Computer depreciation for business use can be expensed in the first year, if qualified, or depreciated over the 5 year MACRS depreciation schedule.
A deduction for computer 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 computer depreciation expense in the first year, the computer muse be used more than 50% for business use, and meet other requirements for expensing.
Computer Depreciation 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..
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”.
Computer depreciation example 1: You purchase a computer in 2014 and use it exclusively in your regular business office. The computer is NOT listed property and can be expensed. 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.
Computer depreciation example 2: You purchase a computer in 2014 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.
Computer depreciation business use example 1: You purchase a computer in 2014 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.
Computer depreciation business use 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 computer depreciation 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 depreciation 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.