Studio Rockstar

Ever wanted a way to buy your next computer and get 25% off? It’s actually a lot simpler than you would guess. In fact, I did it last year — saving over $1,000 on my gadget purchases. But how can it be so easy? The goal is to take a look at how the United States tax system works. If you can come up with a way to make money online by using these gadgets, you can write them off as a business expense.

Step 1: Make Money

The first step is admittedly the hardest one: make the money you need to buy the gadgets through some kind of venture exploiting them. This may seem hard at first, but remember businesses are judged by the whole of the business, not just the part that makes the money.

So, let’s say you own three sites: one very successful web development blog, one blog that reviews XBOX 360 games, and one random gadget site, like Decomodo. Let’s say the web dev site makes $500/mo, and the rest of the sites make $1-2/mo. You now have around $6,000 extra revenue per year you need to claim on your taxes.

You can now also buy all kinds of XBOX 360 games & accessories, web development tools & services, and any kind of “cool stuff” you post or research for your gadget site — and save 25% off every single one without a coupon.

Step 2: Understanding revenue and profit

This is the most important part: understanding how the IRS taxes businesses. You see, as soon as you start making money without getting a W-2 from your employer (i.e. Adsense), you’ll need to claim this income on your tax return. The best way to do this for beginners is by filling out a Schedule C — this is basically telling the IRS that you own a sole-proprietorship business. Taxes on this business are generally around 40-50% (ouch!). However, the taxes for this are based on the profit from the business. So, if you spend $500 in materials and earn $700 from the finished product, you’re taxed on $200.

This means that any items you purchase for use in your business can be deducted from your business’ revenue. So, say that brand new 24″ Dell LCD in your bedroom that you write blog posts for the web development blog — is suddenly an expense for the business. The laws are pretty complicated here, but this is the jist of it — and I’d highly recommend you get an accountant to do your taxes (if not only for the money they’ll save you).

Step 3: Save 25%

It may not be readily apparent how you’re saving 25% on your tech gadgets, but it’s pretty simple. Since you are deducing the cost of purchase of the gadget from your sole-proprietorship, this means that the money you spend on it suddenly disappears from the amount you have to claim on your tax return. If you did not have this sole-proprietorship, a $500 gadget purchase would come out of your regular revenue. Assuming you’re in the 25% federal tax bracket, this means that you have to earn $666 to purchase the $500 gadget.

When you purchase the $500 gadget from your sole-proprietorship revenue, you only need to earn $500 to purchase the $500 gadget. This is a savings of $167!

Step 4: Have another reason to buy gadgets

The best byproduct of all of this is that you now have another reason to buy the latest and greatest gadgets. Not only are you purchasing them from what I would consider extra income (making money online), but you are saving a huge chunk in taxes. Rejoice, and go out and buy yourself that new gadget now!

Caveats

I would be lying if I said there weren’t some caveats to this, but they’re pretty minor in my eyes:

• You need to actually make the money to buy the gadgets. If your business makes $5000 in revenue and spends $20,000 in expenses — you just don’t pay taxes. You don’t get credit for losing $15,000.
• You need to justify the gadget as a tool used in your “business.” This may be as simple as writing a review about it, but it’s very important. Unfortunately there’s no solid black & white rules for what qualifies as a business tool and what qualifies as a personal toy. Talk to your accountant.
• Tax laws change all the time, and it’s very likely that within a few years the rules will be different. Again, check with your accountant.