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- Self-employed people can deduct the cost of tools on their federal Schedule C (Profit or Loss From Business) as an expense or offset against self-employment income. Tool deductions are particularly helpful in this case, as the net effect of the tool deduction is to reduce self-employment tax as well as federal and state income taxes.
- Tool deductions aren't quite as favorable for employees -- that is, people who work for someone else. For them, the cost of tools or equipment is an "unreimbursed employee expense," which is in the category of miscellaneous deductions on federal Schedule A. This deduction is only available if you itemize -- and only to the extent that your total miscellaneous deductions exceed 2% of adjusted gross income.
For example, if your adjusted gross income is $50,000, you spent $750 on tools, and you have no other miscellaneous deductions, you would not qualify for a deduction on your work tools, because they accounted for less than the 2% threshold ($1,000). If you had spent $1,500 on tools with an adjusted gross income of $50,000, you would be able to deduct $500 of the cost of the tools. - There is no limit on the dollar amount you can deduct for work tools. But if the life of the tools or equipment is more than one year, you will be required to depreciate them for income tax purposes. This would reduce the amount of annual deduction, and could even make the deduction less than what is needed to exceed the 2% floor. If the individual in the example above had purchased $5,000 worth of tools with a life of five years and deducted them using the straight-line method, he would not be able to deduct the work tools. That's because the depreciation would be $1,000 per year, and with an adjusted gross income of $50,000 only expenses in excess of $1,000 would qualify for a tax write-off.
- To be deductible, the tools or equipment must be considered an "ordinary and necessary expense" of doing your job, and they cannot be supplied by your employer. According to the IRS, "An ordinary expense is one that is common and accepted in your trade or business. A necessary expense is one that is helpful and appropriate for your trade or business. An expense does not have to be indispensable to be considered necessary." A simple letter from your employer won't be enough to establish deductibility. You must be able to demonstrate a valid work reason for needing the tools.
- If the tools are used for both work and personal purposes, only the percentage that applies to the business use can qualify for a tax deduction.
Self-Employed People
Employees
Taking Depreciation into Account
Ordinary and Necessary Expense
Shared Business and Personal Use
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