Taxes: Equipment Expenses

[Pete Cofrancesco]

Can someone explain the proper method to deduct equipment expenses? I think I've been doing it wrong. When I buy anything business related, I save the receipt and claim the cost in schedule C. If I ever sell the item then I report it as income. I've learned from a friend I should use depreciation. So if I bought a $5,000 camera I would deduct a certain amount off each year until all of the value has been deducted. But that raises a lot of questions:

1. How do you know how much to deduct each year or does it matter?

2. If you sell it how is the money reported?
What do you do if the sale price is either more or less than the amount you have depreciated it?

3. How do you handle small to medium purchases?
Lets say you buy $10 extension cord are you going go to the trouble of depreciating it? What about a computer hard drive $60. What is the threshold for equipment purchases?

[Chris Barcellos]

I am not a tax accounting expert, but I slept at a Holiday Inn last night, so take this with a grain of salt.....

In equipment puchases, you do not claim as an expense. Traditional tax treatment is to deduct the annualized depreciation of the item, over its expected life. Then when it is sold, or disposed of any recapture of the deducted amount or additional cost would be calculated. However, years ago, to help spur the economy, Congress enacted a way of expensing of all the current price of an item. This was called a a 179 deduction method. Over the years, the amount of purchases that could be deducted was increased dramatically. I seem to remember something saying that it was in the million dollar area now, so it shouldn't be an issue to most of us. The idea is that you can deduct 100% of the purchase price of your item. If there is a residual value at the end of life, or when the item goes out of service, you would have to recalculate, and recapture a portion of the deducted amount.

So technically, you may have been on point, but the question remains did you declare in properly in your tax documentation. If you use tax preparation software, most equipment should be expensed through the depreciation portion of the software, in which you will eventually be given the choice to expense the entire amount through the 179 deduction.

There are also other requirement to follow in depreciation analysis. There is always the question of "listed property".... ie., property that the IRS knows has double uses, like cameras, monitors, computers, etc. In those situation you have to state percentage of business use, as part of the analysis. I know it raises flags with the IRS.

And yes, technically, an extension cord would probably be considered equipment, as a opposed to an expense item.

[Pete Cofrancesco]

I don't think it was listed on the proper form. I didn't pay attention to what forms my online software was plugging my answers into. I skipped over the depreciation section and listed it in a custom expense category called equipment. I can't go back and change how expense were filed in previous years but I'd like to do it the accepted way going forward so I don't get flagged for an audit.

There are many things they are in between equipment and supplies. Take for example memory cards for tapes camera. Are they equipment or supply?

[Gabe Strong]

I have ALWAYS used the section 179 to write off the entire purchase
price of gear. It just makes it easier for me. I have a hard
enough time doing my taxes (as I do them myself). If I had to
go back 10 YEARS and keep track of expenses that I had back then, and
calculate depreciation percentages.....I shudder to think of it.
I just save receipts of business equipment, write them off as a
section 179 expense, and be done with it!

[Steve House]

I hate to say it, but questions such as these are why anyone in business MUST have an accountant. Don't even think of trying DIY on this stuff.

[Chris Barcellos]

Originally Posted by Gabe Strong

I have ALWAYS used the section 179 to write off the entire purchase
price of gear. It just makes it easier for me. I have a hard
enough time doing my taxes (as I do them myself). If I had to
go back 10 YEARS and keep track of expenses that I had back then, and
calculate depreciation percentages.....I shudder to think of it.
I just save receipts of business equipment, write them off as a
section 179 expense, and be done with it!

Nice thing about most tax software you buy each year is it will carry everything forward automatically, as long as you keep the previous years file to load into the new year.

Check this article out on recapture issue when you use section 179 deduction:

SUV Tax Deduction - Section 179 Pitfalls

[Shawn D. Caple]

Originally Posted by Steve House

I hate to say it, but questions such as these are why anyone in business MUST have an accountant. Don't even think of trying DIY on this stuff.

Amen to that Steve. I've used my account for years and now that I'm freelancing and trying to start a business, I could not live without his "accounting skills" if you know what I mean.

[Don Bloom]

I have to agree with Steve on this. when one has their own business, be it a brick and mortar or working from the spare bedroom of your apartment or house there are tax implications to everything. I speaking of in the USA as I do not know about other countries.
The absolute best advice I got, back in 1971 when I first go into freelance photography and work as an independent contractor (not a well used term back then), was this "get a good lawyer and a great accountant". Best advice ever. What ever I have paid my accountants over the years I have either gotten it back or at least saved that and more by using them. Do not be penny wise and dollar foolish, get a good accountant. Remember it's only expensive if it doesn't work. (True of products and or services)

Just my $.03 worth (adjusted for inflation and $4.27 per gallon gas)

O|O
\--/

[Shaun Roemich]

Originally Posted by Don Bloom

What ever I have paid my accountants over the years I have either gotten it back or at least saved that and more by using them. Do not be penny wise and dollar foolish, get a good accountant.

I'll echo what Steve and Don have said...

Having an accountant is NOT optional, unless you ARE an accountant.

My accountant has saved me MANY thousands of dollars at a cost of about $800 a year. And I do LITTLE to prepare except split my receipts into broad categories.

Thus endeth the sermon.

[Don Bloom]

Hey Shaun, good to "see" you again.
Wow you're a nice guy, I give my acountant a shoebox or big envelope filled with receipts. Maybe he'd charge me less if I seperated them.

O|O
\--/

[Gabe Strong]

Originally Posted by Chris Barcellos

Nice thing about most tax software you buy each year is it will carry everything forward automatically, as long as you keep the previous years file to load into the new year.

Check this article out on recapture issue when you use section 179 deduction:

SUV Tax Deduction - Section 179 Pitfalls

Yeah, well, the nice thing for me is that I almost NEVER use my business
gear for personal use. If I buy a video camera or steadicam or
light kit, or edit software, or anything that I actually write off....
I use it for my business. Period, end of discussion. So for ME, the
section 179 expense works. For many others, it may not. I try
and really keep my business and personal stuff separate.....I have
a 'handycam' camcorder for shooting the kids and such that I do NOT
write off as a business expense, even though I do use it for my
business sometimes......but because I also use it for personal use,
I did not count it as a business expense.

However, I have noticed that you are exactly right. My tax software does
exactly what you are talking about which is AMAZING. However, there
are a couple state law reasons that still benefit me to use a section 179
expense. For example, 'depreciation' is NOT considered a legitimate
business expense by certain departments in my state when figuring out my
total business income. Don't ask me why, as they could not explain it to me,
but that's the way it is.