Question

Can I Deduct Computer Cost If Only Starting Using it a Lot for Business in Year 2 of Business?

Forum|Forum|4 years ago
February 13, 2022
3 replies
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I purchased a computer in early 2021 that is for personal use and use for my business (a sole proprietorship). My business didn't begin until November 2021, so a very small percentage of the computer's use was for business in 2021. Can I claim any of the computer's cost as a business expense for 2021, or for future years (when I expect to use it 60% for business)? Or am I just completely out of luck because I didn't use it enough for business in the year I purchased it?

TurboTax Home & Biz Windows

A

AamilD

Yes, you can deduct it as a business expense in 2021. You will be listing your business expenses on Schedule C. However, the computer which you purchased would go under the Assets category in Schedule C

To input business expenses on Schedule C, please follow the steps below:

While inside the software and working on your return, type Schedule C in the Search at the top of the screen (you may see a magnifying glass there). There will be a popup that says Jump to Schedule C. Select that to get to the general area.

Business Income and Expenses
select Edit next to your business (if it is there)
scroll to Business Assets

It will ask you to Describe the asset and since its Computer, you would put it in the "Computer, Video, Photo and Telephone Equipment" Category. It will then ask you about the cost and date of purchase and you can put in that info.

It will then ask you whether you purchase the laptop as New or Used. Further, it will ask you the usage percentage of this asset. Based on your question, you would mark No when it asks you if this item has been used 100% for the business since you acquired. Further, you can indicate that this was used for personal purposes initially. Then you can type in the start of business date and the percentage usage in 2021.

Once you input, that would will have to make a decision:

1) You can either choose "Special Depreciation Allowance" which will allow you to take the entire deduction in 2021.

2) You can say no to the Special Depreciation Allowance and take the depreciation for the computer over 5 years. This means every year you can take a depreciation expense deduction for the next 5 years.

M

messner8000Author

Thank you for the response. However, when I follow the process you describe (and try to enter it under Business Assets, and indicate I want to claim the expense in 1 year, not over 5 years), it says that because the computer is under $2500 I should enter it as "other miscellaneous expense" - and that portion of TurboTax does not let me put in information like the date I bought it, how much I used it in 2021, etc. Ideas? I can enter it as a misc. expense, but then I'm back to not knowing how much to claim as an expense (since I'm used it very little in 2021, but expect to use it 60% for business in 2022 and beyond...)

Z

ZoltanB45

If you wanted to deduct it all in year 1, depreciation expense would be the same as a miscellaneous expense. Going forward, you would not take any more expenses either way. If the computer cost $1000, take the percentage you want to take for the business, multiply and enter that number under miscellaneous expense. I would enter it under office supplies.

Carl11_2

Employee

A couple of things to clarify here.

At best, you paid no more than $1500 for that computer, monitor, keyboard, mouse and printer when you purchased it brand new 2 years ago for personal use.

When converting it to a business asset, you can not expense used equipment that was personal use prior to it's business use. You have to treat it as an asset and depreciate it over time. Computer equipment is depreciated over 5 years. It's cost basis is the "LESSER" of what you paid for it, or it's FMV (Fair Market Value) at the time you made it a business asset. Computer equipment losses value fast. SO at best, the total of your computer equipment "might" make it to $800. Over 5 years, that's $160 a year of depreciation. Any reduction in your tax liability each year for a mere $160 will be negligible, if anything at all.

Claiming the Sec179 for the computer is not permissible, as IRS Pub 946 states one of the requirements for SEC179 eligible property, is that it must be acquired for business use. Your computer was not acquired for business use at the time you purchased it. It was acquired for personal use. So it's not eligible for SEC179. See IRS pub 946 at https://www.irs.gov/publications/p946 where it reads as below:

What Property Qualifies?

To qualify for the section 179 deduction, your property must meet all the following requirements.

It must be eligible property.
It must be acquired for business use.
It must have been acquired by purchase.
It must not be property described later under What Property Does Not Qualify .

DaveF1006

Yes, you will be able to deduct 60% of the computer cost for 2021 as an expense if the cost of the computer is less than $2500. This is a one-time deduction.

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messner8000Author

Thanks! I will admit I am now confused. I'll try one last time, but I know this chain is getting long...

I bought my $802 computer in July and the percent I am using it for business is:

2021: 5%

2022-2025: 60%

You said in your response I could deduct 60% of the total cost in Year 1. That strikes me as strange because I'm not using it for 60% business (either in Year 1, or on average over all 5 years). Can you point me to an IRS guidance document that supports this interpretation? Also, I read the responses from ColeenD3 and DMarkM1 to say that based on my facts I need to depreciate (which is why I'm trying to figure how how to do that for assets under $2500). Thanks!!

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DianeW777

Let me try to simplify the correct action and options for 2021. First, we cannot use information that has not occurred yet. What this means is that it is interesting that your intent is to use it 60% of the time for business in future years, but it's not yet a fact.

Note: Time of use for business vs time of use for all purposes (personal purposes) is the correct way to determine business use percentage.

In 2021, you can make the De Minimis Safe Harbor election (business asset cost less than $2,500) and deduct only 21% of your computer expense. This is a reasonable assumption because if you were depreciating the item, you could depreciate 20% of the 21% of the cost in year one under the regular depreciation method. IRS FAQs for De Minimis Safe Harbor

Navigate to the Other Common Business Expenses section to enter the deduction under Other Miscellaneous Expenses. Enter a De Minimis Safe Harbor as your description and enter the 21% amount.

OR

You can choose to depreciate the 21% business use portion of the cost in 2021 (recommendation would be to use the allowable election above). This means you would get 20% of the 21% business use percentage as your depreciation deduction if you enter the computer asset that has a 5 year recovery period.

IRS Publication 946 (Section 179 does not apply for you in 2021)

If you choose to use the election in 2021, then in 2022 when the business use percentage changes you must depreciate the remaining business use balance. You will not be allowed to use the De Minimis Safe Harbor election after the first year an asset is placed in service.