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Program home computers for tax breaks if self-employed

by on
in Centerpiece,Small Business Tax,Small Business Tax Deduction Strategies

woman working from homeIf you operate a self-employed business from home, you may qualify for valuable tax-saving home office deductions. But using the computer in your home office for personal reasons could cost you the home office deductions.  

Strategy: Buy a separate computer or laptop for personal use.

Here’s the whole story: To qualify for home office deductions, a portion of your home must be used “regularly and exclusively” as:

  1. Your principal place of business.
  2. A place to meet or deal with customers, clients or patients in the normal course of business.

If you qualify, you can deduct expenses directly associated with your home office, like painting or repairs, in addition to a proportionate share of the home’s expenses. This includes utilities, insurance, mortgage interest and property taxes as well as a depreciation deduction.

If you buy computer equipment for business use in a home office, the cost and related fees are deductible, but there are several special rules to consider.

Generally, depreciation deductions for a computer are limited if business use amounts to less than 50% of its overall use. First, accelerated depreciation isn’t available. Second, you may have to recapture prior-year depreciation deductions in a year in which business use dips below the 50% mark. Third, you can’t take advantage of the Section 179 deduction which can allow you to write off the entire cost of a newly acquired computer in Year One. (The maximum Section 179 allowance for tax years beginning in 2012 is $139,000.)

Therefore, you could run into tax problems if you and other family members use the computer personally. What’s more, you’re jeopardizing your home office deductions because you are technically no longer using the office “exclusively” for business.

Fortunately, you can “buy your way out” of this predicament.

Example: You’re self-employed and in the 35% tax bracket in 2012. You just bought a state-of-the-art computer system for $5,000. If you use the system exclusively for business this year, you can write off 100% of the cost under Section 179.

But suppose your daughter intends to use the computer at night and the weekends for school. If your business use this year drops to 40% of the total use, the first-year straight-line deduction is limited to $400, based on the depreciation tables. That’s a tax savings of only $140 (35% of $400). And you’re putting all your home office deductions at risk.

Suggestion: Use the expensive new computer system solely for business. Now you can write off the entire $5,000 for a tax savings of $1,750 (35% of $5,000). Then you can buy a reasonably priced laptop for your daughter for, say, $750, giving the family an extra device and $1,000 in extra cash after counting the tax savings. And, you preserve your home office deductions.

Tip: Other special rules may apply to home computers used for investment and tax planning reasons (see box below).

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