ignatz (01/17/83)
Two questions: 1) I recently purchased a micro-computer system with some peripherals and software. As I'm a consultant in the field, I'm sure I can write off the purchase price (a modest $3000.00) The only problem is that I've been told of three ways to do it; and friends of mine who are tax lawyers can't agree on which is best! I'd like to know of anyone who's *used* one of these methods, or *knows* that one is best for my purposes (i.e., greatest deduction in the shortest amount of time) I. Educational expense. (A co-worker at my branch of the consulting firm used this, but it was 3 years ago; have the laws changed?) Basically, there is a clause which allows you to deduct *all* expenses related to education necessary to allow you to retain your job (NOT train for a new or better job.) Also, apparently this may be applied as a lump sum deduction to you gross income. Thus, the rationale my friend applied was that it was necessary for him to have a system to train and experiment on. The IRS hasn't audited him yet. (Comment: was all of this information from him correct? Or is he just lucky so far?) II. Capital expenditure, amortized over a period of time. Depending upon which lawyer I talked to, it was over 3 or 5 years. In any case, the amount isn't worth it. III. Capital expenditure under $5,000. This one the lawyer was woozy on, both because it's supposedly new, and also because of the 4th or 5th Jack Daniel's we'd put away; but he stated that for small capital expenditures under $5000, or was it $6000 or $10000...anyway...you could write it all off on the first year. Hmmm? Any veracity to this? Thanks for any legit responses...if they check out, I'll let you all know in Dave Ihnat ihuxx!ignatz
gear (01/18/83)
#R:ihuxx:-31400:uiucdcs:13200002:000:1742
uiucdcs!gear Jan 18 08:58:00 1983
I don't know about the first option, but does that matter because the
second has the same effect. As for the difference between II and III,
it is simply a question of the effective rate of return after noting that
if you use II you can tax an investment tax credit on the first
filing year. The trade-off depends on your tax bracket, favoring II more
strongly in the lower brackets because a tax credit is a deduction against
taxes, not income. At a recent seminar by my tax accounting firm, a
break-even point was given at about 18% pre-tax return per annum at the
50% tax bracket. (These figures may be way wrong, as I didn't write them
down but just noted that the return rate was sufficiently high that option
II was almost certainly the best.) In case this confuses you, the picture is
roughly the following: Price $5,000, tax bracket 50%
Method III--Deduct in year purchased as an "expense" item
Net tax reduction: $2,500
Method II--Depreciate over 5 years
First year: 10% Investment tax credit (this may be the wrong #)
$500 tax savings
Years 1 - 5: Depreciate remaining $4,500 at $900/year, saving
$450/year.
Total Tax reduction: $2,750
Then the question is "What interest rate must one get (before taxes) to
do as well by investing $2,500 in year one and sitting around instead of
investing $950 in year 1 and $450 in years 2 through 5?"
The facts are a little more complicated because you can probably depreciate
it more rapidly and/or use a non-straight-line method which takes a
larger percentage of depreciation in the early years. If it were me, I would
use method II and get a table from the IRS which gives the depreciation
schedules for various classes of equipment.mikem (01/18/83)
I am not a lawyer or tax accountant, but you may take the following information for what it is worth. This came from "Tax Guide for Engineers", mentioned on these pages previously... 1) The educational expense is a risky one at best, since if an employer wanted you to learn about computers, he should provide one. If you think you might have need for computers in the future, you are really preparing yourself for a new job, and the deduction is not allowed. 2) The difference in times depends on what the application of the computer is. If it a business related expense, you are allowed to depreciate it over three years. If it is an expense related to investments, the computer must be depreciated over five years. In both cases, you also get an investment tax credit (which subtracts from taxes due) of 6% of the basis. If you intend to use the computer for personal use as well, you must adjust the basis; for example if you purchased a computer for $5000, and used it 90% for business/investments, and 10% for fun and games, your basis for depreciation and tax credits must be multiplied by 0.9. The 3 year depreciation schedule is also applicable to R&D expenses. You should play close attention to how much you really use a computer for fun and games; I already have an old computer (no I didn't worry about the depreciation stuff at that time) that I use exclusively for managing my investments. I have plenty of game programs, but haven't used them in years. 3) The option of a $5000 expense deduction is new this year(for 1982 filing); I am not sure if it will be around in 1983. This applies only for usage of the computer in a business environment. You may expense (essentially depreciate in one year) up to $5000 worth of capital goods. You are not allowed an investment tax credit though. Now for the question, what is the best way to go? It all depends on your tax bracket, your other tax deductions, etc. The best way to figure it out, is to estimate your income during the depreciation years, and determine what provides the best tax savings for you, by calculating tax liability each way. Also remember that you only get the tax credit when you depreciate the computer over 3 or 5 years. The book mentioned above, also explains how to get private tax rulings from the IRS in writing. Remember, that anything the IRS tells you over the phone is not binding. Mike Mihalik (just another person wanting to buy a computer, and write it off)
dee (01/19/83)
It might not be so bad to treat a micro as a capital expense. You can use accelerated depreciation over 5 years or something, after the extra 20% first year depreciation plus the investment tax credit.
