Laptops and smartphones are usually among the first “big” purchases a company will make.
Smaller expenses such as electricity or phone bills are simple to deduct, but laptops and phones generally require a more complex accounting process.
This article is a short guide for business owners and accountants on how to properly deduct a laptop or phone for tax purposes.
If you’re new to this, we recommend you first read this short explanation n on capital expenses versus operating expenses, just to get a general idea of the accounting rules involved.
If you’re already familiar with these, scroll down to the section titled ” How a business can deduct a purchased laptop from its taxes”.
Operating expense or Capital expense?
When a business buys anything, from paper clips to a factory, it must decide how to classify that expense for accounting and tax purposes.
The most important distinction is to classify the purchase either as an Operating Expense (OpEx) or a Capital Expense (CapEx). This decision dictates how the cost of the purchase impacts the company’s financial statements and tax obligations.
Nearly every laptop and most smartphones are usually classified as a Capital Expense. Here’s why:
Operating Expense (OpEx): These are the day-to-day costs of running a business. They are consumed in the short term (typically within one year) and are fully deducted or “written off” in the year the expense is made.
This means the entire cost is deducted from revenue in that period, immediately reducing the business’s profit. Examples include electricity bills, marketing costs, salaries, office supplies etc.
So, if a business generates 1 million euro in revenue but 900,000 euros in operating expenses, its profit is 100,000 euros.
Capital Expense (CapEx): These are costly purchases of physical assets that will be used for more than one year. Instead of being fully deducted immediately, the asset is “capitalized.”
This means it’s recorded on the balance sheet as an asset, and its cost is gradually expensed over its useful life. This process is called depreciation.
For example, if a smartphone costs 1000 euros, the business can deduct just 500 euros from its taxes in the first year, and the remaining 500 euros in the second year.
Laptops and smartphones are classified as capital expenses because they provide value to the business for several years. As a result, their cost is deducted over multiple years.
NOTE: If your or your company isn’t interested in handling the accounting rules involved for deducting capital expenses, then you might be interested in our DaaS service at INKI.
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Depreciation
Since a laptop or a smartphone is usually classified as a capital expense, a business cannot deduct its full cost right away. Instead, the cost must be depreciated over time.
The process is simple:
Determine the Cost: This is the full purchase price of the laptop or smartphone, but it can also include any necessary accessories or software bought with it.
Estimate the Useful Life: The business determines a reasonable lifespan for the laptop or smartphone.
Accounting standards, laws or fiscal guidelines often provide clarification on how to determine the reasonable lifespan (typically 3-5 years for computer equipment).
Deduct the Cost Every Year: Let’s assume a business purchased a laptop that costs 2100 euros. You estimated its useful life to be 3 years.
This means the laptop can be depreciated over the course of 3 years. This means every year a business can deduct 2100 / 3, meaning 700 euros, from the company’s taxes.
Depreciation calendar and methods
When depreciating a capital expense, businesses must keep in mind two important aspects: the depreciation calendar, and what depreciation method must be applied.
Businesses operate on a fixed accounting period, which is most commonly a calendar year (Jan 1 – Dec 31) or a fiscal year (any 12-month period, e.g., Jul 1 – Jun 30).
In the European Union, a calendar year and a fiscal year usually (but not always) completely overlap, so January 1st to December 31st is the typical fiscal year for most businesses in the EU.
In the United States, the fiscal year starts on October 1st and ends on September 30th.
Depending on the purchased asset and fiscal rules, some expenses can only be claimed for the portion of the year that the business actually owned and used the asset.
For example, if a fiscal year ends on December 31 and a company buys a warehouse on October 1, it can only claim the depreciation expense for the last three months of the year (October, November, December). This is often called a pro-rata calculation.
Another important aspect is what method companies use to calculate the depreciation rate.
There are multiple depreciation methods, but the two most common ones are linear amortization and declining balance method.
Linear amortization: This is the simplest and most widely used method. You spread the cost evenly across the useful life.
Formula: Cost of asset / Years of useful life.
