I purchased a computer in early 2021 that is for personal use and use for my business (a sole proprietorship). My business didn't begin until November 2021, so a very small percentage of the computer's use was for business in 2021. Can I claim any of the computer's cost as a business expense for 2021, or for future years (when I expect to use it 60% for business)? Or am I just completely out of luck because I didn't use it enough for business in the year I purchased it?
Yes, you can deduct it as a business expense in 2021. You will be listing your business expenses on Schedule C. However, the computer which you purchased would go under the Assets category in Schedule C
To input business expenses on Schedule C, please follow the steps below:
While inside the software and working on your return, type Schedule C in the Search at the top of the screen (you may see a magnifying glass there). There will be a popup that says Jump to Schedule C. Select that to get to the general area.
It will ask you to Describe the asset and since its Computer, you would put it in the "Computer, Video, Photo and Telephone Equipment" Category. It will then ask you about the cost and date of purchase and you can put in that info.
It will then ask you whether you purchase the laptop as New or Used. Further, it will ask you the usage percentage of this asset. Based on your question, you would mark No when it asks you if this item has been used 100% for the business since you acquired. Further, you can indicate that this was used for personal purposes initially. Then you can type in the start of business date and the percentage usage in 2021.
Once you input, that would will have to make a decision:
1) You can either choose "Special Depreciation Allowance" which will allow you to take the entire deduction in 2021.
2) You can say no to the Special Depreciation Allowance and take the depreciation for the computer over 5 years. This means every year you can take a depreciation expense deduction for the next 5 years.
Thank you for the response. However, when I follow the process you describe (and try to enter it under Business Assets, and indicate I want to claim the expense in 1 year, not over 5 years), it says that because the computer is under $2500 I should enter it as "other miscellaneous expense" - and that portion of TurboTax does not let me put in information like the date I bought it, how much I used it in 2021, etc. Ideas? I can enter it as a misc. expense, but then I'm back to not knowing how much to claim as an expense (since I'm used it very little in 2021, but expect to use it 60% for business in 2022 and beyond...)
If you wanted to deduct it all in year 1, depreciation expense would be the same as a miscellaneous expense. Going forward, you would not take any more expenses either way. If the computer cost $1000, take the percentage you want to take for the business, multiply and enter that number under miscellaneous expense. I would enter it under office supplies.
But how do I determine the amount I can deduct in year 1? If the computer is $1000, and I'm only using it a de minimis amount in year 1, but will use it for 60% business for years 2-5. Can I claim $480 as a business expense (i.e., $120 per year in years 2-5, and $0 in year 1)? To do this, do I need to identify as a "start up" cost? Or under Section 179 do I need to wait until 2022 to claim the deduction?
Your computer does not qualify for Section 179 for 2021 since you used it personally for the majority of the year and did not place it into service until November. this prevents someone from using it for the majority of the year for personal purposes and then adding it as an asset at the end of the year. You did not fully convert the property to business use. You are continuing to use it for personal use.
Since you placed it in service in the last quarter of the year, you must use the midquarter convention. In future years, you can depreciate the business percentage as usual. Percentages can change from year to year.
Partial business use.
When you use property for both business and non-business purposes, you can elect the section 179 deduction only if you use the property more than 50% for business in the year you place it in service. If you use the property more than 50% for business, multiply the cost of the property by the percentage of business use. Use the resulting business cost to figure your section 179 deduction. PUB 946
Example.
May Oak bought and placed in service an item of section 179 property costing $11,000. She used the property 80% for her business and 20% for personal purposes. The business part of the cost of the property is $8,800 (80% × $11,000).
So if I claim $0 in 2021 due to the de minimis use, I can still claim part of it as an expense in future years? In other words, not claiming any deduction in the year the computer is purchased does not prevent me from claiming the deduction in future years?
So, to take my example, if the computer I bought this year is $1000, and I'm only using it a de minimis amount in year 1 for business, but will use it for 60% business for years 2-5, it is okay to claim $0 this year, and then $120 in each of the next 4 years? Thanks!
It is perfectly okay to convert a personal asset to business use. It is also okay to start using a personal asset for a percentage of the time and for business a percentage of the time.
You can take the small percentage allotted to you for 2021 and then take the balance over the next five years. You will not lose anything by doing it this way. While you do not get much the first year, you make up for it in the second. Please see the screenshot for the percentages, by year, of 5-year property (computer).
Thanks so much - very helpful! One last question. Your table lists 5% in Year 1, how would I apply that if the computer was purchased in Year 1 for $1000, and used for 5% business (and 95% personal use) in Year 1? What about in Year 2 (next year) if I use the computer for 60% business year year 2? Thanks!!
TurboTax already uses this table information. If you enter the purchase price 1000 and enter a date you put into service in the last quarter say 11/15/2021, and used it for business 100% from that date on. The depreciation will be $50 (5% of 1000) per the table.
The business use percent is for the time when it was a business asset. So if you used it as a personal computer for 10% of the time between 11/15/2021 and 12/31/2021 your depreciation will be 90% of $50 ($45).
Next year the entire year will be considered for the business asset so the table for year 2 will apply automatically but you can edit the asset and change the business use to say 80% (because you also used it a personal computer while it was a business asset) and your depreciation expense will be 80% of the calculated table value.
Thanks! What part of the TurboTax software do I use to enter all this information? Is it under "Business Assets" or elsewhere? It sounds like I need to find the right place so I can enter the correct information (such as the date I started using the computer for business use, and in future years, the correct depreciation percentages can be applied). Thanks.
