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Next month, the intriguing Apple Vision Pro will be released to the public, and orders are being accepted now. As with most new Apple products, it has generated a lot of hype. Supposedly, it allow users to experience various forms of virtual reality and be able to do computer tasks without the confines of a monitor.
But at a minimum price tag of $3,499 plus sales tax for the basic model, not everyone will be able to buy it. The target audience seems to be wealthy Apple fans, nonwealthy Apple superfans who will purchase it on credit with their Apple Card, social media influencers hoping to flex it to get more clicks and followers, and businesses.
While its business use has not been established, businesses seem to have several reasons to purchase it for their operations. They may find it useful for recruiting younger people who would be attracted to the newest tech products and are generally tech savvy. Or they might be able to use it to help employees with disabilities be more productive. Also, the purchase could be tax deductible as a business expense.
Some people might want to minimize the cost of major purchases by treating the purchase as a business expense and reduce their tax bill. But before people run out to start a business and write off the purchase of the Vision Pro as a business expense, there are a few tax rules you should know about.
Is it a startup cost? A startup business can deduct only $5,000 of startup costs from taxable income. Additional startup costs are generally deductible over 15 years.
It is debatable whether the Vision Pro would be a qualified startup cost, as it would depend on the nature of the business and when it is purchased. But if it is, paying just under $4,000 for the Vision Pro with sales tax will eat up a huge chunk of your $5,000 limit.
Can you expense the cost in full or does it have to be depreciated over time? Most major purchases of equipment that are expected to last more than one year cannot be claimed as a business expense deduction. Instead, only a portion of the cost must be deducted every year based on very specific depreciation rules under the tax law.
But a special rule known as a Section 179 deduction allows businesses to deduct a normally depreciable asset in full. While this sounds appealing, it is not always advantageous to do so.
What is your tax bracket? Assuming the purchase of the Vision Pro is immediately deductible, another thing to consider is your tax bracket. Remember that the purchase, if deductible, will reduce your taxable income. Your tax bill will not be reduced by the amount of the purchase. If you are in a higher tax bracket, then the deduction will result in greater tax savings. If you anticipate being in a lower tax bracket, then you may want to think about whether the tax savings is worth it. This is why claiming a Section 179 deduction mentioned above may not maximize your tax savings.
If your business incurs a net loss, will the IRS consider your venture a hobby? Lastly, if a business incurs a net operating loss, that loss can generally be used to offset other income. But if your business incurs a net loss for multiple years or if the business seems more like a hobby, the IRS may disallow the net loss.
While the IRS will look at all facts and circumstances, the Treasury regulations list a number of factors the IRS should consider when determining whether the business is more like a hobby:
- whether the taxpayer treats the activity like a business
- the expertise of the taxpayer or his advisors
- the time and effort expended by the taxpayer in carrying on the activity
- expectation that assets used in activity may appreciate in value
- the success of the taxpayer in carrying on other similar or dissimilar activities
- the taxpayer’s history of income or losses with respect to the activity
- the amount of occasional profits, if any, which are earned
- the financial status of the taxpayer
- elements of personal pleasure or recreation
These factors are not exclusive and each is given different weight depending on the circumstances. But generally, tax auditors will look at whether you had a plausible profit motive and took the necessary steps to make a profitable business.
This can be challenging for aspiring social media influencers. A skeptical tax auditor may have a hard time believing that there is a business purpose for posting photos or a video of someone using the Vision Pro. Having paid sponsors, subscribers or being monetized by YouTube or Twitter/X could certainly help your case. But it can take some time to establish enough credibility to be monetized and obtain sponsors.
These days, it is very easy to establish a business purpose for purchasing a smartphone or a tablet because these products have established business uses. But before you spend at least $3,500 on a new product like the Apple Vision Pro where the business purpose has yet to be established, make sure you have a plan to use it to help you earn business income. Otherwise, the IRS will limit how much of the cost you can deduct from your taxable income.
Steven Chung is a tax attorney in Los Angeles, California. He helps people with basic tax planning and resolve tax disputes. He is also sympathetic to people with large student loans. He can be reached via email at stevenchungatl@gmail.com. Or you can connect with him on Twitter (@stevenchung) and connect with him on LinkedIn.
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