Expenses: section 179 tax deduction for your computer

Expenses: section 179 tax deduction for your computer

Tax deduction 179 is used to recover all or part of the cost of certain qualifying property. When conducting business you can include your tools, computer, etc.

in your costs either as an expense, via depreciation or through deduction 179. Deduction 179 is short for the official name section 179 depreciation deduction.

What is section 179 depreciation deduction?

Small items such as office supplies, pens, writing pads, markers are expensed directly. They are included in accounting and in taxes in the year when purchased. Items that have useful life of more than one year are a bit more complicated.

Property with useful life of more than one year generally has to be included in your costs via depreciation deductions.

You can also elect to recover all or part of the cost of certain qualifying property, up to a limit, by deducting it in the year you place the property in service. This is the section 179 deduction. You can elect the section 179 deduction instead of recovering the cost by taking depreciation deductions.

The following summarizes key facts concerning the section 179 depreciation deduction:

  • Section 179 deduction property is generally limited to tangible, it must meet certain conditions of eligibility,
  • The property has to be depreciable,
  • The property that is deducted is personal property (that is acquired by the purchasee),
  • It is acquired for use in the active conduct of a trade or business,
  • The 179 election may only be taken in the year the equipment is placed in use.

These characteristics are explained more below.

What are the benefits of taking the section 179 deduction?

In addition to lowering your taxes for the year, the section 179 deduction also provides many less obvious benefits:

  • Lowers earned income which can increase your earned income credit.
  • Lowers adjusted gross income which could help you qualify for various deductions which are limited by the adjusted gross income.
  • Deduction 179 is allowed in full even if the eligible property is placed in service on the last day of the year.

The 179 deduction can be a very nice treat at the end.

Deduction 179: business use

To qualify for the section 179 deduction, the property must have been acquired for use in your trade or business. You cannot buy a TV set and claim that you watch it while growing potatoes that you sell for your business. The use must be related to your business.

When you use property for both business and nonbusiness purposes, you can elect the section 179 deduction only if you use the property more than 50% for business in the year you place it in service. If the property is used more than 50% but less than 100% for business, then multiply the cost of the property by the percentage of business use. For example, if you purchase a computer for $2000 that you use 80% for your programming and 20% for playing games, then the business part of the cost of the property is $1,600 (80% × $2,000).

Deduction 179: property acquired by purchasee

To qualify for the section 179 deduction, the property must have been acquired by purchase. This means that for example property acquired by gift or inheritance does not qualify. If the property is acquired from a related person, then it does not qualify as well. 

Deduction 179: excepted property

Some property does not qualify for the deduction at all. That is for example air conditioning and heating units and property that is being used predominantly outside the United States.

How much can I claim for the deduction 179?

Your section 179 deduction is generally the cost of the qualifying property. However, the total amount you can elect to deduct under section 179 is subject to a dollar limit and a business income limit.

Section 179 deduction dollar limit...

The total amount you can elect to deduct under section 179 for most property placed in service in 2007 generally cannot be more than $125,000. It was $108,000 for year 2006.

Section 179 deduction business income limit...

After you apply the dollar limit to determine a tentative deduction, you must apply the business income limit in order to determine your actual section 179 deduction.

The total cost you can deduct each year after you apply the dollar limit is limited to the taxable income from the active conduct of any trade or business during the year. To make this clear, let us use an example. You are someone else's employee for most of the year. Your wages exceed the Section 179 deduction. You start your own business at the end of the year and purchase business property. Even if your new business does not generate gross income that year, you can still take the Section 179 deduction on the new property.

Are there any exceptions to deduction 179?

Yes, there are many exceptions, but to name a few, for example buildings are not eligible for section 179 deductions, and also property that is being used outside of the USA is not eligible.

What do I do if I can't take the deduction 179?

The section 179 deduction election is not mandatory, it is an option. If you cannot take this deduction, you can always depreciate the property that is not eligible for a section 179 deduction. A such property is still deductible over a number of years through MACRS depreciation (sections 167 and 168 of the code).

Can I deduct my computer from my taxes?

Let us picture a scenario that is very common. A web developer works for a corporation where he is being paid as an employee. Then he starts his own business of developing websites. Can he take section 179 deduction for the computer he purchased to do his business?

In general, the entire acquisition cost of a computer purchased for business use can be expensed under code section 179 in the first year if qualified, or depreciated over a 5-year recovery period. Computer equipment has a useful life of more than one year so generally it is depreciated rather than taken as an expense in the year purchased.  For computers and their peripheral equipment the recovery period is 5 years.

However, under section 179, the developer could elect to recover all or part of the cost of certain qualifying property up to a dollar limit by deducting it in the year he places the property in service.

If the computer equipment is used more than 50% for business, the developer could claim a 179 expense deduction in the year of purchase.  This is important. If he buys the computer in November 2008, he can only take the deduction for taxes in 2008.

This would allow the developer to write off the entire expense. There are however two catches to it:

  • If he uses the computer only 80% in his business and 20% is personal use, then the 179 deduction would be only 80% of the purchase cost.
  • If business usage drops to 50% or less within the 5 year recovery period, the developer would have to recapture some of that depreciation.

The business use proration is often forgotten.

What form do I need to report deduction 179?

Use Form 4562 Depreciation and Amortization to calculate and report your 179 deduction and attach it to your federal tax return for the current tax year. You can download this from www.IRS.gov.

Where can I find more information about deduction 179?

You can find more details about the deduction 179 in the following two sources:

  • IRS publication 946 How to Depreciate Property.
  • United States Internal Revenue Code (26 U.S.C. § 179)

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