Yes, you would enter this information as a Business Asset. Basically, the instructions given to you are how to enter a business asset and take depreciation on the asset.
Assuming your business has already been set up in TurboTax, you'll want to click Edit next to your business and then scroll down to the Business Assets topic and click on Start (or update) and you will be able to begin entering your new asset.
To enter business assets in TurboTax please follow the steps below:
TurboTax will walk you through the process. If you have any questions or hit some snags along the way, feel free to request for help on this thread.
Thanks. When I go through the "Business Assets" prompts I get to "Now, let's review each item you bought." I select the option "Every item I bought cost $2,500 or less" and it says "Okay. Make sure these purchases are entered as other miscellaneous expenses, not assets." And then it sends me back to the general Expenses Page. In other words, I can't seem to list my $802 computer expense as a depreciating asset. What should I do?
@messner8000 If you choose the election you mentioned for assets costing less than $2,500, then you enter the computer as an expense, so it doesn't go in the asset section. When you enter your other expenses, just enter a description such as "Expensed Assets" and enter the cost of the computer.
A couple of things to clarify here.
At best, you paid no more than $1500 for that computer, monitor, keyboard, mouse and printer when you purchased it brand new 2 years ago for personal use.
When converting it to a business asset, you can not expense used equipment that was personal use prior to it's business use. You have to treat it as an asset and depreciate it over time. Computer equipment is depreciated over 5 years. It's cost basis is the "LESSER" of what you paid for it, or it's FMV (Fair Market Value) at the time you made it a business asset. Computer equipment losses value fast. SO at best, the total of your computer equipment "might" make it to $800. Over 5 years, that's $160 a year of depreciation. Any reduction in your tax liability each year for a mere $160 will be negligible, if anything at all.
Claiming the Sec179 for the computer is not permissible, as IRS Pub 946 states one of the requirements for SEC179 eligible property, is that it must be acquired for business use. Your computer was not acquired for business use at the time you purchased it. It was acquired for personal use. So it's not eligible for SEC179. See IRS pub 946 at https://www.irs.gov/publications/p946 where it reads as below:
To qualify for the section 179 deduction, your property must meet all the following requirements.
It must be eligible property.
It must be acquired for business use.
It must have been acquired by purchase.
It must not be property described later under What Property Does Not Qualify .
Thank you for the response. However, if I listed it as an expense and not an asset, isn't it the case that I can't depreciate it over 5 years? From other TurboTax responses in this chain, my understanding is I have to depreciate it (and thus have to list it as an asset?) because in Year 1 I only used it 5% for business, and in future years I will use it 60% for business Thus, I can't claim the entire computer amount as an expense this year. Thanks.
Sorry for the second response, but I just saw the other response. I think I need to provide some more details (since I think the computer is for business use):
I bought the computer for $802 in July 2021. I had not opened my business, but I was in the "start up" phase and while I used the computer principally for personal use when I bought it, I bought a good computer knowing I would use it for my business when I went "live" in December. I used it for business a small amount (say, 5%) from July through November (e.g., I used it for the business use of designing my webpage). Admittedly, for 2021 it was principally for personal use, but not entirely. Under these circumstances, I think I could claim it as a business asset and depreciate it. And if so, how do I do that in TurboTax? Thanks!!
To enter the asset in TurboTax for depreciation, edit your business entry and look for the screen that says Your Business. Then choose the Assets Being Depreciated option and follow the instructions to enter your business asset.
Yes, you will be able to deduct 60% of the computer cost for 2021 as an expense if the cost of the computer is less than $2500. This is a one-time deduction.
Thanks! I will admit I am now confused. I'll try one last time, but I know this chain is getting long...
I bought my $802 computer in July and the percent I am using it for business is:
2021: 5%
2022-2025: 60%
You said in your response I could deduct 60% of the total cost in Year 1. That strikes me as strange because I'm not using it for 60% business (either in Year 1, or on average over all 5 years). Can you point me to an IRS guidance document that supports this interpretation? Also, I read the responses from ColeenD3 and DMarkM1 to say that based on my facts I need to depreciate (which is why I'm trying to figure how how to do that for assets under $2500). Thanks!!
Let me try to simplify the correct action and options for 2021. First, we cannot use information that has not occurred yet. What this means is that it is interesting that your intent is to use it 60% of the time for business in future years, but it's not yet a fact.
In 2021, you can make the De Minimis Safe Harbor election (business asset cost less than $2,500) and deduct only 21% of your computer expense. This is a reasonable assumption because if you were depreciating the item, you could depreciate 20% of the 21% of the cost in year one under the regular depreciation method. IRS FAQs for De Minimis Safe Harbor
OR
You can choose to depreciate the 21% business use portion of the cost in 2021 (recommendation would be to use the allowable election above). This means you would get 20% of the 21% business use percentage as your depreciation deduction if you enter the computer asset that has a 5 year recovery period.
If you choose to use the election in 2021, then in 2022 when the business use percentage changes you must depreciate the remaining business use balance. You will not be allowed to use the De Minimis Safe Harbor election after the first year an asset is placed in service.
Thanks so much! So just to confirm I understand, if I don't want to depreciate the asset (and to simplify things, I don't!) this is what I can do/how it works:
Even though I am only using the computer for business 5% of the time in 2021, I can still make a deduction this year using the de minimis safe harbor election. Under this election, I can deduct 21% of the total computer cost ($802) on my 2021 return, and then will simply ignore the computer expense on all future tax returns. Do I have that right? It never would have occurred to me I could claim a $168 deduction (.21 x $802) this year when most of the computer's business use is in the future!
Do I have things right? Thanks!