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XOIIO's avatar

How does writing stuff off for a business work?

Asked by XOIIO (18328points) August 16th, 2013

So, I run a small business-ish operation where I repair computers, and go out on service calls and whatnot, although the name isn’t trademarked or registered or anything.

I find myself in need of a new desktop PC, my old xps 720 is getting old, is kind of unstable and can’t do as much as an i5 or i7 would be able to, even with a fairly expensive video card a lot of games and programs slow down because of the CPU, I especially notice this when rendering.

I was sort of wondering, would it be possible to build a PC and write off the cost somehow? I do use it for the business, running VMs and getting familiar with different operating systems, but I don’t know the start of dealing with this sort of thing, or if writing of a PC that cost ~2k would even work.

I am thinking of this because it would be pretty nice to be able to build a good gaming and multi purpose rig and do it for (from what I understand) free. I’m sure other people have thought of this before though and it could count as fraud, not sure the exact rules around it though.

Note that I am in Canada not the US, if that makes a difference.

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7 Answers

Tropical_Willie's avatar

In the U.S.
( I think ) you write off the value of computers over a four year period on time. 1/6 the first year and ⅓ for years Two and Three the last 1/6 is in the four year. Records for all pieces and components are required.

augustlan's avatar

In the US, you don’t get to buy (or build) a computer for free, you just get a tax break on the money you spend doing it. Depending on how much you spend, it could be considered an asset that you can claim depreciation on (which is what @Tropical_Willie is talking about), or it might be considered a flat business cost that you can use to reduce the profit you pay taxes on. Your best bet is to talk to an accountant.

SadieMartinPaul's avatar

“Your best bet is to talk to an accountant.”

I fully agree with @augustlan. I’m a CPA, but I don’t know Canadian tax law (except for the fact that every Canada Revenue Agency employee is fully bilingual – amazing).

CWOTUS's avatar

You should talk to an accountant or tax preparer for your jurisdiction, who can give you all of the relevant rules and information that you need.

Essentially, though, there are two ways to “write off” equipment.

The first, and most common, is “depreciation” of capital equipment used in the execution of your business. For example, you have a computer that you use – for business purposes! – let’s say for invoicing, your own accounting, even tax preparation, customer records, purchasing, all sorts of “business activities” (generally, you have to be prepared to show that the machine is used “for business only”, or claim only a part of it as business and the rest as personal – non-depreciable). But let’s say that you have a computer that you use 100% for business. Your rules may allow for “accelerated depreciation” of this equipment, because it’s recognized that computers “age” (from a utilitarian viewpoint) rather quickly. So perhaps you take 50% of the computer’s value as depreciation on your business tax return in the first year of ownership (or 50% of the value of the used machine, if that’s how you acquired it) in the first year after you purchased it or put it to use in your business. The next year’s depreciation might be an additional 30%, and the final year, say 20%. What that means is that after three years of ownership and use in your business you have written off the full value of the computer. That is, you have noted a negative hit on your earnings from the business as the value of the computer has decreased over time. (The flip side of this is that if you do sell the computer in the fourth year or any year after it is fully depreciated, you have to note the total sale price as income.)

The second way of writing off assets is via capital / catastrophic loss. That is, equipment and goods that are lost in fire or flood or through theft, vandalism, embezzlement, etc. I have no advice for you on this; it’s something that varies so much (from jurisdiction to jurisdiction, and sometimes even from year to year as tax codes change) that you really need to talk to a professional about how to document the loss (since you’ll have to prove your investment AND your loss). You might even be able to claim losses as a result of changing market conditions, but I’m much less certain of that.

For example, if you own a large inventory of iPhone 3s when the iPhone 4 is introduced, then your stock of brand-new equipment just got a lot less valuable if you had bought it not knowing about the introduction of the iPhone 4. So the items still have some value, and you can still sell them, but maybe for not even as much as you paid. In that case you will take a regular loss on the sale, which will, of course, be “written off” against profits you made in the business, assuming there were any. (And if there weren’t, and you ended up taking a loss for the year, then you could probably take the “carryover loss” to offset profits a year or two later – depending on the rules where you pay taxes.)

Of course all of this presupposes that you ARE filing a tax return that includes “business income”, and that the business has a profit motive AND does, in fact, turn a profit (I think in the US the general rule is “at least one year in three” must be profitable, otherwise it’s a hobby and none of this stuff is “depreciation”, it’s just hobby expense and has no bearing on taxes at all.

You need to know the rules for your tax jurisdiction and your business to make informed choices and file the correct tax returns.

Judi's avatar

When you write something off its not free. It just reduces the amount of income that you pay taxes on.
Some things can be expensed and all written off in one year and some things are capitalized. That means that you spend it all in one year but you take the deduction over the expected life of the item.
I know @CWOTUS said a lot of this but I just tried to simplify it.

cazzie's avatar

Every one is giving you very good advice here. If you want to start running your enterprise as a proper business and not just ‘business-ish’ then you need to start keeping track of your costs and income. Talk to a good small business accountant in your area. We used to give people a ‘one hour free look’ to see if we could help them and if we were going to be a good fit for them as an accountant. Just keep in mind, if you want to start claiming expenses and capital item investments (like equipment that is written off over time and not treated as an expense) you have to also claim your income. That means you need to generate invoices, receipts, perhaps a separate bank account…etc… It is a bit of a jump to take a ‘hobby’ that is ‘business-ish’ and ramp it up proper with book keeping and tax returns. Make sure it is going to be worth it.

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