Tools purchased for your business use are generally tax-deductible. However, there are some limitations on deducting tools purchased as an employee. In addition, taxpayers who use their tools for both business and personal use can deduct only a portion of the expense.
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Business Versus Personal Use
The IRS allows you a deduction for tools only in so much as you use them for work or business. If you use the tools for both business and on the side as a hobby, you can still deduct the tools. However, the expense is limited to the percentage of time you use them for work. For example, if you use a $100 set of garden shears 80 percent of the time for your landscaping business and 20 percent of the time for your personal garden, you can claim a deduction for $80.
Tools as an Employee Business Expense
If you bought tools for your work and you weren't fully reimbursed or reimbursed at all, you can deduct them as an employee business expense. To deduct the cost of tools as an employee business expense, you can't be self-employed and the tools must be necessary for your job or trade. Unreimbursed employee expenses
are subject to a 2 percent floor. That means you can claim employee business expenses that exceed 2 percent of your adjusted gross income. Record your expenses on Form 2106, Employee Business Expenses.
Tools for Rental Property
You can deduct the cost of tools you use for repairs and maintenance on your rental property. Tools that you use for your rental, like paint supplies and gardening equipment, can be classified as supplies expense. However, large-ticket items like furniture and fences must be capitalized as assets. To claim the deduction for tool expenses, list the total in supplies expense on line 15 of Schedule E.
Tools as a Business Expense
If you're an independent contractor and you use tools as part of your business, they are deductible. For any business you run that doesn't involve rental property or royalty income, record your income and expenses on Schedule C. If you didn't purchase the tools to resell them, enter the cost of tools on line 22, labelled "Supplies." If you did purchase the tools for resale, they are considered inventory and the purchase price is the cost of inventory. Enter inventory purchased during the year on line 36 in the "Cost of Goods Sold" section.