Started a business in 2022 and bought a computer in 2020. Could I take this computer as an expense with its FMV (fair market value) instead of an asset to take depreciation?

[tagteam · Accepted solution]

You should be able to expense the computer if 2022 is the first year it was placed in service and the original use began with you.

[Opus 17]

When you place an item in service, you use the purchase price or fair market value, whichever is lower at the time.  There are various ways to take the depreciation faster than over the full lifetime of the asset, including the safe harbor for items under $2500, bonus depreciation, and section 179 depreciation.

 I believe that, to take the $2500 de minimis safe harbor election, you must have actually paid for the item during the year you want to claim the expense.  See here,

https://www.irs.gov/publications/p535#en_US_2021_publink100075803

This safe harbor would not apply to your computer if purchased for personal use in 2020 and converted to business use in 2022.

I believe you can take section 179 depreciation for used property when placed in service for the first time in business.  This will have the same effect as allowing you to deduct the entire FMV the first year, but you will have to deal with deprecation recapture if you take the computer out of service before the end of its useful life.

Even if you did expense the computer, you may have to recapture depreciation if you sell it later (even as used), since your adjusted cost basis after claiming the safe harbor would be reduced by the amount you claim as FMV. 

If you list the computer as an asset in Turbotax, the program should hopefully advise you on what options you have. 

[Carl]

My two cents.

Technology moves fast. For a computer purchased in 2020, I doubt it's FMV is more than a few hundred bucks if you're lucky. I wouldn't even bother with claiming it in any way in the business, as I doubt it will have any impact on your tax liability. Wait until the business has profit. Then go out and purchase a new computer strictly for the business so it's 100% business use. If it's less than $2,500, you can flat out expense it in the year of purchase.

[tagteam · Accepted solution]

You should be able to expense (deduct) the value of the computer, @ukingyu, under Section 168(k) (bonus depreciation, aka special depreciation allowance).

You do not need the de minimis safe harbor for this purpose and, hence, are not subject to the $2,500 limitation of that safe harbor. You also do not need to use Section 179 since that section has business income limitations.

Further, recapture will not be an issue if the computer is eventually scrapped (or converted back to personal use at a time when it has absolutely no value).