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I'm currently self-employed doing computer programming work. As part of self-employment I'm learning about filing taxes quarterly (not fun) and also writing things off as business expenses (potentially more fun).

Say I purchase a new iPad for the sole purpose of testing and developing apps for clients. I don't use this iPad for watching movies or reading non tech industry and development related news. So it's just for business purposes.

What are the ins/outs/gotchas of writing this purchase off as a business expense?

I've been saving my receipts but that's about all the preparation I'm doing. I'm wondering if there's a minimum amount of income one needs to earn in a year to qualify for writing off things as business expenses.

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    Where are you located? Tax law varies greatly from place to place. If you are in the United States, add a tag for the united-states to indicate whose tax law you are curious about. If you are from another country, add that countries tag. It helps us answer you better. – Alex B Oct 23 '12 at 21:42
  • @AlexB Good point. Country and state tags added. – SundayMonday Oct 24 '12 at 14:06
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Most items used in business have to be depreciated; you get to deduct a small fraction of the cost each year depending on the lifetime of the item as per IRS rules. That is, you cannot assume a one-year life for an electronic item even if it will be obsolete in three months. Some items can be expensed; you get to deduct the entire cost in the first year but then if you don't stay in business, e.g. you get a job paying wages and are no longer self-employed, you have to recapture this and pay taxes on the amount recaptured in the later year. With respect to consumer-type electronics such as an iPad or laptop, it helps to have a separate item for personal use that you can show in case of an audit.

  • Interesting. Makes me wonder if renting the iPad or a computer could perhaps be advantageous from a tax perspective. – SundayMonday Oct 24 '12 at 14:11
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    why? you still have the burden of proving business use. – JoeTaxpayer Oct 24 '12 at 18:56
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    @JoeTaxpayer Yes, the taxpayer still has the burden of proving business use, but suppose that a self-employed programmer claims that he uses his iPad/iPhone/laptop solely for business purposes and thus is entitled to claim 100% of the cost as a business expense. If the taxpayer does not have another similar item for personal use, he should pray that the auditor is so extraordinarily naive and gullible that the auditor will accept such a claim at face value. Having another similar item, maybe even a different brand or platform (e.g. Android), for personal use will mitigate some suspicion. – Dilip Sarwate Oct 24 '12 at 19:22
  • @JoeTaxpayer to clarify I'm wondering about renting computers, chairs etc and other capital items because maybe I can just write off the cost of renting them instead of dealing with the depreciation (since I don't own the items when I rent them). Also I'm not doing anything tricky where I have, say, an iPad that's used for both work and personal stuff. I'm talking about using my original iPad for personal stuff and buying an iPad 2 and 3 solely for app development. – SundayMonday Oct 25 '12 at 20:08
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    It has been a couple of years since I was self employed but as I remember there was always a special depreciation category (section 179) that allowed a small business to immediately deduct many items immediately up to a certain amount (~$25k). – stoj Oct 29 '12 at 0:46
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First of all, Dilip's answer explains well how the business deductions generally work. For most (big) expenses you depreciate it. However, in some cases you need to capitalize it, which is another accounting method. When you capitalize your expense, it becomes part of the basis of the product you're creating. Since you're an engineer, this might be relevant for you. Talk to your tax adviser.

How exactly you deduct/depreciate/capitalize things, and what expense goes which way depends greatly on the laws and jurisdictions. Even in the US, different states have different laws, and the IRS and State laws don't have to conform (unfortunately). For example, the limitations on Sec. 179 deduction in 2010-2011 were 20 times higher on Federal level than in the State of California. This could have lead to cases where you fully deducted your expense on your Federal tax return, but need to continue and depreciate it on your State return (or vice versa). Good tax adviser is crucial to avoid or manage these cases.

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Keep this rather corny acronym in mind. Business expenses must be CORN:

(C)ustomary
(O)rdinary
(R)easonable
(N)ecessary

As other posters have already pointed out, certain expenses that are capital items (computers, furniture, etc.) must be depreciated over several years, but you have a certain amount of capital items that you can write off in the current tax year.

  • What about renting the computer and chair? Assume they are used 100% for business purposes. Since I don't own them can I just write off the rental cost and not worry about the depreciation? – SundayMonday Oct 25 '12 at 20:11
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    Yes. Rent is usually fully deductable in the year it is paid. That's why many companies prefer leasing to owning (in addition to improved cash flow). But keep in mind that the cost of renting may be much more than the cost of owning an item outright (even if you borrow money to purchase it). – Tony the Pony Oct 25 '12 at 21:36
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    Renting computer will probably cost significantly more than buying it, so whatever tax benefit you're getting - you need to see if its worth it. – littleadv Oct 26 '12 at 18:05

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