We can’t deny the usefulness of computers – they are everywhere, from our homes, businesses, and schools to soon enough. As such, you may be able to take advantage of computer tax write-offs. So let’s explore what’s available.
It’s a wonder that they haven’t taken control of the planet yet, considering how often people hit the “Remind me tomorrow” button when asked to update. Yet, no matter how much we can accept this inevitability, one concern continues to linger in our minds: can we deduct them from our taxes?
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Did you know you can claim your computer as a tax deduction?
The simple answer: Yes. Any computer used for business-related activities can be written off as an expense.
In 2018, the Tax Cuts and Jobs Act (TCJA) removed an important deduction for W-2 employees: write-offs for business expenditures. Therefore, to cover costs associated with work such as a computer, it is recommended that you ask your employer to reimburse you.
Calling all freelancers and self-employed workers, laptops might be the perfect addition to your office. Before you make the purchase, however, take a moment to consider the details. Remember that you can only deduct the business-use portion of the laptop from taxes.
Are you one of the people using their own laptops to run a business? Then you need to accept the fact that it limits your possible deductions. To give an example, let’s assume that in a day, you spend two hours on your business and eight hours watching YouTube. In this scenario, 20% of the usage time of your computer is allocated for work purposes.
In a notable shift, the Internal Revenue Service (IRS) has removed “computers” from its list of “listed property.” Such property is any item that could be used for both personal and business purposes, like automobiles. As a result, there are now different IRS regulations to take into account.
The exclusion of computers from the category affected two matters:
Firstly, it abolished the need for detailed recordkeeping when claiming the deduction. This is because taxpayers no longer have to keep track of their use of the computer in order to be eligible for this tax benefit.
Secondly, it conformed with conventional depreciation regulations that allow for greater convenience and flexibility; I will break down what this entails below.
Learning the Concepts of Computer Tax Depreciation
Now that you’re familiar with the tax filing process of calculating your business’s portion, it’s time to take a deeper dive.
The IRS generally states that computers are capitalized and depreciated over five years – this is known as depreciation. This method helps account for an asset’s decreasing value over its lifetime.
When it comes to depreciation, many people tend to think of cars. However, when you buy a car, the resale value tends to decrease with time. Why is that? This is because, over time, the car will gradually become subject to more wear and tear, which reduces its overall performance and puts it at a disadvantage compared to newer models in the market.
As with most technology, the value of a computer decreases over time. That is why depreciation comes into play – it spreads out the cost of purchasing a computer across its “useful life” to account for this decline in performance.
Do you want to be able to tax deduct the entire cost of your computer right away?
Well, the IRS has some solutions for that! Specifically, they have a few methods in place to help people who want to see their deductions before tax season. This is known as “accelerated depreciation,” and it allows folks to get their expenses back sooner rather than later.
Fortunately, you can avoid any hassle of figuring out depreciation when it comes to purchasing a computer, provided certain criteria are met. Maximizing your deductions when you purchase computers under $2,500.
By taking advantage of the IRS’s de minimis safe harbor election, it is possible to write off the cost of any tools or equipment that costs $2,500 or less in the first year of using the equipment. For example, should you acquire a computer for $2,500 and use it 20% of the time for business purposes, you may claim up to $500 as a deduction.
This process does not require you to depreciate it or include it as a fixed asset; rather, treat the expenditure like any other business cost. Additionally, a formal election should be included with your return every year – this cannot be carried over from one fiscal period to the next.
Taking advantage of Section 179 to Tax Deduct on Computers.
Section 179 has been established to motivate entrepreneurs to buy their company’s machinery and equipment, including computers. It allows you to deduct as much of your expenditure as desired in one year up until an overall limit of $1,040,000.
When it comes to selecting a tax strategy, one of the best options is to determine whether or not it’s advantageous to depreciate certain items.
Two things to consider when taking Section 179 for Tax Deduction:
First, though it is not possible to deduct a loss when claiming, those whose computers are used at least half for business can still take advantage of the allowance. Additionally, even for those who use their computer less than 50% for work, taking the benefit of de minimis or bonus depreciation is still an option. Let’s explore these two further.
Second, deciding whether or not you should depreciate your computer can take time and effort. Although the IRS has structured their rules in such a way as to avoid requiring this, there are some instances in which it may make sense to go ahead and do so. In fact, taking this route can offer more wiggle room.
Tax planning for the upcoming year can include creating a sound strategy for the depreciation that may benefit you from both a cash flow and tax perspective. For example, instead of spending money on an upgraded printer for the sole purpose of taking a write-off now, delaying the purchase provides an opportunity to use up $400 in deprecation costs.
For those trying to reduce their computer’s value, bonus depreciation is hands down the most straightforward solution. A few other possibilities can be explored, but this is the easiest.
Using the Bonus Tax Depreciation
The Tax Cuts and Jobs Act has presented a great opportunity in the form of bonus depreciation. By taking full advantage of this new feature, you can receive a deduction for 100% of the cost associated with purchasing business-use items during the first year. In addition, there is no need to fill out any forms or submit documentation – bonus depreciation is automatic!
When it comes to simplicity, nothing beats claiming a deduction through the use of depreciation. All one needs to think about is when to take advantage of this special allowance – whether that be in the present or spread out further into the future. Note, though, with the Tax Cuts and Jobs Act (TCJA) lifting a prior limit on net operating losses (NOLs) – i.e., losses which may be applied against any future profits earned – deferring said claim is less essential than it once was.
In the event that you incur a net loss of $20,000 stemming from your claim of bonus depreciation on office equipment, this financial setback can be applied to any future gains in perpetuity.
Unfortunately, bonus depreciation has a minor downside that will only affect some freelancers and self-employed individuals drastically. This method must be used for all business assets belonging to the same grouping or “asset class”.
You can either choose to adjust the depreciation of your computer, which is expected to last five years or opt for a different schedule on other assets that degrade over a similar period. This could be anything from cars and trucks to more unusual business-related purchases such as planes and cows! Note that you can also select seven or 10-year asset schedules when it comes to boats, railroad cars, and farm machinery.
Should you find yourself subject to this bizarre limitation, you can still take advantage of Section 179 depreciation for your computer.
Tax Writeup on Depreciation with Section 179
Recent NOL legislation revisions have taken away many of the advantages associated with Section 179. In almost all cases, bonus depreciation is the more favorable choice over its predecessor. Nevertheless, it is still possible to take advantage of depreciating your laptop or desktop using Section 179.
If you acquire $4,000 worth of computer systems for your new home office and net $3,000 in income for the year (before computing the computers’ cost), a Section 179 election could be beneficial. This would enable you to offset any self-employment earnings and divide up the remaining $1,000 over the asset’s lifetime – depreciating it.