Most small biz owners have a PC or a Mac at home. For example, a self-employed individual may use a home computer to run spreadsheets and keep business records, while the kids use it for homework and surfing the Internet.
Strategy: Limit your personal use of the computer. If this is the only computer in the home, you might even buy another one for the rest of the family. It costs more upfront, but the tax savings are usually worth it.
This tax strategy might also preserve annual home office deductions for a self-employed individual.
Here’s the whole story: Generally, depreciation deductions for a computer are limited if business use amounts to less than 50% of overall use. For starters, accelerated depreciation isn’t available (including deductions claimed in future years). Furthermore, you may have to recapture tax benefits in a year in which business use dips below the 50% mark.
Finally, you can’t take advantage of theelection for current write-offs. The maximum Section 179 allowance for 2010 is $250,000.
Another special rule applies if you’re a company employee. Unlike a self-employed individual, you’re eligible to claim business deductions for a home computer only if it is used for the convenience of the employer and the use is required as a condition of employment.
So you generally can’t deduct computer costs if you take your laptop home to work on a project over the weekend.
These harsh rules don’t apply to a computer at a “regular business establishment” such as a company’s main office (see box below). And, if you are self-employed, your home office can qualify as a regular business establishment. But there’s a catch: If you allow family members to use a PC in a home office, the home office no longer is used “exclusively” for business. This also puts home office deductions at risk.
On the other hand, if you use the computer 100% for business, the home office deductions are secure as long as you also use the office space 100% for business.
Best of all, you can write off the entire cost of the computer this year and use the tax savings to help buy a second computer.
Example: Buy a laptop with tax savings
Suppose you are a self-employed business owner and you’re normally in the 35% tax bracket. You bought a cutting-edge computer system in January for $5,000. If you use the system exclusively for business reasons, you’re entitled to write off 100% of the cost.
But suppose your daughter also uses the system for personal reasons. If your business use comprises only 40% of the total use, the deduction is generally limited to only $500.
Conversely, if you use the computer system exclusively for business, you can write off the entire $5,000 cost. In your tax bracket, that’s a tax savings of $1,750 (35% of $5,000). Then you can buy a laptop for your daughter for, say, $750, giving the family an extra computer and $1,000 in cash.