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Maintain tax breaks by limiting access to your home PC

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in Employee Benefits Program,Human Resources,Small Business Tax,Small Business Tax Deduction Strategies

The personal computer (PC) has become part of the average American household. But if you’re self-employed and you use your PC extensively for business, you can lose valuable depreciation deductions by allowing family members to use it.

Strategy: Keep the PC strictly for business use. Then, you can parlay the tax savings into another computer for the rest of the family. You will often come out ahead tax-wise, plus you get an extra PC out of the deal.

This tax move will also help you preserve annual home-office deductions.

Here are the details: As a general rule, your depreciation deductions are limited if you use your PC for business less than 50 percent of its total use. For starters, you can’t use accelerated depreciation (including deductions claimed in future years). You may even have to recapture tax benefits during a year that your business use drops below 50 percent.

Finally, you can’t take advantage of the Section 179 election for current write-offs. (The maximum Section 179 allowance for 2006 is $108,000.)

These tough rules don’t apply to a computer at a “regular business establishment,” such as a company’s main office. And, if you’re self-employed, your deductible home office qualifies as a regular business establishment.

The catch: If you allow family members to use your home-office PC, the home office no longer qualifies as being used exclusively for business. So, not only are you risking tax write-offs for your PC, but you’re also jeopardizing your home-office deductions.

On the other hand, if you use your PC 100 percent for business, your home-office deductions are secure. Best of all, you can write off the entire cost of the computer this year and use the tax savings to buy a second computer … with plenty to spare.

Example: Buy an extra PC with tax savings

Say you’re in the 35 percent tax bracket. You bought a state-of-the-art computer system earlier this year for $5,000. If you use the computer in your self-employed business, you’re entitled to write off the percentage of the cost allocable to business.

But, your spouse and children also use the PC for pleasure. If you use the PC only 40 percent of the time for business, your depreciation deductions are limited to $1,000 and must be spread over time.

On the other hand, if you use the PC 100 percent for business, you can write off the entire $5,000 cost in the first year. In your tax bracket, that saves you $1,750 (35 percent of $5,000). Then, you can spend $1,500 on a less-expensive PC for the family, giving you two computers and an extra $250 in your pocket.

Can you do the same thing if you’re a company employee who works at home weekends and evenings? Yes, but you qualify for depreciation deductions only if the computer is used for the employer’s convenience and is required as a condition of employment.

As far as the IRS is concerned, your company must request that you supply your own computer for you to qualify.

Best approach: Have the company provide a PC for your home or reimburse you for the cost. It’s a tax-free fringe benefit your company can deduct.

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