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Home Business Computers
Can you deduct a computer from your taxes when starting up a home business? A common question for the entrepreneur; nevertheless, it is one that does not have an easy answer. As a general rule of thumb, the entrepreneur who purchases a computer that will only be used in the course of doing business may usually take a tax deduction. Computer purchase rules stipulate that the exclusive use of the machine makes it eligible for being deducted in the year it was purchased, even it is not the year in which it is put into use.
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Tax Deduction Checklist
The problem arises when the entrepreneur uses the home office computer for other applications that are not business related. For example, does she use the computer to compile a shopping list for the grocery store? Does she play on Facebook or email friends and family members with the latest photos of the kids? Speaking of the kids: do they sometimes use the computer for homework? In these cases, income tax deductions for a computer may be limited, even if it was used initially for starting up a home business.
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Computer Deduction Scenarios
Scenario: Mixed use of the computer
Input a partial depreciation of the computer – in keeping with the percentage of use you make of it for business purposes – as a miscellaneous itemized expense line item.
Scenario: Business use of exterior disk drives
These commons tax deductions for small business owners fit under the supplies category. Be careful: if using external disk drives to back up personal photos as well as business files, deductions are limited!
Scenario: Computer purchased initially for a business startup
It is possible to realize a deduction for a business computer -- if you anticipate its future mixed use. TurboTax outlines that accelerated depreciation makes it possible to realize the lion’s share of the depreciation in the first year.
This is referred to as a Section 179 deduction. Yet tread lightly, especially if you later on sell the depreciable asset at a fiscal gain. If you start and sell a business and the equipment with it, there is a chance that you are liable for declaring the financial gain derived from selling the computer as income.
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Overlooked Tax Deductions or Trouble?
The fear of any entrepreneur is setting off an audit flag. Home office deductions are rumored to be some of the most notorious audit dangers around and the IRS does little to dispel this notion. The trick to having computers qualify for small business tax deductions is to use them exclusively and consistently only for business related activities.
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So … Can I deduct a Computer for Starting up a Home Business?
Computers, peripherals and equipment are fully deductible in the year they were purchased for a small business if they meet the exclusivity challenge. When it comes to mixed use, consult a tax professional for the applicable amount of write-off.
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- TurboTax. “Managing Assets" at http://turbotax.intuit.com/tax-tools/tax-tips/Small-Business-Taxes/Managing-Assets/INF12032.html (accessed May 30, 2011)
- IRS. “Publication 529" at http://www.irs.gov/publications/p529/ar02.html#en_US_publink100027070 (accessed May 30, 2011)
Photo Credit: "Digital HiNote Ultra Computer" by Aquila2664/Wikimedia Commons at http://commons.wikimedia.org/wiki/File:DHU.jpg