Start a New Business? Here’s Your First Tax Deduction.

Matt Norris, CPA
February 12, 2020

When you decide to take the plunge into business ownership there are a few perks. You can say bye to your old boss, your morning commute, your dry-cleaning bill, and hello to a few new tax deductions.

Being an employee offers very limited opportunity to find tax deductions. Often times, the would-be deductible items are being reimbursed by your company. And the items that actually would be deductible rarely add up to the 2% AGI floor that you are required to meet. That is, if you even itemize (not likely in 2018).

Once you get out there on your own (and by that I mean, once you’re spending 14 hours a day buried in your home office) a world of new deductions open up for you. I’m going to focus on just one – and it’s free. Converting personal assets to business use.

That home office that you already have set up? The computer, the monitors, the desk, the chair. You bought these all with your personal credit card over the last few years. You didn’t get to deduct anything on your tax returns for these personal expenses, but now it’s time to finally reap the benefits.

Contributing these assets to your new business is very simple. You just start using them for business and tracking the business use. You will also need to do a little research to determine the fair market value of the property because that will be the basis for your depreciation deduction.

Let’s say you bought $2,500 of computer equipment and $1,500 of furniture to set up your office over the past few years. After looking on eBay you determine that you now have computer equipment valued at $1,500 and furniture valued at $700.

The IRS says that you cannot take Section 179 nor Bonus Depreciation on an asset that was not purchased in an arm’s length transaction for business use. Sorry, you cannot deduct the entire $3,200 in the first year. You also cannot use the favorable 200% declining balance MACRS depreciation table for similar reasons. You are left with the good old-fashioned straight-line method.

How to Calculate Your Deduction

You use your office computer equipment and furniture 100% for business now! You have another computer you use personally – and you’re definitely not sitting in that office longer than you have to be. The computer equipment will be depreciated over a 5-year period using a half year convention. The furniture will be depreciated over a 7-year period also using the half year convention. Here is how the deduction breaks down:

Pretty good for not having to spend any additional money! (my personal favorite type of deduction). Keep in mind that if you use the computer equipment or office furniture for less than 100% business use, you will need to prorate these amounts based on the business use percentage.

For more information about accounting and tax services that are perfect for your new business, please visit my website at www.MattTheCPA.com

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