Buying a $2,500 laptop for your freelance work feels like it should knock $2,500 off your taxable income. Often it can, but the tax code treats equipment that lasts for years differently from things you use up, like printer ink or a monthly software subscription.
You generally have a few options for how to deduct equipment, and the right one depends on how much you earned this year and how much you expect to earn in the next few.
Why equipment is treated differently
Assets that last more than a year, such as computers, cameras, furniture, and tools, are normally depreciated, meaning the cost is spread across several years of their useful life. The idea is to match the deduction to the years the asset helps you earn income. In practice, several rules let small businesses deduct much or all of that cost up front instead.
The de minimis safe harbor for smaller items
Businesses without audited financial statements can generally elect to expense items costing up to $2,500 per item or invoice in the year they are bought. For many freelancers, this covers most purchases: a monitor, a tablet, a mid-range laptop. You make the election by attaching a statement to your return, and it applies to all qualifying purchases that year.
Section 179 for bigger purchases
Section 179 lets you elect to deduct the full cost of qualifying equipment in the year you start using it, up to a high annual limit that most freelancers will never reach. The catch is that the Section 179 deduction cannot exceed your business income for the year. Any amount over that carries forward to future years rather than creating a loss.
Bonus depreciation and regular depreciation
Bonus depreciation is another way to deduct a large share of an asset in year one, and unlike Section 179 it can create or increase a business loss. The available percentage has changed over the past several years, so check the current rules for the year you buy. If you use none of these, regular depreciation spreads the cost over the asset's class life, which is generally five years for computers and cameras.
Business-use percentage and when faster is not better
If you also use the equipment personally, you can only deduct the business-use share, and certain items need more than 50% business use to qualify for the faster methods. Also, deducting everything now is not automatically the best move. If this was a low-income year and you expect next year to be much stronger, spreading the deduction out can save more tax overall, because each dollar of deduction is worth more in a higher bracket.
- Keep the receipt and note the date you first used the item for business
- Track the business-use percentage if the item is also used personally
- If you sell or stop using an item for business after expensing it, some of the deduction may need to be recaptured
This article is for general education only and is not tax or legal advice. Tax rules vary by jurisdiction, change over time, and depend on your specific situation. Talk to a qualified tax professional before making filing or payment decisions.