Owning a business has its perks. You get to make your own schedule and reap the benefits of your own hard work. You also get to use your phone, vehicle, and other personal equipment for business purposes. Or do you?
I’m Neil Fridman with the Fridman Law Firm. Today, I want to help you gain a better understanding of what you are and aren’t allowed to do with your personal equipment in your business when it comes to taxes. This is a tricky area that gets a lot of business owners in trouble with Uncle Sam. So let’s take a quick look at the three types of personal equipment most business owners hope they can use in their company.
1) Electronics
Can I use my personal phone and computer for my business? This is a question we get asked every time we help a new business owner form a company. The answer is yes, but it isn’t necessarily straightforward.
Cell phone
When it comes to your personal phone, you have to carefully track both personal and business calls made from the device as it is an area that is closely scrutinized by the Internal revenue service. If at the end of the month 30% of your calls were business related, you can deduct 30% of your cell phone bill from your taxes. This is an area you want to keep a close eye on. You need to be able to support your deductions with very detailed phone records.
Computer usage
The IRS makes computer usage a bit more simple. Section 179 of the internal revenue code allows you to deduct the entire cost of the computer if you use it in your business more than 50% of the time in the year in which you buy it.
If you’re starting a new business and bring an old computer with you, you need to calculate the value of the device and only deduct the value of the percentage used for work purposes.
2) Home office space and furniture deduction
Another common question we get from new business owners who work from home is about the deduction of office space and furniture. Simply put, the IRS allows you to deduct $5 per square foot of home office space up to 1,500 square feet, as long as the home office is regularly and exclusively used for your business. The alternative is deducting the exact value of your expenses, but much like using your personal phone for work, this requires extensive tracking.
In addition to your home office space, the IRS allows you deduct $5,000 worth of office furniture for your new business, as long as it is strictly used for work. One thing to note here is that computers are included in this $5,000 limit.
3) Personal vehicle deduction
What about using your personal vehicle in your business? The good news is that you can use your personal vehicle for your business. The question is, which deduction method will you choose? The IRS allows you to use either the standard mileage rate or something that is called actual costs.
For the standard mileage rate, you simply multiply the annual rate, which is 56 cents per mile for 2021, by the total number of miles driven for your business. If you choose this method, keep in mind that it includes all costs, such as gas, repairs, tires, etc.
Choosing the actual cost method means that you track your vehicle’s total expenses for the year and deduct the percentage cost based on how many miles you drove for your business purposes. As an example, if your expenses were $6,000 and your total mileage was 10,000 miles with 9,000 of those miles being driven for work purposes, you’d be able to deduct $5,400 from your taxes.
Please keep in mind that you cannot alternate from a standard mileage rate to actual cost for your deduction each year. You must pick one or the other and cannot change until you get a new vehicle.
Can you write off a new vehicle?
Another question I’m frequently asked is whether you can write off a new vehicle as a business expense. The answer is yes. Under section 179 of the internal revenue code, you can write off the business use percentage of a vehicle purchased for your company up to $10,100. In other words, much like your phone, you must track your vehicle usage and you can only deduct the business usage on your taxes.
If you purchase a new vehicle and use it 50% of the time for your business, your deduction will be $5,050, that’s $10,100, multiplied by 0.5.
As you can see, there are many different things that can impact how much you pay in taxes each year in your business. Your goal as a business owner is to create the most profitable business possible, and a key component of that is how much you save on your taxes.