Guest Blog: Tips For U.S. Freelancers and Clients On Writing Off Your Computer Equipment.e_darrellj | Jul 29, 2013
Occasionally we invite professionals to wax poetic about issues of importance to Elance clients and freelancers. Here are some thoughts from Graham Hunter, a big Elance fan and self-described Tax Nerd.
When tax time comes there are many challenges that face self-employed taxpayers. One of the biggest challenges is figuring out which expenses are allowable and how to get the most benefit from those write-offs. The number one rule for business expenses is that they must be ordinary, meaning that they are common and accepted, they must be necessary for developing and maintaining your business, and they must be reasonable. What defines reasonable expenses will vary depending on your profession. For the self-employed all these expenses are recorded on the Self Employment Schedule, the Schedule C.
A discussion about writing off business hardware and equipment must include a discussion about depreciation. Many business expenses such as office supplies and advertising expenses can be deducted outright on the Schedule C; however, there are some items which must be depreciated. Depreciation is the recovery of the value of a business asset over the life of the item (which is preset by the IRS). For example, computers are five year property, meaning that the cost of your new business computer is recovered over the five years after it is placed into service. Though there are some exceptions, most business property will fall into either the five year or seven year category. Depreciation is recorded on the form 4562, which must be attached to your return.
What's that? You don't want to wait five years to recover the cost of your computer? In that case, let's talk about section 179. Section 179 allows you to deduct the entire value of certain (and here's the catch) eligible property in the year it was placed into service rather than over the life of the property. In order to qualify for section 179 property must be eligible, it must have been acquired for business use, and it must have been acquired by purchase. The asset must also be used at least fifty percent for business. The decision to take the 179 deduction or depreciate over the life of the asset should be based on which method will benefit the business more; if you are just starting out, section 179 can help to free up more money to put back into the business right away; but if your business is growing, the deduction can help to lower the taxable income over the next few years.
There are a few things to watch out for when it comes to depreciation and section 179. First, equipment that is used less than fifty percent for business is listed property and is not eligible for the section 179 deduction. Second, there is a dollar limit for 179 deductions ($500,000 for tax years 2010-2013) so be mindful of approaching that limit and be aware that 179 deductions cannot be used to increase the amount of a business loss.
Depreciation can be a complex topic: The IRS publication on the topic is 114 pages long, and has more information than you could possibly want on the subject but making the right choices when it comes to writing off business equipment and hardware can make a big difference in your taxes.
Graham Hunter is a Tax Nerd at GoodApril