The ins and outs of deducting equipment; this tax advice will help you pay less on April 15

Home Office Computing, Dec, 1992 by Linda Stern

This Tax Advice Will Help You Pay Less On April 15

Falling leaves signal the start of the shopping season. We self-employed types are easy to spot among the holiday consumers--we're the ones rushing past the sweater and perfume counters to the electronics departments and computer stores.

We're not shopping for our friends and relatives; we're thinking of ourselves as we aim to load up on tax-deductible business equipment before the calendar year ends. Especially this year, when computer-industry price wars have made shopping that much more fun for bargain-conscious technophiles.

Tax deductions (and the occasional freedom to go shopping in the middle of a workday) are among the rewards of self-employment. Buy a computer for the business, and under the right circumstances, you can save half the purchase price in taxes.

Right circumstances is the key phrase. When you are ready to add business equipment, you need to buy (or lease) it right and use it right if you want to take full advantage of the tax breaks. Here's how to do it.

(One caveat: Don't even think about cars while you are reading this article. The rules for deducting business use of automobiles are so singularly complicated that they deserve a column of their own. Which they will get next month, in this space.)

THE GOOD OLD 179

When buying equipment, first consider tax code Section 179, which allows businesses to deduct the entire purchase price of equipment--up to $10,000--in the year in which they buy it.

This deduction can save you significant amounts of money. If you're in the 28 percent tax bracket, live in a state with a 7 percent income tax, and are subject to the 15.3 percent self-employment tax, your business-tax bracket approaches 50 percent. Purchase a $4,000 computer, deduct it under section 179, and your bottom-line savings will probably be in the neighborhood of $2,000.

Them are, of course, a slew of limitations on Section 179. The IRS gives only one $10,000 deduction per family. So a husband and wife who each have their own businesses get just one $10,000 equipment deduction to divvy up.

You can't use Section 179 if you aren't making money, either--your deduction is limited to the amount that your businesses (you can use more than one) make in a year. So if you bought $9,000 worth of equipment but recorded only $7,000 in business income, you would only be able to take a $7,000 deduction. However, you don't lose the rest of the deduction--you can carry the remaining $2,000 over into the next year. You'll still be limited to a $10,000 deduction that year, however.

The $10,000 limit is also aimed at small businesses, as the deduction falls one dollar for every dollar over $200,000 that you spend on equipment in a year. So if you spent $204,000 last year on business equipment, you can deduct only $6,000, not $10,000.

And you can only use a Section 179 deduction for equipment that you buy and immediately bring into the business. If you convert to business use an item that you had originally bought and used personally, you can depreciate it over time but you can't expense it, which is accountant talk for taking the whole deduction in the first year, as Section 179 allows.

There's one other catch: If you use Section 179 to expense an item, and then take it out of the business before the longer depreciation period is up, you are required to recapture the part of the depreciation you didn't use. That means that if you bought that $4,000 computer, used it for two years and then gave it away in the third year, you would have to claim $1,920 as income in the third year. That's the amount of deduction that you received but didn't own the computer long enough to legitimately take.

OF CELLULAR PHONES AND VIDEOTAPES

Car phones, computers, videotape equipment, and similar items are called listed property. That means they are on an IRS list of equipment that you could easily and happily use outside of your business. The list was created by Congress to make sure that you don't take business deductions for equipment that you play with.

If your listed property shares business and personal use, you have to prove--with a contemporaneous log--that you use it at least 50 percent of the time for your business to take any business deduction at all for it. Even then, you can't take the Section 179 deduction. Instead, you depreciate the equipment over time and prorate your deduction for the percentage of time that the equipment is used in the business.

(The IRS exempts from this listed-property test any computer that you keep in a bona fide place of business, even a home office, as long as the office qualifies for a home-office deduction. But this is tricky-- keep your computer in your home office and stuff it with personal files, and a visiting IRS agent could disallow the whole office as well as the computer.)

Once you try to deduct the cost of tape recorders, telephones, and the like that are of mixed use, you subject yourself to more pages of IRS formulas and tables than I could satisfactorily explain here. Suffice it to say, the best answer is to keep your computer and electronic equipment exclusively in your business. (At today's prices, you can buy a cheap or even secondhand computer for personal use and as a backup for your business machine.)