Whether you're just getting started, entering a period of growth, or looking to streamline processes, technology should be a critical component of your strategy. And if you're looking to purchase new technology for your business, it makes sense for you to strategically do so through the lens of tax deductibility. Fortunately, there are many ways — with proper planning through a tax planning professional — to invest in the future of your business while reducing tax liability. Let's take a closer look at the tax-deductible technology purchases you may be eligible to make. You should, however, always consult with your tax planning professional before making the purchase to ensure it applies to your business.
Research and Development (R&D) Credits and Deductions for Technology
Whether your business provides semiconductors, Software as a Service (SaaS), hardware components, or some other type of innovative technology, your growth and adoption is directly related to your investment in R&D. Because of this, several states, as well as the federal government, offer significant tax breaks to encourage innovation and stimulate the economy. In fact, you may be eligible to offset certain technology-related expenses associated with R&D against your organization's tax liability through the highly-coveted R&D tax credit.
For the most part, money your business spends on supplies, labor, and consultants associated with R&D qualifies for the federal credit. To qualify for this credit, the IRS has created a four-part test:
- The project must be designed to eliminate the uncertainty of a process or product.
- The project must involve a process of experimentation with either trial and error or steps like modeling and statistical analysis.
- The project must rely on hard sciences, such as computer science, biology, chemistry, physics, etc.
- The project must be designed to serve a business opportunity or need, such as generating better function, quality, performance, or reliability.
As one of the most valuable credits in your toolbox, it can even be applied to prior tax years or the current one. It's imperative to work with your small business tax accountant to determine if certain technology purchases qualify for the R&D tax credit.
100% Bonus Depreciation for Technology
The bonus depreciation is a tax incentive that allows your business to immediately deduct the cost associated with certain technology purchases. Similar to the R&D credit, this bonus depreciation is designed to grow the economy and inspire spending. This is one of the reasons the Tax Cuts and Jobs Act of 2017 bumped the first-year bonus depreciation to 100% from 50%. As such, you may be able to write off technology purchases.
What Technology Purchases Are Tax Deductible?
Most business owners are surprised to learn that many technology purchases are tax-deductible — whether standard depreciation or 100% bonus depreciation is claimed. Here are some of the most common types of technology purchases that are tax-deductible.
Computer Purchases May Be Tax-Deductible
For the most part, you can deduct the cost of new or used computers as well as computer peripheral equipment used for your business, such as:
- And more
If the computer or equipment is "used" it just has to be "new to you." Many businesses strategically purchase new computer equipment before year-end to claim the purchase as a tax deduction. You may want to consider replacing old computers that are more than four years old. According to a Microsoft study, continuing to use older business computers could cost your business up to $2,726 annually in downtime and lost productivity.
Software May Be Deductible
If a business software can't be claimed under R&D, it still may qualify for a deduction. To claim the software as a business deduction, it must be "off the shelf," which means it wasn't custom-designed for your organization. At the same time, software bought to host through a private cloud service or through an on-premises server may also be tax-deductible.
Office Technology May Be Deductible
Most of the technology used around your office may be deductible. As long as it's used in the course of business, you may be able to deduct the purchase. Examples include:
- Telephone systems
- Coffee makers
- And more.
Protecting your business isn't cheap. And many of the security technologies you purchase may be tax-deductible. This includes CCTV camera systems as well as cloud-based camera systems. Make sure to work with your CPA to understand which technologies are and aren't tax-deductible before purchasing.
As today's workforce becomes increasingly mobile, it's important to maximize purchases that are tax-deductible. Mobile phones, Blackberry devices, tablets, and more are all typically deductible as long as they are used for business.
Contact MB Group Today
Generally speaking, most technological solutions you purchase for your business are tax-deductible and may even apply for 100% depreciation. And some of the technology you've purchased may even qualify for the highly-coveted R&D tax credit. However, deciding what is and what isn't tax-deductible can be very confusing and challenging.
If you get it right, you can enjoy significant tax savings. On the other hand, getting it wrong could lead to audits and other legal implications. Fortunately, the experienced team of CPAs and accountants at the MB Group can help. We specialize in helping business owners navigate complex tax laws toward minimizing tax liability.
Contact the MB Group today.