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Subject:  Computer HW/SW Deduction Date:  3/24/2000  3:40 PM
Author:  akajackson Number:  32510 of 120789

Having read through several old posts on this board as well as the TaxFAQ (including the one on this topic) and IRS publications 529 (Misc Deductions) and 946 (Depreciation), I feel I am fairly well versed in the depreciation deduction for home computers. But the more I know, the more I realize I don't know...

Situation 1:

I buy a computer last year for personal use. This year I use the computer for income producing activities (investments as well as some consulting I do as a sole proprietor). Since I use the computer for my consulting work, I can claim the deduction on my schedule C which is not subject to the 2% limit on schedule A. Since I bought the computer last year, I must use the FMV of the computer on the date I placed it in service this year. No problem so far.

Let's say I use the computer this year for 75% business/investment use. Because this is in excess of the 50% limit, I can depreciate using MACRS giving me a larger deduction in the earlier years of the depreciation. However, because I am somewhat conservative, I can envision that next year, my business use may fall to 50% or less. By my understanding of publication 946, I would have to continue to use MACRS, but recapture some of the deduction as income since I would no longer qualify for MACRS depreciation. Given that, I am inclined to use the straight line ADS depreciation method even though it means less of a deduction this year but means that regardless of how low my business use drops in the future, I will never have to worry about recapturing any excess deduction already taken. What do you Fools think?

Situation 2:

For this situation, let's assume that I purchase new computer hardware or software this year that costs less than, say, $100 - an external zip drive or some investment software. These items both have useful lives greater than the current year and technically should be depreciated, but since the original basis is so low, it hardly seems worth the hassle. No IRS publication that I could find specifies a dollar limit on what should be depreciated versus what can just be expensed (subject to the percentage of business use). Do I really need to keep track of every little (<$100) expense for depreciation purposes or can I just expense them.

I am also under the impression (again from Pub 946) that I can't lump any computer equipment items together since you can't form a general asset account for listed property. The software, however, is not listed property so could I use the rules for general asset accounts to lump software together as one depreciable item without having to list each separately. This seems reasonable, but also a headache since I would have to determine a combined business use percentage for all items lumped together. Foolish thoughts on this?

Situation 3:

TurboTax or other tax preparation software doesn't really have a useful life greater than a year so it would seem to me that this can be classified as an expense (subject to the business use percentage, of course) and not depreciated.

I appreciate any help you can offer me. If I (somehow) missed an appropriate post, please accept my apology and thanks in advance if you could kindly share the link with me.

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