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Program your home PC for a high-speed write-off

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in Small Business Tax,Small Business Tax Deduction Strategies

If you're like most high-income taxpayers, you probably use your home PC to help manage your investments. But unless you're a highly active trader and your investment activity constitutes a bona fide business, your depreciation deductions for the machine are severely limited.

Strategy: Combine your home PC investment use and business use. Why? Assuming that you qualify for fast business write-offs anyway, you can increase your depreciation deductions through your investment use.

In fact, you may be able to deduct the entire cost right away using the Section 179 expensing allowance.

Two hurdles

Here's the story: If you use your home PC to manage your investment portfolio, you typically can claim "straight-line" depreciation only for the investment use, which spreads the depreciation over five years.

For instance, if you buy a home PC for $2,500 and use it 25 percent for investment purposes in that first year, your depreciation deduction is limited to $125 (25 percent of $500 first-year depreciation).

Unfortunately, you can't claim depreciation deductions under the Modified Accelerated Cost Recovery System (MACRS) or elect the Section 179 expensing allowance on the PC.

Another problem: You must deduct your personal investment expenses—including depreciation on a home PC—as "miscellaneous expenses." That means you can't start deducting them until they reach 2 percent of your adjusted gross income (AGI). Furthermore, the itemized-deduction tax benefit is reduced for certain high-income taxpayers.

So normally, you won't see much of a tax break, if any, for the bucks you spend on your home PC.

Solution: Mix business, investment use

Don't throw in the towel on PC write-offs just yet.

If you're self-employed and you claim depreciation deductions for the business use of your home PC, you can increase your overall deduction by using the computer for investment purposes, too.

Example: Say you buy a state-of-the-art PC and all the peripherals in 2004. Total price: $5,000.

As long as you use the equipment more than 50 percent for business, you're entitled to elect the Section 179 expensing allowance or claim faster depreciation deductions under MACRS.

Icing on the cake: The time you spend on the PC for investment purposes increases the allowable tax basis for your depreciation deductions. So if your business use is 60 percent and your investment use is 35 percent, your write-offs are based on 95 percent of the cost, not just 60 percent.

That means, with the Section 179 election, you can deduct $4,750 of the cost in 2004.

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