Converting stuff you already own into business assets

It’s pretty much common knowledge that if you purchase things for your business you can write them off. “It’s a write off!” What does that mean exactly? It means you get to subtract the cost of those items from your business income, with the bottom line being that you don’t pay tax on that money. In a simplified example, if you are a painter and you buy a paint brush for $10, you don’t pay tax on that $10. Let’s say you earned $100 for the year (this is just an overly simplified example), and you bought that $10 paint brush. You wouldn’t pay tax on the whole $100 you made, you would only pay tax on $90 of it, because you “wrote off” the cost of the paint brush. 

But what about stuff you already own? What if that same painter found some brushes in his garage and decided to use those? Converting things you already own into business assets is extremely common, and pretty much everyone who goes into business has to do it. If you’re reading this post on a digital reader that you bought before you went into business, you’re could be converting that reader into a business asset at this very moment! Let’s describe how it works.

First, remember the old tale of King Midas? In case you need a refresher, in this tale Midas was a king who was granted a wish, and he wished that everything he touched turned to gold. From that day forth he was the richest king in the world because he could make anything gold just by touching it. When you create a business you get to have the same “power” in a manner of speaking. Everything you own that you “touch” in your business can be converted into a business asset, and thus it becomes a potential tax savings. Since a penny saved is a penny earned, by converting your stuff into business assets you’re practically using the Midas Touch. 

Think about all the things you do, all the things you have. Every time you use one of those for business, it is now a business asset. Go home to your office and start touching things. Your desk, your lamp, your rug, your chair, your computer, and on and on. All of these things you can deduct or depreciate, depending on when you bought them if you legitimately use them in your business. If you bought those things this year, you can deduct them. If you bought them in the past, you can depreciate them, which simply means you get to deduct a portion of them every year for a few years. 

Even if you received any of these things as an inheritance (sorry, gifts don’t get this tax advantage) you can “place them in service” (which just means you use them in your business) and get a nice tax savings. Here’s how to do it: Make a list of everything you’re placing in service, and be as accurate as possible. Describe what it is exactly, when you bought it, how much you paid for it (or how much it was worth when you inherited it), and the percentage you use it for business. That last part is tricky - it doesn’t mean how much you use it per day for business or per year. If you use it one time for five minutes for business the whole year, and otherwise it just sits around doing nothing, then you use it 100% for business. If it’s your computer and you use it 6 hours per day for business and 2 hours per day for chatting with grandma, then you use it 75% for business. Be accurate and fair, but obviously these numbers are best-guesses.

Next go to ebay, craigslist, or your other favorite used goods website and try to get a “fair market value” for the item. In other words, try to see about what it would sell for, if you got a good price. Put that on the list as well. Here’s what your list might look like:

The amount we get to use to lower our taxes is the lesser of the fair market value or the cost. If you got the deal of the century on your desk and it’s really worth a lot more than you paid for it (see the table above), unfortunately you can only use the amount you paid for it. Likewise, old office chairs don’t tend to hold their value well, and you can only use the amount that you would spend for a similar used chair.

Now, a word of caution. If you remember how the tale of King Midas ended, it wasn’t a happy one. In the story he touched his daughter and turned her to gold, killing her. If you likewise let your “Midas Touch” go too far you can end up with some unwanted outcomes just like the King. For example, it might be unwise to say, “Oh, I use this treadmill to stay in shape, and I have to be in shape for my business selling t-shirts online, so it’s a business asset!” Or, “I once watched Fast Money on my 70 inch tv in the living room, so that’s a business asset, too!” The key words for whether something should be a business asset or a business purchase are “ordinary” and “necessary.” It needs to be both. If your business is driving for Uber, a jetski wouldn’t be an ordinary nor necessary purchase, but if you are a water sports videographer then it would be. If you simply allow those two words to be your guide as you “Midas” around the house you will be well on your way to making sound decisions with your assets placed into service.