Example: A $1,500 laptop with a 3-year useful life would be expensed at $500 per year for 3 years.
Declining-Balance Method: This is an “accelerated” method where more of the asset’s cost is expensed in the earlier years and less in the later years.
This reflects the reality that assets are often more productive when they are new.
Example: For the same $1,500 laptop, the expense might be $750 in Year 1, $375 in Year 2, and $187.50 in Year 3.
Documents required to deduct a laptop or smartphone for tax purposes
To deduct a capital expense, businesses need to first have proper documentation for that expense.
Without proper documentation, tax authorities can disallow a deduction, leading to back taxes, penalties, and interest.
The foundational documentation for capital expenses include:
Proof of Purchase: The most important document. A detailed invoice is the preferred document, since it includes the seller’s and buyer’s details, a description of the item, the date, and the price.
A simple receipt may be acceptable for smaller purchases but often lacks the necessary detail for a significant asset and might be refused by tax authorities.
Proof of Ownership: To depreciate an asset, the business must own it. Typically, the proof of purchase can also function as a document that proves ownership.
Business Use Justification: The asset must be used by a business in a way that produces revenue.
Placed-in-Service Date: Depreciation does not begin on the purchase date, but on the date the asset is “placed in service”—that is, when it is ready and available for its intended use within the business.
This date is critical as it marks the official start of the depreciation calendar and must be documented.
How a US business can deduct a purchased laptop from its taxes
In the U.S., the primary determinant for capitalization is the “useful life” test. Any property with a useful life that extends “substantially beyond” the tax year must be capitalized and depreciated.
However, to ease the administrative burden of capitalizing numerous small purchases, the IRS provides a de minimis safe harbor election.
Under this provision, a business can establish a policy to expense certain items below a specific threshold.
If the business has an “applicable financial statement” (AFS), typically an audited financial statement, it can elect to expense items costing up to $2,500 per item. If it does not have an AFS, the threshold is $500 per item.
The Duo of Section 179 and Bonus Depreciation
Section 179 of the Internal Revenue Code allows companies to treat certain purchased assets as an immediate expense rather than a capital asset.
Qualifying Property: The deduction applies to tangible personal property, which includes machinery, equipment, and “off-the-shelf” computer software.
A critical requirement is that the property must be used more than 50% of the time for business purposes. Significantly, Section 179 is available for both new and used equipment, as long as the used equipment is “new to you”.
Annual Limits for 2024: The system is designed to benefit SMEs through specific dollar limits. For the 2024 tax year, a business can deduct a maximum of $1,220,000 under Section 179.
Bonus depreciation, also known as the additional first-year depreciation allowance under Section 168(k), provides another avenue for accelerated cost recovery. It is often taken after the Section 179 deduction has been applied.
For qualified property acquired after September 27, 2017, and placed in service in 2024, the bonus depreciation rate is 60% of the asset’s adjusted basis (the cost remaining after any Section 179 deduction). This rate is scheduled to phase down in subsequent years.
The allowance applies to property depreciated under MACRS with a recovery period of 20 years or less. This category explicitly includes computer equipment and software. Like Section 179, it is available for both new and used property.
A key strategic difference from Section 179 is that bonus depreciation is not limited by the business’s taxable income. A business can claim bonus depreciation even if it has a net loss for the year, and the deduction can be used to increase that net operating loss, which can then be carried forward to offset future profits.
The Default Pathway: MACRS Depreciation
If a business chooses not to elect Section 179 expensing, then the standard depreciation method is the Modified Accelerated Cost Recovery System (MACRS.
Under MACRS, different asset classes have their own depreciation period. Computers, peripheral equipment, and office machinery are classified as 5-year property.
MACRS prescribes the 200% declining balance method. This method allows for double the depreciation rate of the straight-line method in the early years.
Required documentation
All depreciation and expensing deductions in the U.S. are claimed and calculated on a single, dedicated form: IRS Form 4562, Depreciation and Amortization. This form must be attached to the business’s annual tax return.
