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Home Business IT - Tax Savings

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Taking Advantage of Tax Savings

Most people understand that the purchase of computer and office equipment is a business expense that can be deducted from one’s tax bill. You have two different options here:

1. Treat the purchase as an expense for the year in which you placed it in service;

2. Take depreciation over a five-year period.

If you claim the expense in the first year, the equipment must be used for business purposes no less than 50% of the time. There may be other requirements that must be met before the equipment is allowed to be “expensed” as well. According to the IRS:

“…the total cost of qualifying property you can deduct after you apply the dollar limit is limited to the taxable income from the active conduct of any trade or business during the year. Any cost not deductible in one year under Section 179 because of the business

income limit can be carried to the next year.”

Depreciation allows you to recover the cost of your equipment over five years based on its decrease in value. Obviously in order to qualify for such a deduction, the equipment must have a useful service life of more than one year.

Computer software purchased specifically for the business can actually be depreciated under certain circumstances. If it is:

• readily available for purchase by the general public

• subject to a nonexclusive license

• has not been substantially modified

it qualifies for depreciation under Section 179.

More information is available in IRS Publication 946, “How To Depreciate Property, available at http://www.irs.gov/publications/p946/index.html, and

Publication 535, “Business Expenses,” which can be downloaded at

http://www.irs.gov/publications/p535/index.html.

This information is not intended to replace the advice of a licensed accountant or attorney; always consult with a tax professional on these issues when you have questions.

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