gear (01/25/83)
#R:ihuxx:-31400:uiucdcs:13200004:000:1038 uiucdcs!gear Jan 24 22:06:00 1983 I just read a newspaper article giving the rules for 82. If you trust such a source, they are: Method II: You can take a 10% investment tax credit in 82 if you give it a life of more than 3 years. A computer must be given a life of 5 years. You can deduct as follows: 82 15% = 750 83 22% =1100 84 - 86 21% =1050 each year. You can do this on full price. (That is, you don't have to reduce the price by the tax credit.) For a $5,000 computer I computed the following example: 50% tax bracket, assume tax savings invested in something yielding 10% AFTER tax return per annum. Using method II you would have $3,750.89 invested after filing for 86. Using method III (expense it first year) you would have $3,660.25. Example moves in favor of method II as tax bracket is lowered, in favor of method III as available after tax return rate increases. A good numerical programmer could plot the graph of the break point for rate of return versus tax bracket. I'm just a numerical analyst and could never do that without error.
jcw (01/25/83)
The IRS does require that computers be depreciated over five years. However, with the current state of the art, it might be desirable to trade computers sooner than that. If the computer is expensed in the first year, I assume that one can dispose of it any time thereafter. However, one cannot continue to depreciate what one no longer owns. In either case, how does one treat revenue from the sale when disposing of the computer?
bcw (01/26/83)
From: Bruce C. Wright @ Duke University Re: Computer depreciation That's easy - if you are depreciating an item over a period of years, and the depreciation period has not yet run out when you sell or otherwise dispose of the item, then your "initial investment" cost is the UN-depreciated cost (that is, the fraction not yet depreciated), and you must pay capital gain tax if you sell the item for more (always the case if it has been depreciated to 0 ...), or you may take a capital loss if you sell the item for less. This is true for anything, of course, not just computers; but the problem is that computer value drops somewhat faster than the depreciation the government allows you ... leaving you usually with a capital loss to claim. Unfortunately, capital gains/losses are loaded towards capital gains, i. e., you don't pay much tax on capital gains (relatively), but then you don't get to deduct very much (relatively) on a capital loss (they are handled differently from other types of losses where you can usually deduct a larger share - maybe even all - of the loss in some circumstances). Bruce C. Wright @ Duke University
smith@umn-cs.UUCP (06/06/83)
#R:ihuxx:-31400:umn-cs:10500004:000:1388
umn-cs!smith Jan 20 13:04:00 1983
When I first approached the problem a few years ago I looked very carefully
into deducting the computer cost as an "educational expense" as mentioned in
your Case I. Superficially it sounds like a good idea, but the books made me
doubt its validity as a deduction. The IRS sets great store by the phrase
"ordinary and necessary" and few people have gotten away with deducting
expenses other than tuition, books, paper supplies, and maybe transportation.
Maybe the new wave of purchase requirements by colleges will someday change
this, but it's hard to tell. It would be interesting to know if, for
instance, the IRS sees a typewriter as a "necesary" college expense.
I used your Case II (deduct depreciated cost) and took it as a business
expense ("calculating equipment used for professional purposes"). Ditto
for the investment tax credit. Since then I've had consulting work and have
deducted depreciation from Schedule C.
I'm getting more equipment this year and plan to just write it all off
using your Case III. I haven't really read the new rules, but what I have
heard makes me think it will apply.
The only weird issue I know of here is that of proving to the IRS that
you're really in business. Things get pretty sticky if your hardware
costs exceed your income, and do so regularly. That's the only advantage
I can see to depreciating these days.
Rick.