When you’re first starting a business, you’re going to be bootstrapping it, which means funding it with your own money and your own assets. Maybe you change your cellphone over to business use, or you begin using your computer for business. How about getting the home office set up? Your desk and chair have to come from somewhere, and if that happens to be the garage or the attic, it’s one less thing you need to spend money on. The question is … can you get a deduction or tax benefit for these things?
The answer is most definitely yes, as long as you follow some simple steps!
Step One: Identify the Assets. Make a list of everything that is now being used in your business. If you’ve got a serial number on equipment, that’s a great identifier. Remember that the things in your home office are deductible. That includes items you may not have thought about, like art on the walls! Make sure that you follow the home office rules — remember the “regular and exclusive for business” rule (see Tuesday’s post to learn more). If you don’t have a specific home office, that’s okay – just follow the same rule with those assets. You’ll want to establish regular, consistent and majority (at least) business use.
Step Two: Value the Assets. Valuing property that you are contributing to the business is not as hard as it sounds. Again, the rules are pretty simple. First, unless the property is brand new, you can’t contribute it and claim it’s worth what you originally paid. What you need to establish instead is the current market value of that property. We like to look at eBay and Craigslist for this, to get an idea of what the current resale price for items that are the same or similar. Add the values to your Asset List, to get an idea of the total amount being contributed to your business.
Step Three: Contribute the Assets. By this we don’t mean physically relocating assets. We’re talking about the paperwork here. First, prepare a set of Minutes or Resolutions for your company, confirming that the assets on your list, along with their current value, are now considered company property. If you can take other steps, such as transferring the phone bill into the company’s name, etc., that’s another way to establish your intent. Then, make sure you enter these assets into your accounting records, so they appear as company assets on your books. Now you can begin to depreciate qualified assets and take a depreciation deduction.
But you also need to make a choice here, to balance your books. That choice is whether you treat the contributed assets as a loan to your business or an investment in your business.
If you treat the assets as a loan, you’ll need to prepare a loan document, probably a promissory note, whereby your company agrees to repay you for the value of the contributed assets. The loan needs to also go into your accounting records. When you repay yourself, the money will be treated as a loan repayment by the company, and won’t be taxable income to you.
If you treat the assets as a contribution to your business, that will increase your basis in the business. There are times when this is a great thing, especially if you’ve had a lot of losses. By increasing your basis, you give yourself more room to offset losses against your personal income.
Not sure which is best? That’s where the advice of your CPA or tax preparer will be invaluable. You’re also welcome to come to our free Forum and post questions on this subject there. Plus, for more information on things you can deduct in your business, check out this week’s special, the Business Deductions Maximizer. We’ve got a list of more than 1,000 potential business deductions, along with audio files, and several self-assessment exercises to help you make sure you get all the benefits your business has to offer.