TIP #9: Deducting the Tools of the Trade

Generally, all businesses require tools for success. They range from construction tools to computers and printers. Uncle Sam lets you deduct equipment that you need for your business.

To make this expense election, the tools (such as computers) must be new to you. It doesn’t need to be new equipment - it just needs to be new to you.

Two Methods to Deduct Tools

Depreciation
Normally you get to write off a percentage of the cost each year over a specified time period. This is called depreciation and the IRS publishes rules for different types of equipment.

For example, IRS says that most hand tools can be written off over a 7-year period while computers and printers can be written off over 5 years.

Example
Assume you buy a new computer that you are going to use 100% for your business. The cost of the computer was $1,000. According to the IRS, if you deduct the cost you must do it over 5 years. So this means that you can deduct $1,000/5 years = $200 per year for each of the next 5 years.

Section 179 Deductions
One of the best depreciation options the IRS provides is the Section 179 deduction. You don’t need to know what the name of it means. All you need to know is that it allows you to write off 100% of equipment in the year you purchase it rather than over time.

There are limits to this deduction though and it changes every year. For example, in 2013 the limit is $500,000 per year but if congress doesn’t renew this limit it automatically drops all the way down to $25,000 for 2014.

Example
Let’s say you bought the same computer above for $1,000. If you use the 179 deductions then you can deduct $1,000 this year rather than the $200/year over 5 years. That means you get your cash savings earlier!

Also, you don’t need to pay cash for the equipment in order to write it off in one year. If the equipment is financed, you still get the deduction for the whole purchase price.

SANDY’S TIP
Off the shelf software and business applications for your smart phone such as Taxbot can be written off in the year that you pay for it. You don’t need to depreciate such items.

NOTE
If you plan on buying a considerable amount of equipment this year, there are other things you need to consider. Please talk to a competent accountant first.