Tax Rules for the Business Use of Your Personal Assets
Small business owners don’t just snap their fingers on day one and create a fully stocked office or a fleet of company vehicles. They must build their business from scratch, and that typically means using what you already have: personal assets.
Your laptop becomes your invoicing system. Or your cell phone doubles as your customer service line. Or your car turns into your delivery vehicle.
This kind of resourcefulness is smart, and it also creates a legitimate deduction opportunity. However, because these assets serve both your personal life and your business, the IRS requires you to carefully separate the two uses and document the separation.
The key word there? Carefully.
Get it right, and you can reduce your tax bill. Get it wrong, and you risk losing the deduction entirely … or worse, inviting extra scrutiny.
Business-Use Percentage
The IRS doesn’t let you deduct all of the cost of an asset when it’s used for business some of the time. You can only deduct the percentage of use of a personal asset that is directly tied to business activity. For instance: If you use your personal smartphone 60% of the time for client calls and business email, only 60% of your phone-related expenses (including your monthly bill and, in some cases, the cost of the phone itself) are deductible.
This business-use percentage applies across most categories of personal assets that can be used for business: vehicles, computers, phones, home internet service and more. The burden is on you to provide documentation that verifies that percentage, which is why documentation is just as important as the deduction itself.
Vehicles: Mileage Log or Actual Expenses
Vehicles are among the most common mixed-use assets, and the IRS offers two ways to calculate the deduction:
- Standard mileage rate: With this method, you deduct an amount per business mile driven that is set by the IRS and adjusted annually to account for the cost of owning a car. This method is simpler and requires less paperwork than the actual expense method. However, it requires you to keep a mileage log noting the date, destination, purpose and miles driven for each business trip.
- Actual expense method: You separately track deductible expenses such as gas, insurance, repairs and depreciation. This method often yields a larger deduction, particularly for newer or more expensive vehicles. But it demands more detailed recordkeeping, including receipts for every expense category.
Regardless of which calculation method you use, you must use your vehicle more than 50% of the time for business purposes to claim any deduction.
Computers and Phones: Depreciation and Direct Expenses
Personal computers and phones follow similar rules. However, the mechanics differ slightly depending on how the asset is classified and how it was acquired.
If you purchased the computer or phone specifically for business functions but also use it in a personal capacity, you can typically deduct the business-use percentage of the purchase price. This can occur through depreciation over the asset’s useful life, or in many cases, immediately through Section 179 expensing, which allows for the accelerated deduction of qualifying business property in the year it’s placed in service, subject to certain limitations.
Monthly service fees, such as your phone bill or home internet, follow the same business-use percentage logic.
The key requirement, again, is documentation. The IRS wants to see how you arrived at your business-use percentage. You typically establish this through call logs, calendar records, time-tracking software or a simple usage log kept over a representative period.
Your Home: The Augusta Rule
The Augusta Rule takes its name from Augusta, Georgia, home of golf’s Masters Tournament. Decades ago, local residents began renting out their homes to visitors during the tournament week for substantial sums. But they didn’t want to pay taxes on those gains, and they even lobbied Congress, which responded by carving out a specific exception in the tax code: Internal Revenue Code Section 280A(g).
Under this provision, if you rent your personal residence for 14 or fewer days during the year, you don’t have to report the rental income at all. It doesn’t matter if you charge $200 for the day or $5,000, as long as you stay at or under the 14-day threshold, that income is excluded from your gross income entirely. There is a tradeoff, however: You can’t also deduct rental-related expenses (like a portion of your utilities or a cleaning service) against that income.
You can learn more about this deduction in our analysis of the Augusta Rule.
Documentation That Holds Up
These deductions rely on your own documentation of business and personal uses, so the quality of your documentation matters. A couple of pointers on protecting your deduction:
- Keep contemporaneous records; don’t try to remember usage months later. A mileage log, call log or time-tracking entry made close to the time of use will carry more weight than an estimate created when you’re working on your taxes.
- Retain receipts and statements for the full cost of the asset and any related expenses. Even though you’re only deducting a percentage, you’ll need the full cost as your calculation starting point.
- Reassess your business-use percentage periodically. If your usage pattern changes significantly at some point during the year, your deduction should reflect that shift.
You’ll also want to avoid a common misstep: Claiming 100% business use that clearly has personal application (such as a family vehicle or a smartphone with a personal phone number) without documentation to support the claim.
Not Sure How to Calculate Your Business-Use Deductions?
Figuring out the truthful split of personal and business use of your assets can get complicated, especially if your usage patterns shift throughout the year.
We can help.
McManamon & Co. is an accounting, tax, fraud, forensic and consulting firm that serves small and midsize businesses. Our experienced accounting team can help you determine the most advantageous method for deducting your personal assets, establish documentation practices that hold up to scrutiny and ensure your business is capturing every deduction it’s entitled to.
Call us at 440.892.8900 or contact us online today to learn how we can help you make the most of your business assets.
Tags: accounting, McManamon, McManamon & Co., small business, small business accounting, small business finances, small business owner, small business taxes, taxes | Posted in McManamon & Co., small business taxes