How to Write Off Tools You Use for Work
Individuals who rely on an array of tools to perform their daily tasks may wonder, "Can you write off tools for work?". Tools used in your line of work may be tax-deductible, but there are some requirements that need to be met. In order to write off tools on your taxes, it is important to understand what types of tools qualify for deduction and how much you can deduct for each item to reduce your tax payments.
Who Can Write Off Tools for Work?
The ability to write off tools as work-related expenses is a valuable benefit. Here's a breakdown of who can benefit from this tax advantage:
Self-Employed Professionals. If you're a self-employed individual, such as an independent contractor or freelancer, you can generally deduct tools and equipment used in your trade or business. This applies to a wide range of self-employed workers, including electricians and auto mechanics, as their tools are considered essential for performing their jobs efficiently and effectively.
Small Business Owners. Small business owners, including those who run auto repair shops or electrical service companies, can write off tools as part of their business expenses. Since these tools are integral to their daily operations, they're eligible for tax deductions.
Who Can't Write Off Tools for Work?
Conventional employees can no longer claim unreimbursed employee expenses, e.g. tools, on their tax returns. The opportunity to claim such expenses as miscellaneous deductions, subject to a 2% of Adjusted Gross Income threshold, came to an end in 2018 following the implementation of the Tax Cuts and Jobs Act of 2017 (TCJA).
We suggest the most prudent course of action for an employee is to engage in discussions with their employer to secure reimbursement for their job-related expenses, e.g. tool expenditures. In some cases, reimbursement for employee business expenses, such as necessary tools, won’t be counted as taxable income.
Criteria to Deduct Tools as a Business Expense
To qualify as a tax deduction, the expense must meet the following criteria set by the Internal Revenue Service (IRS).
1. Ordinary and Necessary
For a tool to qualify as tax-deductible, the IRS states it must be ordinary and necessary for your business. "Ordinary" signifies that the expense is common and widely accepted in your industry, while "necessary" implies that the expense is helpful and appropriate for your trade or profession.
The tools you intend to deduct must be required for your work and should play a vital role in completing your job safely and efficiently. For example, electricians cannot perform their tasks without basic tools like wire cutters, voltage testers, and pliers. Mechanics also require specific tools in order to perform car repairs.
2. Exclusively for Work
The IRS distinguishes between tools exclusively used for work and those suitable for personal use. Tools that can be used for purposes other than work might not qualify. For instance, an engine hoist used in a professional garage is not typically used for personal tasks.
The Process of Claiming Tool Deductions
Claiming tool deductions is a systematic process that involves meticulous record-keeping and adherence to IRS guidelines. These steps will help you navigate this process effectively.
Clear Boundary Between Work and Personal Use. To make the most of these deductions, it's essential to maintain a clear line between work-related tools and personal tools. Mixing personal and business use can complicate the deduction process.
Keep Detailed Records. Accurate record-keeping is paramount. Save receipts, invoices, and any other documentation that proves the cost of the tools. Well-organized records will make the deduction process much smoother at tax time.
Short Lifespan Tools. Any tool with a lifespan of less than one year can be deducted as a business expense from your taxable income during the year it was put into service.
Understand Depreciation. Tools and equipment with a lifespan longer than one year are considered assets and a depreciation election will need to be taken. Since depreciation is a complex subject, it's always wise to consult with a tax professional who specializes in small business accounting.
Complete Form 4562 and Schedule C. As a self-employed individual or business owner, you'll need to fill out Form 4562: Depreciation and Amortization when you are seeking a depreciation deduction or electing Section 179 in any tax year. The figure from Form 4562 is then used on Schedule C to report the depreciation.
Important note: Maintaining records of all the Form 4562s you've filed is of utmost importance because it enables you to monitor previous deductions and accurately report them in subsequent tax years. This record-keeping ensures your tax filings remain precise and compliant with IRS regulations.Seek Professional Guidance. Tax laws and regulations can be complex. Consulting a tax professional with expertise in accounting for electricians or accounting for auto repair shops can help you make the most of every available deduction you're entitled to while ensuring compliance with tax laws.
Navigating Depreciation: A Key Consideration
The IRS states that tools designed for extended use should be considered assets subject to gradual expensing over their useful life. This implies that you can't instantly deduct the entire cost, as you might with regular supplies. This typically applies to significant machinery, such as automobile lifts for auto repair shops.
Nonetheless, some regulations offer opportunities for accelerating depreciation for specific long-lived tools you put into service.
De Minimis Safe Harbor Election
The IRS has established a de minimis safe harbor election, allowing eligible businesses to deduct tool expenses as long as they do not exceed $2,500 for each tool. This provision encompasses many tools commonly used by electricians and mechanics, including drills, testers, torque wrenches, impact drivers, and curbside jacks.
Example: Self-Employed Electrician
Sally, a self-employed electrician, provides electrical services to residential and commercial clients in Jacksonville, Florida. This year, Sally realized she needed to invest in several new tools to enhance her work efficiency and meet her clients' growing demands. She purchased the following:
Digital multimeter for $150
Power drill for $120
Wire strippers for $50
Tool bag for $80
Sally plans to deduct these tool expenses using the de minimis safe harbor election. The tools she purchased are essential for her electrical business and they qualify because each tool cost less than $2,500. By using the de minimis safe harbor election, Sally can write off the entire $400 cost of the tools in the tax year she put them into service.
Bonus Depreciation
Bonus depreciation, which saw changes under the TCJA 2017, currently allows for the accelerated depreciation of specific assets placed in service. During 2023, you can depreciate certain assets at a rate of 80% in the first year of their use by completing Form 4562. However, this rate is set to decrease by 20% annually until it eventually phases out after 2026.
It's essential to note that not all states currently adhere to bonus depreciation rules, and Florida is one of the states that does not conform. This may result in using different depreciation methods for federal and state taxes.
Section 179 Provisions
Section 179 grants businesses the ability to deduct the entire cost of select "tangible property," including machinery and equipment, in the tax year it's put into service.
Understanding these depreciation elections is vital to optimize your financial resources. By staying informed and making informed choices with the help of a tax expert, you can maximize your tax benefits and ensure your business remains financially sound.
Things to Keep in Mind Beyond Tools
It is wise to consult with a tax professional so that you understand all the valuable tax deductions for independent contractors and small business owners for which you are eligible. You can generally deduct business expenses such as:
Vehicle Expenses. If you use a vehicle for business purposes, you can deduct expenses related to its operation.
Home Office Deduction. If you operate your business from a home office, you may be eligible for a home office space deduction.
Business Use of Cell Phones. If you use your personal cell phone for business purposes, you can deduct a portion of your cell phone expenses.
Travel Expenses. If your work requires travel, expenses such as accommodation, meals, and transportation may qualify for deductions.
Professional and Legal Fees. Expenses related to hiring professionals such as lawyers, accountants, or business consultants are typically deductible.
Retirement Contributions. Small business owners can often deduct contributions to retirement plans, providing both a tax benefit and a path to future financial security.
Maximizing Deductions = Minimizing Tax Liability
Deducting tools used for work is not just a tax benefit, it's a smart financial move. Self-employed individuals and business owners can reduce their taxable income, lower their tax liability, and improve their cash flow by claiming tool deductions.
Remember to maintain detailed records, understand the criteria for deductible tools, and seek professional guidance when navigating the intricate world of tax deductions. By doing so, you'll ensure that you make the most of available deductions and remain IRS compliant.
