As a business owner, you can deduct the cost of a computer that you use in your business or for business-related purposes. While sometimes a business owner can deduct the cost in a single year, they may need to spread the cost over multiple years in some cases. The Tax Cuts and Jobs Act, which went into effect in 2018, removed the classification of computers as listed property. This means that you do not need to meet strict record-keeping requirements to show that the computer was used for business rather than personal purposes. Also, you can use bonus depreciation to deduct a larger amount of its cost than you could previously.
If you are an employee rather than a business owner, your employer should reimburse you for the cost of a computer purchased for your business. You do not need to include the cost of the computer in your income from your job. However, if you do not get reimbursed by your employer, you will not be able to deduct the computer as an unreimbursed employee expense under the Tax Cuts and Jobs Act.
Deductions Under Section 179
Section 179 of the tax code allows a business owner to deduct the cost of new or used tangible personal property that is bought for their business. A computer is a type of tangible personal property, and Section 179 will apply to the computer if you use it for your business more than 50 percent of the time. The 50 percent rule applies to the year in which you buy the computer. As a result, a business owner cannot convert a personal computer to a business computer and then apply a deduction. Section 179 deductions are subject to a $1 million annual limit. You can read more here about how this rule works.
Many business owners use a computer for both business and personal purposes. In that situation, they would need to reduce the amount of the deduction by the percentage of their personal use. Perhaps a business owner uses a computer for entertainment 25 percent of the time, while using it for their business during the remaining 75 percent. The deduction would account for 75 percent of the cost of the computer.
There are certain exceptions to the use of Section 179. You cannot use Section 179 to cover a computer (or other property) that you rent, inherit, or receive as a gift, or that you buy from another business that you own, a relative, or a business that a relative owns. Also, you cannot deduct more than your net taxable income in one year. If you do not get a deduction because you did not get money from your business, you can save the deduction to apply in a future year in which you earn a profit. (Your taxable income includes income from a job or other sources in addition to your business income, as well as the income of your spouse if you are filing your tax return jointly.)
Business Computers and Depreciation
The depreciation process applies to any property that you use for business less than half of the time, including a computer. This means that you will need to deduct the cost gradually over a period of several years. The deduction will be proportionate to the percentage of use that is related to your business. If you use a computer for your business only 20 percent of the time, you could depreciate only 20 percent of its cost. The depreciation would extend over a period of five years, as with other office equipment.