As accounting and tax experts, we encounter many situations where small businesses are confronted with complex Federal Income Tax issues in regards to both business and personal use assets. (These are known as dual-use assets).
First of all, what exactly are dual-use assets? Simply put, they are any property that is used at least part of the time in your small business and part of the time for personal use or enjoyment. By “property” we mean any of a variety of items used in your small. These can include computers and all manner of electronic devices and motor vehicles. They can even a portion of your own home. When we talk about computers we include consider software.
We will discuss the tax treatment of dual-use computers and software first because they create additional complications. Then we will talk about the tax treatment of vehicles and homes. These can also can be quite complicated.
Taxation of Dual-Use Computers and Software
The taxation of dual-use computers and software for small businesses presents additional complications. Fortunately, as tax and accounting experts, we can help you navigate this complex area.
The main complication is the question of whether the costs of the computer or other electronic equipment can be deducted from your small business income fully in the year in which it was purchased. Alternatively, it may have to be amortized over a period of several years.
Next, you must determine the percentage of time the item is used for business use and personal use. Your small business needs to keep an accurate record of the use of the property. This record must stand up to IRS scrutiny if your small business is audited. One simple method is to create two screen names: one for business and one for personal use.
The Internal Revenue Code was changed fairly recently. Now the IRS will probably allow you to deduct the full cost in the first year rather than amortizing it. We say “probably” because there are limits. You generally cannot deduct more than $1 million per year. Your small business must have made sufficient income to offset the deduction. Finally, the property must be used more than half the time for business purposes.
Here’s a simple example. Your small business buys a computer for $1,000 in 2020. You use it 70% of the time for business. You also have a personal email and Facebook accounts that you use during the other 30% of your computer’s use. Assuming all the conditions we described above are met, you can deduct $700 from your small business income for Federal Income Taxes for the 2020 tax year.
Dual-Use Motor Vehicles
Motor vehicles can present a variety of issues for small businesses. A pickup truck or panel wagon that is used exclusively for business is a simple case. But there are many other complicated situations.
One example is a car that is used to drive from work to your client but is also used as the business owner’s personal vehicle. Another is a car that is partially used for work and its mileage is billed to clients. You can imagine many other combinations.
As accounting and tax experts we can walk you through them. Fortunately, there are a number of software programs that allow you and your employees to record all varieties of automobile use. These programs are in a format that we can easily use to determine what portion of your car’s mileage is deductible against your small business income. By the way, for 2019 the deduction is 58 cents a mile, whether the vehicle is a car, van, pickup, or panel truck.
Dual-Use of the Family Home
It is very common for small businesses to operate all or partially out of a family home. However, deducting a portion of a home as a business expense can raise a red flag with the IRS. Thus, it is very important to keep very careful records.
Let’s use a fairly simple example. You run your family business out of your home. Your home has 2,000 square feet of living space and your home office is 200 square feet. So you can calculate that you are using 10% of your home for business. That means that 10% of virtually all home expenses are deductible. This requires careful record keeping on your part.
As you can see, when your small business has a property that is used for both business and personal use there are a number of tax and accounting issues that need to be addressed carefully. As accounting and tax experts we can help you with these issues.
If you’d like to learn more about tax laws and your business, we at Akif CPA are here to help. Learn about our services here.
Do you have unique issues or concerns not discussed in this blog then please contact us by email or phone. We are here to help.
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