Want to cut the cost of your personal computer? The best way, says James H. Stevralia, an associate in the law firm of Squadron, Ellenoff, Plesent & Lehrer in New York City, is to make use of the tax breaks available to you.
To write off all or a portion of the cost of your personal computer on your federal income tax return, you must use the machine for business or for managing your investments. "If you're using the PC entirely to play video games," notes Harvey J. Berger, a partner in the Washington, D. C., office of Fox & Co., the accounting firm, "you're not going to be able to deduct it."
The first step, then, in determining write off is to separate business and personal usage. If the machine is utilized solely for business or investment management, the entire amount is deductible. But if you use your computer for a variety of purposes, you may write off only that portion of the cost attributable to business or investment management.
Here is an example: Suppose you shell out $5,000 for a personal computer. The kids play games and type school papers on it, but three-quarters of the time the machine is in operation, it is utilized strictly for business. What that means, in this case, is that you may write off 75% of the cost of the computer, or $3,750, on your federal tax return.
The cost of a personal computer may be deducted on the line labeled "Miscellaneous Deductions" on Schedule A of your personal income tax return, explains David W. Kennedy, an attorney and the co-author of Perfectly Legal, a book listing 350 ways to trim your taxes. You may choose to write off the total cost of the computer (up to $5,000 for 1983) or depreciate it over five years. However, if you elect the lump-sum deduction, you aren't entitled to an investment tax credit.
The investment tax credit, which amounts to 10% of the purchase price of the machine, may be claimed in the year you acquire the computer and is in addition to depreciation deductions. After subtracting half the amount of the tax credit, employing accelerated depreciation rules, you may write off 15% of the cost of the computer in the first year, 22% in the second year, and 21% in each of the third, fourth, and fifth years. Or, instead of electing the 10% tax credit, an 8% tax credit can be taken, and accelerated depreciation can be applied to the full cost of the computer.
Before you choose depreciation methods or the lump-sum deduction, Kennedy suggests that you figure your taxes all ways, then select the method that saves you the most money.
What about software for your personal computer?
Like hardware, software may be deducted in a lump sum or depreciated. "But there's a little twist in the rules," attorney Stevralia explains. "If the computer and the software were bought at the same time, then the software can qualify for an investment credit, the same as the hardware. But if they're bought at separate times, you just get the investment credit on the computer itself, not on the software."
Finally, be sure to maintain records to substantiate the amounts you claim. If you don't, and you are audited by the Internal Revenue Service, you may have problems. Take what happened to James Alman. When Alman, an electrical engineer, filed his 1976 tax return, he claimed $2,793.68 in depreciation of a home computer. The case wound up in Tax Court, with Alman the loser. He was unable to prove that he used the computer for anything but preparing tax returns and typing resumes. Those activities, in the court's opinion didn't "establish substantial business usage."
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