Tax Laws on Computer Expenses & Deductions

Initial Purchase Expense

• The cost of an outright purchase of a computer, monitor, printer, scanner, external hard drive and other peripherals can be either taken as a deduction in its entity in the tax year of the purchase, or the equipment can be depreciated over time. Depreciation allows you to recover the cost of the system by taking part of the deduction each year. Get advice from your accountant, but generally a computer can be depreciated over a three- to five-year period, as this is considered to be the life expectancy of the equipment, even though the computer may still work fine and be used in the business beyond these years. An example of a depreciation deduction would be if you paid $1,000 for your computer and you elect to depreciate the cost over a five-year period. You would deduct 20 percent of the purchase price each year, or $200 a year, for five years.

Business Use Of Your Computer

• If you have a business based in your home, more than likely your computer is used partly for business and partly for personal use. If you use your computer about half the time for business work and half the time for personal use, you can deduct 50 percent of the cost of the purchase of the computer. This amount can be taken in full in the tax year the computer was purchased, or you can depreciate it over several years and deduct a portion each year.

Computer Leasing

• Since computers can become obsolete in a relatively short time, some businesses opt to lease a system rather than purchase one. That enables a business to upgrade to the latest technology more easily and quickly, without the hassle of having to sell or dispose of the older computers. The cost of renting or leasing a computer for business use is fully tax deductible.

Other Computer-Related Deductions

• As with anything that is mechanical or electrical, computer equipment can fail. Costs incurred for repairs and routine maintenance are tax deductible. Again, if your computer is not used exclusively for business, you can only deduct a portion of repair expenses in relation to the amount of business use of the computer. Computer accessories are also deductible, such as a mouse and connecting cables. Reusable computer-related items, such as paper, ink, toner and blank CDs and DVDs, are tax deductible. Report deductions for these types of items under "supplies" on income tax forms. For "sole proprietorship" businesses, all expenses are reported on Form 1040 Schedule C. Supplies are considered "ordinary expenses" as opposed to the purchase of computer equipment, which is classified as a "capital expense". A capital expense is when an asset, such as a computer system, is purchased with the intent of it having a useful life of over a year.