Deducting Computers Bought for Work
Don't miss out on this important business expense deduction.
Computers you purchase to use in your business or on the job are a deductible business expense. If fact, you may be able to deduct the entire cost in a single year.
If You're an Employee
If you're an employee in someone else's business and you buy a computer to use in your work, you should get your employer to reimburse you for the cost. The employer will then be able to deduct the cost as a business expense. You need not include the cost in your employee income. If your employer does not reimburse you, you can deduct the cost only if and to the extent it and your other unreimbursed employee expenses exceed 2% of your adjusted gross income. For example, if your AGI was $100,000, you could deduct the amount of your unreimbursed employee expenses exceeding $2,000.
If You Have Your Own Business
If you purchase a computer for use in your own business, there is no problem deducting the whole cost. Usually, you can deduct the entire cost in a single year instead of depreciating it over five years.
Section 179 Deduction
If you use the computer in your business more than 50% of the time, you can deduct the entire cost under a provision of the tax law called Section 179. Under Section 179, you can deduct in a single year the cost of tangible personal property (new or used) that you buy for your business, including computers, business equipment and machinery, and office furniture. There is a $500,000 annual limit on the amount you can deduct under Section 179 (indexed for inflation each year starting in 2016). See Section 179: What Every Business Owner Needs to Know for more information on Section 179.
If you use the computer for both business and personal purposes (such as playing computer games), your deduction is reduced by the percentage of your personal use. For example, if you use your computer 60% of the time for business and 40% of the time for personal use , you can deduct only 60% of the cost. If your computer cost $1,000 you could only depreciate $600.
You can’t use Section 179 to deduct in one year more than your net taxable business income for the year. Thus, if you made no money, you get no deduction. But you can save the deduction for future years when you do earn a profit. If you’re a sole proprietor and you have a job in addition to your business, you can add your salary to your total business income. If you’re a married sole proprietor and file a joint tax return, you can include your spouse’s salary and business income in this total as well.
There is another important limitation regarding the business use of property: You must use the property over half the time for business in the year in which you buy it. You can’t convert property you previously used for personal use to business use and claim a Section 179 deduction for the cost.
You can use Section 179 expensing only for property that you purchase—not for leased property or property you inherit or receive as a gift. You also can’t use it for property that you buy from a relative or a corporation or an organization that you control.
If you use an item for business less than half the time, it won't qualify for Section 179 and you will have to deduct the cost a portion at a time over several years--a process called depreciation. There is no requirement that you use the computer at least 51% of the time for business to be depreciated. You can depreciate business property even if you use it only 1% for business and the rest of the time for personal use. However, as with Section 179, your depreciation deduction is reduced by the amount of your personal use of the property. For example, if you use your computer 40% of the time for business and 60% of the time for personal use (such as playing computer games), you can only depreciate 40% of the cost. If your computer cost $1,000 you could only depreciate $400.
Office equipment such as a computer is deducted over five years.
Computers Are Listed Property
Computers are "listed property." These are items that can easily be used for personal as well as business purposes--for example, cars and certain other vehicles, computers, and any other property generally used for entertainment, recreation, or amusement such as VCRs, cameras, stereos, and camcorders.
The IRS fears that taxpayers might use listed property for personal reasons but claim a business deduction for it. For this reason, you’re required to document your business use of listed property. You can satisfy this requirement by keeping a logbook showing when and how the property is used.
You generally have to document your use of listed property even if you use it 100% for business. However, there is an exception to this rule for computers: If you use a computer or computer peripheral (such as a printer) only for business and keep it at your business location, you need not comply with the record-keeping requirement. This includes computers that you keep at your home office if the office qualifies for the home office deduction.
Example: John, a freelance writer, works full time in his home office that he uses exclusively for writing. The office is clearly his principal place of business and qualifies for the home office deduction. He buys a $4,000 computer for his office and uses it exclusively for his writing business. He does not have to keep records showing how and when he uses the computer.