The nuances of writing a new laptop off as a tax expense.
January 29, 2013 7:36 PM   Subscribe

If I quit my job in April and start working on my own projects, can I buy a new laptop in July and write it off as a work expense on my taxes, even though I might not actually make any money from my projects until next year?

I know you're not my lawyer, and I won't take any of your advice without further consultation, but any insight at all would be appreciated.

I'm thinking of quitting my job in April and working on a few of my side projects full-time. I'd like to get a new laptop for this purpose (as well as for personal use, roughly half-and-half), but it's likely that the models I'm looking at will get an update around the middle of the year, so I don't want to waste my money now. However, it's possible that I won't actually make any money from my projects until next year.

When you deduct something from your taxes as a work expense, is it deducted only from those taxes related to the work in question, or are all your taxes taken into consideration? My issue is that I'll be deducting the laptop as a work expense after I quit my current job, meaning that if I only get to expense the cost from the relevant work income, I might not be able to do it if I have no income from my projects. On the other hand, if it doesn't matter, I can deduct the cost of my laptop from the four months of income I'll have from my current job.

Also, do I have to have an LLC or something to qualify for work expense deductions? I was planning to just work on the projects without any bureaucratic complications.

Thank you for your advice!
posted by anonymous to Work & Money (11 answers total) 3 users marked this as a favorite
It is deducted from all your taxes, so yeah, you can do that. It's not abnormal for a business to run at a loss during its first year or so, and it's legitimate to deduct that. However if your business consistently runs a loss year after year the IRS might come inquire as to whether you are running a legitimate business.

An LLC is not directly related to the tax structure of your business. You do not need one to claim expenses. The kind of structure you're referring to as wanting is a "sole proprietorship", where your SSN is basically used to identify the business (instead of getting a separate EIN) and you file all the business's income and loss as part of your own tax return, on schedule C.
posted by phoenixy at 7:48 PM on January 29, 2013

IIRC, the number of years you can run at a loss is 3 years...deduct away :)
posted by sexyrobot at 8:15 PM on January 29, 2013

When I buy large machines or computer stuff, the CPA tells me that it can be deducted, but only in 5 or 7 year increments.

For things that are mixed-use, we figure out the percentage of use and then spread that out over the span allowed.

So my understanding is that you can't deduct $1200 outright the first year you buy the laptop, but a specific percentage of that over a number of years. Talk to a CPA.
posted by Tchad at 9:04 PM on January 29, 2013

What Tchad is talking about is depreciation. However, Section 179 of the tax code allows you to take certain items that would normally be depreciated and treat them as expenses.

So, to actually answer your question, unless you're unusual, you can take the full price of the laptop as a deduction and you can use it against your entire tax bill.

I’m not an accountant. I’m not a lawyer. There’s a good chance I don’t know what I'm talking about, although this is the way I handle my expenses as a freelancer.
posted by danielparks at 9:30 PM on January 29, 2013 [1 favorite]

The majority of the advice about deductions thus far is wrong. Please don't take tax advice from Wikipedia or sources who cite Wikipedia. (Sorry danielparks, I truly mean no offense.) From your description, this would not be a legit Sec. 179 deduction.

I don't think you need a CPA right away -- because this isn't that complicated -- but a book about small business tax issues would help you sort it out on your own. Good luck with the business.
posted by stowaway at 10:13 PM on January 29, 2013 [1 favorite]

In general: you can get some credit for non-inventory purchases in furtherance of your business activities. The fact that said business activities may not be profitable is irrelevant: as long as you're trying to make money, in good faith, it counts.

In particular: whether this purchase should be deducted as a business expense or depreciated over a period of a few years is something you're going to need to discuss with a CPA.

Bonus: you do not need a business entity such as an LLC to qualify for business deductions/depreciation. But you may find that (1) having an LLC may be useful for liability purposes, and (2) even if you don't create an LLC, getting a separate EIN for your business activities is helpful for the purposes of accounting clarity. Again, consult with a CPA.
posted by valkyryn at 3:16 AM on January 30, 2013

stowaway is of course correct, Wikipedia shouldn’t be relied on for tax information — though in this case the information is slightly more up-to-date than the relevant IRS publication.

You can read more about depreciation in IRS Publication 946, How To Depreciate Property. The general overview in chapter 1 isn’t too bad, and Section 179 is covered in chapter 2. Unfortunately, this is the 2011 version; the 2012 and 2013 versions don’t seem to be out, yet.

To answer your question about whether you can deduct from your entire income, note that under that under the business income limit section in chapter 2 it says that you can’t deduct more than your taxable income that year, and then says, “In general, figure taxable income for this purpose by totaling the net income and losses from all trades and businesses you actively conducted during the year. Net income or loss from a trade or business includes the following items. … Wages, salaries, tips, or other pay earned as an employee.”

One big caveat that I should have mentioned before: you can only deduct business expenses, so if you use your laptop 50% work and 50% personal, you can only deduct 50% of that expense. Further, section 179 requires that property claimed under it must more than 50% for business purposes. See property acquired for business use in chapter 2.

So, it seems that if you use your new laptop for more than 50% business use, you can deduct that percentage of the cost under Section 179, and that can be applied to your entire taxable income for the year, including your wages.

Again, this is just my understanding.

Also, to reiterate what everybody else said, the NOLO books I looked at were great.
posted by danielparks at 7:11 AM on January 30, 2013

1. Yes, you can deduct your laptop using Sec. 179 if you use it for at least 50% business purposes. You can only deduct the percentage of cost equal to the percentage of business use. You can also deduct software you use in your business, again, by percentage of business use.

2. You can only take a 179 deduction up to the amount of net business income. You can't take a deduction against your regular wages not associated with your business.

3. If you have left over deduction because of business income limits, you can carry over the deduction to next year when presumably you will have business income to deduct against.

4. You do not need an LLC to take business deductions.
posted by JackFlash at 8:43 AM on January 30, 2013 [1 favorite]

Of course, all this is moot if the laptop combined with all of your other business expenses (and other deductions) doesn't add up to more than the standard deduction, which is $6,100 in 2013 for singles, $8,950 for head of household, and $12,200 for married filing jointly.
posted by ultraviolet catastrophe at 9:41 AM on January 30, 2013

Of course, all this is moot if the laptop combined with all of your other business expenses (and other deductions) doesn't add up to more than the standard deduction, which is $6,100 in 2013 for singles, $8,950 for head of household, and $12,200 for married filing jointly.

This is not correct. You are talking about Schedule A deductions, which are an alternative to the standard deduction. Business deductions are separate and, in this case, come from Schedule C. Business deductions are especially valuable because they reduce your self-employment tax in addition to income tax.
posted by JackFlash at 10:42 AM on January 30, 2013 [2 favorites]

Good to know, thanks.
posted by ultraviolet catastrophe at 12:59 PM on January 30, 2013

« Older Where can I download TT or T1 of public domain...   |   Keeping a toddler in bed: sharing a room edition Newer »
This thread is closed to new comments.