Many assume that a smartphone used for business is a tax write-off. But what about an Apple Watch, Ringly or any other IoT device that helps you with your job? As the number of Internet of Things (IoT) grows in the business world, companies and workers are eager to take these tools as tax deductions.
Few businesses issue company-owned phones to their workers today. Instead, employees are increasingly depending on their own IoT devices for their jobs—part of the Bring Your Own Device (BYOD) movement. More than 6.4 billion devices will be connecting to the Internet this year, with many of those IoT tools used to conduct business, according to a study by Gartner, Inc. In the business space alone, Gartner says to expect to see more than two billion devices and related services come online this year.
Because IoT devices and services are so integrated into the business world, then, these tools could have an impact on your tax return, says Ryan Saltz, Esq. licensed tax professional at Tax Defense Network.
"As IoT devices become increasingly necessary for all types of businesses, you should be able to write off at least a portion of them," Saltz explains. "Just remember, you must be able to verify that anything you're purchasing is ordinary and necessary for your operations."
These devices aren't limited to smartphones, but could include tablets, and other technologies used as BYOD. Still—workers need to prove the gadgets are absolutely needed for work purposes—and not for playing the latest version of Grand Theft Auto or because you just want an upgrade.
"If you have that strong urge to get a new tablet and hope to write it off as a necessary business purchase, think again," says Saltz. "In the event that the IRS performs an audit, which does happen, your employer must be able to validate the expense as a work requirement."
Buying for business? Save the receipt
If the company reimburses the purchase? Then, you are also out of luck for a tax deduction. Plus, if you plan to write-off your IoT devices, you should retain receipts for each deduction, and you should not deduct any portion of the IoT device that you're using for personal reasons—such as text messages from your significant other about picking up milk on the way home.
Better yet, Saltz recommends that you take advantage of functions on your IoT device that allow you to partition work functions from personal functions. The partition features show precisely how much of the device and service plan are used for business purposes, eliminating any doubts in case of an audit.
IoT goes well beyond smartphones and tablets, of course, and it increasingly includes devices and services that, not very long ago, would have raised red flags about inclusion as a business expense. As Saltz points out, wireless phones and laptops are pervasive and found throughout the business world, and arguments can be made that these are both ordinary and necessary to carry on a business.
"When newer devices such as an Apple Watch, Ringly or VR headset are concerned, these are new and have not been widely adopted yet," he says. "If you are not in a progressive technology business, proving ordinary and necessary use may have to wait a couple more years."
If you run your business from home, there may be some IoT deductions available for security or energy systems. But this can be a trickier deduction. Smart home systems usually cover the entire house and business deductions on those systems would be proportional.
Another point to consider is the difference between devices and services, where the lines are blurring, according to Jim Nason, U.S. Tax Telecommunications sector leader, Deloitte Tax LLP. How you are using your IoT devices could change the way they are viewed by the IRS.
"Even answering the question 'what is the service?' can be less than straightforward, especially when multiple value propositions are packaged into a single offering," wrote Nason in a Perspectives piece for Deloitte. Nevertheless, it's important to be able to answer it because taxing authorities across the country are in the process of rethinking their taxation rules to ensure they are receiving a fair share of the revenues from these bundled, technologically advanced services."
Follow the rules
This constant and continuous evolution of technology forces us to redefine what it means to be online, and what is allowed as a tax write-off is going to continue to evolve. For this tax season, at least, Saltz recommends keeping the following issues in mind as you prepare your taxes:
- If you're purchasing a computer or mobile device strictly for business purposes, don't lose the receipt. Much like any other business expense, your IoT equipment can be written off. Similarly, if you're subscribing to a data plan for your work needs, this too may be deductible, but only to the extent it is used for business. If you use the device or plan for personal use, the portion utilized for personal use cannot be deducted.
- Don't try to write off device purchases made simply for gifts. For example, if your nephew needs a tablet and you pick one up, this doesn't count as a legitimate deductible purchase or charitable contribution.
- Donations of an IoT device may be made to a charity and you can enjoy the accompanying tax break. So long as your chosen organization is a federally recognized charity, you may turn over your old PC or phone in exchange for a receipt to add to your deductions. Make sure you get a receipt or statement indicating the value of the donation. Visit IRS.gov for a list of approved charitable organizations.
- Don't forget to use your IoT hardware to your advantage come tax time. Use any lulls in your day to research common deductions you've been missing, along with any tax credits you may be eligible for. Take advantage of the information age by digging into all of the benefits that come with filing.
When it comes to IoT-related tax deductions, the rule of thumb – whether you're self-employed, running a business or working from home – is that all purchases should be necessary for the operation of your business, and if you aren't sure, consult with a certified tax professional who can step you through the nuances of how evolving technology is changing the face of tax write-offs.
"Taking this extra step will ensure that no mistakes are made," says Saltz. "And [that] you have a clear understanding of what IoT items can and can't be deducted on future tax returns." —Sue Poremba