11.1 Sale or Trade of Business, Depreciation, Rentals: Depreciation & Recapture
Can the entire acquisition cost of a computer that I purchased for
my business be deducted as a business expense or do I have to use depreciation?
A deduction for depreciation of a computer for business use can be expensed
in the first year if qualified, or depreciated over the recovery period. To
claim the expense in the first year, the property must be used more than 50%
for business use, and meet the other requirements for expensing.
The 2003 Jobs and Growth Tax Relief Reconciliation Act of 2003 raised the
aggregate cost that can be expensed for any tax year after 2002 and before
2006 to $100,000. The new law also expanded the definition of Code Section
179 property to include off-the shelf computer software. See Code Section 179 for the expanded definition.
If you make a choice to depreciate the property you can claim a special
depreciation allowance for qualified property you acquired in service after
September 10, 2001 and before January 1, 2005. The allowance is a depreciation
deduction equal to 30% of the property's depreciable basis. The special depreciation
is figured before you calculate your regular depreciation. To qualify for
the special deduction the property must:
Be new property this is depreciated under MACRS with a recovery period
of 20 years or less.
Be property that was acquired after September 10, 2001 and before January
1, 2005.
Be property that was placed in service and before January 1, 2005.
Be property the original use of which began after September 10, 2001
See Publication 946, How to Depreciate Property for
additional information on the special deduction.
The 2003 Jobs and Growth Tax Relief Reconciliation Act of 2003 modified
the bonus depreciation rule by substituting a 50% special depreciation allowance
for the 30%, for property acquired after May 5, 2003 and before January 1,
2005. No binding contract for acquisition can be in effect before May 6, 2003.
Property eligible for the 50% additional first-year depreciation is not eligible
for the 30% additional first-year depreciation. However, an election can be
made to have the 30% additional first-year depreciation deduction apply to
the 50% depreciation property instead of the 50% additional firs-year depreciation
deduction. It is also possible to elect not to claim the additional first-year
depreciation.
References:
What kinds of property can be depreciated for tax purposes?
Only property used in a trade or business or in an income production activity
can be depreciated. Additionally, the property must be something that wears
out or becomes obsolete and it must have a determinable useful life substantially
beyond the tax year. The kinds of property that can be depreciated include,
but are not limited to, machinery, equipment, buildings, vehicles, and furniture.
Depreciation is a complex topic. For more information, refer to Tax Topic 704, Depreciation,
or Publication 946, How to Depreciate Property ,
or Publication 534 (PDF) , Depreciating Property
Placed in Service Before 1987.
References:
I purchased a computer last year to do online day trading part-time
from home for additional income. Can I deduct or depreciate the cost of the
computer or internet connection from my investment income?
You may deduct investment expenses (other than interest expenses) as miscellaneous
itemized deductions on Form 1040, Schedule A (PDF),
line 22, Itemized Deductions. This would include depreciation on
the portion of your computer used for investment purposes, and the portion
of your internet access charges used for investment purposes.
A deduction for depreciation of a computer for business use can be expensed
in the first year if qualified, or depreciated over the recovery period. To
claim the expense in the first year, the property must be used more than 50%
for business use, and meet the other requirements for expensing.
The 2003 Jobs and Growth Act raised the aggregate cost that can be expensed
for any tax year beginning after 2002 and before 2006 to $100,000. The new
law also expanded the definition of Code Section 179 property to include off-the-shelf
computer software. See Code Section 179 for the expanded definition. If the business use falls
to 50% or less in a later year, these tax benefits may be subject to recapture.
See Publication 946 , How to Depreciate Property for
additional information on the special deduction.
These deductions must be reduced by 2% of your adjusted gross income. Use Form 4562 (PDF), Depreciation and Amortization,
to compute the depreciation for the portion of your computer used for investment
purposes.
Note: Unless the computer is used more than 50% for business purpose (as
opposed to investment purposes), you cannot claim section 179 expensing of
the computer or claim accelerated depreciation for it. For more information,
refer to "Listed Property" in Publication 946, How to Depreciate Property.
References:
I purchased a computer to support my job-related activities. As
an employee, can I write-off the entire allowed cost or will I have to depreciate
it over a few years?
You can claim a depreciation deduction for a computer that you use in your
work as an employee if its use is:
For the convenience of your employer, and
Required as a condition of your employment.
Use Form 4562 (PDF) , Depreciation and
Amortization , to compute the depreciation. There have been recent changes
to the percentage of depreciation claimed in the first year you place the
property in service.
The cost of a computer purchased for business use can be expensed under
section 179 in the first year if qualified, or depreciated over the recovery
period. To claim the expense in the first year, the property must be used
more than 50% for business use, and meet the other requirements for expensing.
The 2003 Jobs and Growth Act raised the aggregate cost that can be expensed
for any tax year after 2002 and before 2006 to $100,000. The new law also
expanded the definition of Code Section 179 property to include off-the shelf computer software.
See Code Section 179 for the expanded definition.
If you make a choice to depreciate the property you can claim a special
depreciation allowance for qualified property you acquired after September
10, 2001 and before January 1, 2005. The allowance is figured before you calculate
your regular depreciation. See Publication 946 , How to
Depreciate Property for additional information on the special deduction.
You cannot take a section 179 deduction for the item or claim accelerated
depreciation unless your use of the computer is more than 50% business or
job-related use (and you meet the two conditions listed above).
Section 179 deductions and accelerated depreciation methods are explained
in Publication 946, How to Depreciate Property.
References:
12.7 Small Business/Self-Employed/Other Business: Income & Expenses
Can I deduct my investment expenses as business expenses?
