The Fastest Way to Deduct Your New Computer
© by Fred W. Daily
Regular tax code rules dictate that major equipment purchases of a small
business be tax deducted over a number of yearsnot all in the year purchased. For
example, a new computer ordinarily must be deducted over six years. The first and sixth
years, you only get 10% of it's cost as a business expense. In the second through fifth
years, a 20% deduction is allowed. Never mind that the computer might well be outdated in
a couple of years; that's how the stingy tax law works. Listen up, I am going to tell you
about a "loophole" that allows a 100% deduction in that first year, and you
don't have to spend a dime!
Small business owners don't need to learn the tax code by section number but
there is one to remember: IRC 179. This is perhaps the best self-employed tax break of
all. Section 179 allowsbut doesn't requirea deduction of up to $18,500 (1998)
of asset purchases to be deducted along with current expenses like rent or the light bill.
This is known as "expensing" an asset. A few years ago I bought a new $7,000
copier and started cranking out copies on December 31, and deducted the whole $7,000 in
that year. What's more, I bought it on the installment plan with zero money down! My
immediate tax savingsover $3,000 off my federal and state income taxes. Perfectly
legal, I assure you.
The fine print: not everything bought for your business qualifies for IRC 179
fast write-off. Vehicles are covered by special rules. Real estate or improvements to it,
never qualifies for IRC 179. And, that computer or cell phone must be used more than 50%
of the time for businessexcessive personal use is a no-no. As you might expect, the
percentage of any personal use reduces the amount of the Section 179 deduction. For
example, Joan bought a $3,000 computer system that she uses 60% for her consulting
business, and 40% for personal things, like financial management. Her 179 deduction is
$1,800. Last, but not least, determine whether or not you fully benefit by using IRC 179.
If your venture is young, and has little or no revenue, it may be better off to spread out
the deduction over a number of future profitable years, using regular tax code
For a complete explanation of what you canand can't dosee my book Tax Savvy for Small Business
published by Nolo Press.
By: Frederick W. Daily, Tax Attorney,
John Raymond, Bankruptcy Attorney, and
Allan H. Rosenthal, paralegal.
All of the three have offices in San Francisco.
(This article was originally written for tax
practitioners who represent clients before the IRS. But the information
presented here is valuable for all taxpayers.)
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