The IRS requires business owners to depreciate, rather than expense, computer equipment. In certain circumstances, the owner can get an immediate tax deduction. Only certain equipment qualifies for deduction, however, and among those, you'll need to conduct a calculation to determine depreciation.
Even the best computer doesn’t last forever. Eventually, you’ll have to start shopping for a replacement. In some instances, you can claim your shiny new MacBook or ultrathin laptop as a business expense on your taxes and even stretch it over several years. But don’t go shopping just yet. You’ll need to make sure your purchase qualifies for the tax deduction and beyond that, you must follow the right procedures to properly depreciate it.
A piece of equipment is only deductible if it fits the requirements outlined by the IRS. Primarily, it must be used in your business or some type of income-producing activity. If you have a full-time job but you do some graphic design on the side, which produces income, you can claim the equipment you buy to support that work. However, the income you earn from the work you do using that piece of equipment must be taxable. To qualify, the equipment also must have a life substantially beyond the year in which you purchased it. If you buy a piece of equipment for a short-term project, then shift it to personal use, you won’t be able to depreciate that item.
The IRS uses the Modified Accelerated Cost Recovery System to depreciate equipment. There are two types of depreciation calculation: straight line and the income forecast method. The latter applies only to motion pictures, books, copyrights and other types of intangibles, so you’ll need to use the straight line method for figuring depreciation on a computer. Computer equipment is classified by the IRS as under-five-year property, which means you’ll need to divide the depreciation over a five-year period.
Calculating Your Depreciation
There are two ways to calculate the depreciation, depending on which method is easiest for you. One is to use the MACRS Percentage Table Guide. Using this table, if you purchase the item in the first quarter of the tax year, you’ll take 35 percent the first year, 26 percent the second year, 15.60 percent the third year and 11.01 percent the fourth and fifth years. The other method is to make the calculation yourself. First, determine your adjusted basis in the property, which is the amount you spent on the item, plus or minus any changes to the property since you purchased it. If you received a rebate, for instance, you would deduct that amount from the cost to get your adjusted basis. Then you’ll need to get the straight line rate, which is the number 1 divided by the number of years remaining at the start of that year. Take the straight line rate and multiply it by the adjusted basis to determine how much to claim each year.