In order to properly determine the correct treatment income and expenses,
it is first necessary to classify the type of investment activity occurring.
An Investor buys and sells securities solely for their
own account. They are not engaged in a trade or business. An investor's investment
expenses are taken as miscellaneous itemized deductions on Form 1040, Schedule A (PDF) , subject to the 2% AGI limitations (with the exception
of investment interest which is not a miscellaneous deduction but subject
to its own special limitations). An investor's sale of securities results
in capital gains and losses.
A Dealer in securities has inventories of securities
that they hold for sale to customers in the ordinary course of their trade
or business. Their business expenses are deductible as ordinary business expenses.
A dealer doing business as a sole proprietor would deduct their expenses on
1040 Schedule C. A Dealer's sale of securities is reported as ordinary income.
A third classification is Trader . A Trader is in
the trade or business of buying and selling securities for their own account.
You are a trader in securities if you meet all of the following conditions:
You must seek to profit from daily market movements in the prices of securities
and not from dividends, interest, or capital appreciation.
Your activity must be substantial.
You must carry on the activity with continuity and regularity.
The following facts and circumstances should be considered in determining
if your activity is a securities trading business:
Typical holding periods for securities bought and sold.
The frequency and dollar amount of your trades during the year.
The extent to which you pursue the activity to produce income for a livelihood
The amount of time you devote to the activity.
:
A trader's business expense are reported on Form 1040, Schedule C (PDF) , not as itemized deductions on 1040 Schedule A. The
deductions are not subject to the limitations that apply to Schedule A (2%
AGI limitation and special limits on investment interest). A trader gain or
loss on sale of securities is reported as capital gain or loss on Form 1040, Schedule D (PDF) unless they have made the mark-to-market
election.
If a trader has made a mark-to-market election, gains and losses are reported
on part II of Form 4797 (PDF) as ordinary income.
For information regarding the manner and timing of making the mark-to-market
election, see Publication 550 , Investment Income and
Expense or Revenue Procedure 99-17, 1999-1 CB 503.
The proper classification of your investment activities is important to
determine how income and expenses are to be reported. Investors trade solely
for their own account and do not carry on a trade or business. Their securities
sales result in capital gain or loss and their deductible expenses are itemized
deductions. Dealers sell securities to customers in the ordinary course of
trade or business. Their sales result in ordinary gain or loss and their deductible
expenses are trade or business expenses. Traders buy and sell securities frequently
but have no customers. Their purchases and sales result in capital gain and
loss, and their deductible expenses are trade or business expenses.
Even if you engage in extensive securities activities, you are an investor,
not a dealer or trader, if you do not seek profit primarily in swings in daily
market movements, and do not personally engage in or direct the purchases
or sales. An investor trades for profit-motivated reasons such as long-term
appreciation, dividends and interest. Whether the activities of an individual
constitute trade or business or investment is determined from the facts in
each case. These distinctions have been established through court cases.
If your trading activity is a business, your trading expenses would be
reported on Form 1040, Schedule C (PDF), Profit
or Loss from Business (Sole Proprietorship) instead of Form 1040, Schedule A (PDF), Itemized Deductions. Your gains or losses,
however, would be reported on Form 1040, Schedule D (PDF), Capital
Gains and Losses, unless you file an election to change your method
of accounting.
If your trading activity is a business and you elect to change to the mark-to-market
method of accounting, you would report both your gains or losses on Part II
of Form 4797 (PDF), Sales of Business Property .
A change in your method of accounting requires the consent of the Commissioner
and can not be revoked without the consent of the Secretary. Though there
is no publication specific to day traders, the details for traders in securities
and commodities are covered in Internal Revenue Code Section 475 (f) and Revenue
Procedure 99-17.
References:
12.8 Small Business/Self-Employed/Other Business: Schedule C & Schedule SE
I buy and sell stocks as a day trader using an online brokerage
firm. Can I treat this as a business and report my gains and losses on Schedule
C?
A business is generally an activity carried on for a livelihood or in good
faith to make a profit. Rather than defined in the tax code, exactly what
activities are considered business activities has long been the subject of
court cases. The facts and circumstances of each case determine whether or
not an activity is a trade or business. Basically, if your day trading activity
goal is to profit from short-term swings in the market rather than from long-term
capital appreciation of assets, if your income is primarily from the sale
of securities rather than from dividends and interest paid on securities,
and if you expect this income to be your primary income for meeting your personal
living expenses, i.e. you do not have another regular job, then your trading
activity might be a business.
For details about not-for-profit activities, refer to Publication 535, Business
Expenses. That chapter explains how to determine whether your activity
is carried on to make a profit and how to figure the amount of loss you can
deduct.
If your trading activity is a business, your trading expenses would be
reported on Form 1040, Schedule C (PDF), Profit
or Loss from Business (Sole Proprietorship) , instead of Form 1040, Schedule A (PDF), Itemized Deductions. Your gains or losses,
however, would be reported on Form 1040, Schedule D (PDF), Capital
Gains and Losses , unless you file an election to change you method of
accounting.
If your trading activity is a business and you elect to change to the mark-to-market
method of accounting, you would report both your gains or losses and your
trading expenses in Part II of Form 4797, Sale of Business Property. See Publication 550, Investment Income and Expenses , for details.
A change in your method of accounting requires the consent of the Commissioner
and can not be revoked without the consent of the Secretary. Though there
is no publication specific to day traders, the details for traders in securities
and commodities are covered in Internal Revenue Code Section 475 (f) and Revenue
Procedure 99-17.
References:
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