A Computer used in a Home Business may be
EXPENSED in the first year of use or Depreciated
over 5 years!

A deduction for depreciation of a computer for business use can
be expensed in the first year, if qualified, or depreciated over the
5 year recovery period.  To claim the expense in the first year,
the computer muse be used more than 50% for business use, and
meet other requirements for expensing. 


Definition
The IRS defines a computer as a programmable, electronically
activated device capable of accepting information, applying
prescribed processes to the information, and supplying the results
of those processes with or without human intervention.  It usually
consists of a central processing unit containing extensive storage,
logic, arithmetic, and control capabilities.  Excluded from this
category are adding machines, electronic desk calculators, etc..

Listed Property
If you use certain types of property, called "listed property", in your
home, special rules apply to depreciation.  Computers can fall under
the category of "listed property".  Listed property applies to certain
equipment that may be used for personal and business purposes. 
This characterization by the IRS allows first year expensing (Section
179 deduction) or accelerated MACRS deductions only if business
use exceeds 50%. 

If business use falls below 50%, thus removing your computer from
the listed property category, you must use ADS (alternative
depreciation system) straight-line depreciation for your computer.

Listed property does not include any computer that you own or lease
that is used exclusively at a regular business establishment.  A home
office that meets the IRS's home office eligibility rules is considered
a "regular business establishment".   

Example 1: You purchase a computer in 2007 and use it
exclusively in your regular business office.  The computer is NOT
listed property.  Thus, you may claim either first year expensing
(section 179 election) or accelerated MACRS depreciation and
bonus depreciation.  The reason the computer is NOT listed
property is because it is used 100% in your business office.

Example 2: You purchase a computer in 2007 and use it but you
do not have a regular business establishment.  The computer is
listed property and you may claim MACRS and/or first year
expensing only if you use the computer more than 50% for
business.  If business use does not exceed 50%, you may only
claim ADS straight-line depreciation.

Note that if business use exceeds 50% in the first year but in a later
year drops to 50% or less, MACRS and any first-year expensing
deduction are subject to "recapture".  You will need to read IRS
publication 4797 to learn how to determine the recaptured amount.

50% Business Use of Computer
If you are an investor who uses a home computer for managing an
investment portfolio, the computer is treated as listed property.  If
the computer is also used for business, and the computer time
spent on business work exceeds 50% of the total time on the
computer, you may claim first year expensing or accelerated
MACRS, otherwise only straight-line depreciation is allowed.
Depreciable investment use must relate to managing investments
that produce taxable income.

Example 1: You purchase a computer in 2007 and use it 50% of the
time to manage your stock investments and 40% of the time in a
part-time research business.  Your home computer is listed
property because it is not used at a regular business
establishment.  You do not use the computer predominantly for
qualified business use.  Therefore, you cannot claim the special
depreciation allowance for the computer.  You must depreciate it
using the straight line method over the ADS recovery period.

Example 2: Using the example above, assume that you use the
computer 60% of the time for business and 35% for investment
purposes.  Since business use exceeds 50%, you may claim
first-year expensing.

Note that if you use the computer as an investment tool and qualify
for the deduction, the expense must add up to more than 2% of your
Adjusted Gross Income (AGI) before you can take the deduction.
And even then you can only deduct the amount over the 2% limit. 
For example, say you purchase a computer for $1,800.  You can
deduct $360 per year ($1800 / 5 years).  Assume you have an
annual income of $50,000.  Your itemized expenses must be $,1000
($50,000 x .02) before you can expense them.  Thus, if the computer
deduction is your only itemized expense, you cannot deduct the
yearly amount of $360.

Leasing a Computer
If you lease a computer, you can deduct the portion of the lease
payments that are for business use.  Note that if business use
falls below 50% for any given year, you must report as income an
amount based on the fair market value of the computer, the percentage
of business plus investment use, and percentage from two IRS
tables displayed in IRS Publication 946.

Disposing of Computer
The last point to make is that any unused depreciation on your
computer can be deducted when the machine is disposed of. 
Thus, if you bought a computer for $2,200 and then scrapped it after
two years you can deduct the remaining balance of $1,320 in the
third year [($2,200 / 5 years) x 3 years].  If you give your computer to
a church or charity, you can take either a charitable deduction for
the value at the time of the gift or you can deduct the balance of the
unused depreciation.  If you have a home based business, you
can deduct the entire cost of the computer in the year of the
purchase, to the extent of your income from that business.




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