If business use is less than 50 percent, Internal Revenue Service Section §179 will not be allowed.
- De Minimis Safe Habor Election. Certain electronics, tools, and supplies determined to have a useful life of 12 months or less are eligible to be directly expensed up to $2,500/per invoice per the final tangible property regulations. This includes some electronics that were previously required to be capitalized or expensed under Section §179 tax regulations or depreciated. Eligible businesses may qualify to expense up to $5,000 per item. The De Minimus Safe Harbor election, which is filed annually with the business tax return, simplifies record keeping and allows for more current year deductions of many gadgets and supplies that historically had to be capitalized. Businesses must however, have an accounting policy in place consistent with such treatment.
- Employees can use electronics to work from home. Consumers working from home for their employers may also be able to deduct a portion of qualifying electronic purchases as employee unreimbursed business expenses on their personal tax returns. Employee unreimbursed expenses are reported on Form 2106, and deducted on the individual’s Schedule A with other itemized deductions subject to a 2% limitation on adjusted gross income. This means that only the portion of the unreimbursed business expenses above 2 percent of the individual’s adjusted gross income will be included as an itemized deduction. If the individual does not itemize, no deduction can be taken.
Eric E. Santa María, CPA/ABV/CFF, CAA, is a partner specializing in accounting, tax, and litigation support services at Verdeja De Armas Trujillo LLP in Coral Gables.
December 11 - 2017