If you purchase computer equipment for business use, you're entitled to a depreciation tax deduction. Instead of receiving an immediate tax deduction the year you buy the computer, you can spread out the depreciation deduction over the life of the asset. But if you qualify, you can elect Section 179 and expense the entire computer equipment right away.
How Depreciation Works
The Internal Revenue Service allows small business owners -- including sole proprietors -- to deduct the expenses they incur in operating their business. Expenses -- like office supplies, utilities, rent, marketing and legal fees -- can be deducted immediately. If you buy an asset -- a piece of furniture, equipment or a building -- you must depreciate it over the life of the asset rather than expense it. A computer -- whether a desktop, laptop, tablet or notebook -- is considered an asset. The IRS instructs users to depreciate the cost of computers over five years.
Calculating Depreciation on Computer Equipment
There are a few ways you can calculate depreciation on your computer equipment. The simplest is the straight-line method. To calculate annual depreciation expense under the straight-line method, divide the cost of the computer by five years. For example, if you buy a $1,000 laptop, you may depreciate it at $200 a year.
The IRS also allows users to use an accelerated depreciation method -- the double declining balance method or modified accelerated cost recovery system (MACRS) -- to depreciate property more quickly. This allows you to depreciate 20 percent of the computer's value in the first year, 32 percent the second year, 19.2 percent the third year and 11.52 percent the fourth and fifth years. For a $1,000 laptop, that means $200 in depreciation the first year, $320 the second year, $192 the third year and $115 the fourth and fifth years.
Section 179 of the tax code allows business owners to immediately expense up to $500,000 of assets they purchase for the 2014 tax year. Unless Congress agrees to an extension, this limit will be reduced to $25,000 for the 2015 tax year. If your total asset purchases during the year are less than this limit, you can treat your computer equipment purchase as an expense and not bother with depreciation.
If you qualify for Section 179, you should consider the benefits of taking it. The immediate expense means you get a bigger tax deduction right away. However, it also means that you won't see any of that tax break for the rest of the years that the computer equipment remains in service.