Depreciation, as an entrepreneur you have a lot to do with it. Still, it’s a tricky-looking concept and there are a number of important rules that you should definitely know. Because: can you just write off everything? When is it allowed and when is it not allowed? And can you write off a business phone, computer or laptop that you both use for private and business purposes?
You can write off your business phone as long as you actually use this phone (partially) for business purposes. The depreciation of your phone always happens over a certain period of 5 to 10 years, depending on the laws and regulations of your country. This is a maximum of 20% per year.
Any subscription costs can be (partially) deducted from taxable income.
In the Netherlands, for example, the depreciation period for a business phone is set at 5 years. This means that you divide the purchase value of the phone evenly over a period of 5 years. Every year, you write off a fifth of the purchase value (20%).
Knowledge about depreciation and deductible expenses is crucial in order not to miss out on necessary tax benefits. In this article, I’m going to explain exactly how depreciating / writing off a business phone works (can be any other investment such as a laptop, computer, etc.).
How does depreciation work?
How can you write off your phone now, and how do you calculate the charge? To calculate the depreciation of an investment, you need three things: the purchase value, the residual value, and the lifespan or expected useful life.
First of all, the purchase value, it may seem simple but needs a note. The purchase value consists of the purchase costs + all costs incurred for making the investment ready for operation. Think of the shipping costs of the phone and a possible protective case.
The residual value is the value that the phone still has after you stop using it. So suppose you use the phone for 5 years and can then sell it for 200, the residual value is 200,-.
The lifespan or expected useful life is the expected number of years that the phone will be usable for your business. The tax authorities (depends on your country) have determined that investments such as a business phone can be depreciated in at least 5 years.
The simple formula for depreciation is as follows: ((acquisition value – residual value) / useful life) = depreciation per year. Suppose the new phone costs 1000 + 7.50 shipping costs. You can sell it for 200 after using it for a number of years. Then the depreciation is: (1007.50 – 200) / 5 = 161.50 per year.
Can I write off my business phone subscription expense?
Now, the purchase of a phone is often accompanied by taking out a (business) subscription. You can also (partially) deduct these costs from your taxable income. Even if you also use the phone privately, this is allowed. Please note: you can only deduct these costs if you also use the phone for business. In that case, you can deduct a percentage of the total subscription costs. This percentage is the portion of total phone usage that you use for business purposes.
For example: I use the phone 70% of the time for business purposes and my total subscription costs are 800 per year. Then I can book 70% x 800 = 560 as expenses and thus deduct it from my taxable income. Always be open and discreet about this and keep track of it if necessary. This prevents problems in the event of any audits by the tax authorities.
Other business expenses
Do you happen to be celebrating a big party and invite your colleagues and/or potential/current customers? Then you can deduct the extra costs involved. Although, you have to pay attention to the distribution of costs. Not the entire party is deductible if friends and family are present in addition to colleagues or customers. So make a guest list and divide the business guests and the private guests. The percentage of business guests can be deducted from the costs incurred for the party.
If you are going out for dinner, always keep the receipt and label it with the date and reason if necessary. This way, you and the tax authorities know exactly what the deductible expenses are. Please note that these are representation expenses, for which separate rules apply.
Summary
In conclusion, you can say that depreciation is quite simple. Now that the rules are clear, all you have to do is apply the formula and know when you can write something off or not. Some deductible items are often forgotten and always check carefully whether you may be able to deduct certain expenses from your taxable income. Always pay attention to your own integrity. There are many cases of fraud through earnings management and penalties can be huge.
You must always depreciate your business phone, laptop, car or computer in a certain amount of years, as decided by your local tax authorities.
There can be major consequences for deliberately filling in the profit incorrectly. It is useful to always keep the receipts of certain activities that serve as proof for the tax authorities. That way, you’ll never get into trouble unexpectedly.
Disclaimer: Always check the rules and regulations of your local tax authority as they may vary across countries.