What is the best way to deduct a new computer that I bought for my business in 2007?
There are 2 ways that you can select the deduction.
1. If your business is profitable and has profits in excess of $1,400:
If your business has a profit of over $1,400, then I would suggest that you take a section 179 deduction, that will allow you to write off the entire cost of the computer. The effect of this is offset your profit with a deduction of $1,400.
This special provision will allow you to report a deduction of the entire $1,400 on Form 4562.
2. If your business is making a loss and you have no other earned income available to the extent of the s179 Deduction:
If your business is making a loss, generally, the taxpayer would be depreciating the computer equipment over 5 years, the applicable period. The IRS have published methods you can choose, some are straight line depreciation other include the MACRS method. The MACRS method is the most favored method that you should select, as it provides an (modified) accelerated method of depreciation.
This means that taxpayers will be able to deduct a higher depreciation in the early years than the later years, and generally, this method will produce a depreciation that is generally 200% more than straight line method in the early years of the asset. Overall, the asset cannot be depreciated for more than its cost!
This depreciation deduction will be reported as a deduction on Form 4562.
For 2007, for your information, the IRS has set a limit of $125,000 for electing the Section 179 Deduction, subject to certain limitations of course.