Question: I use a computer for my home business - how do I deduct it for my taxes, and what form do I use? Form 179? Also, how do I deduct my cellular phone? - B.S. in Cincinnati
Answer: Margery Mattox, a certified financial planner and financial management adviser with Cincinnati's Financial Affairs Management, says the unincorporated business person who is not pursuing a hobby interest or maintaining an office for the benefit of an employer, can use Schedule C of Form 1040.
Schedule A of Form 1040 is used if the equipment or supplies are used for work that can be considered an unreimbursed employee business expense.
The original value of the owned asset is reduced over its useful life. For tax purposes, this depreciation can be deducted in a systematic manner. The effective use of the depreciation deduction is to have money available to replace the asset when it wears out.
If you have comparable income - including employee compensation - you can elect to apply Section 179 on an item-by-item basis and immediately write off qualifying assets of up to $17,500 when taken in the year of acquisition.
Qualifying property must be used 50 percent or more for business. You cannot write off more than your income.
If the business use of the listed asset falls below 50 percent, and you sell the property, it must be accounted for as ordinary income on Form 4797, Part IV. That amount is subject then to self-employment tax if Schedule C is used.
If business use is less than 50 percent, you cannot use Form 179. You must figure depreciation under the straight line method of the Alternative Depreciation System (ADS) recovery period. If the qualified business use of the listed property is greater than 50 percent of total use, the Modified Accelerated Cost Recovery System (MACRS) defines five different methods used to calculate depreciation.
Again, the amount of income and percentage of business use will dictate whether you are eligible for a method of depreciation other than straight line. Form 4562 Depreciation and Amortization, Part I (Section 179) refers you to Part V for cellular phones and certain computers.
Keep in mind that after you begin this process, it behooves you to continue with it and substantiate each element of expense and use with adequate records. Only the serious need apply, so to speak. It is best to consult with a tax preparer or CPA accustomed to working with small businesses if the accounting terms and methods are unfamiliar to you. Consultation with a specialist will get you started in the right direction for preparing your return in subsequent years, and the cost of the consultation is deductible.
From a financial planning standpoint, operating your own business can be the best tax management strategy available for people with the time, money, talent and inclination.
There are tax incentives available for these risk takers, and they come in the form of expense deductions for home-office use, supplies, equipment and business use of the automobile, to name a few.
As a consequence of taking advantage of these tax breaks, the entrepreneur must be especially conscientious in keeping records for reporting the income and its sources and in claiming expenses.
Keep it separate and maintain a paper trail. The temptation for personal use of office equipment is always present, but to claim items as office expenses, they cannot be used for personal reasons.
The income tax return provides the best format for organizing your records. There is a tax reporting form for almost everything that affects your business plan (and your personal financial planning).
Asset costs and depreciation, operating income and expenses, business-vs.-personal use find their way to being tallied and tracked on Form 1040 for the independent, unincorporated businessperson.
The tax code remains somewhat consistent in the treatment of business entities. Techniques and degree might vary, along with the type of reporting form.
It is recommended to keep a ''contemporaneous log'' to document the percentage of asset use for business purposes. It might be difficult to explain those game programs residing on your business computer. The billing statement from your cellular phone carrier is a handy starting point for your business record-keeping.
Readers should consider the advice from the Money Panel as general information only. Investors should seek the help of professionals on questions regarding their own portfolios because circumstances might vary.
- Compiled by Perry Brothers