My university required each incoming freshman to come to school with their own computer. Is there any way to deduct the cost of the computer from my tax liability?

The cost of a personal computer is generally a personal expense that is not deductible.

References:

• Tax Topic 513, Educational expenses

What kinds of property can be depreciated for tax purposes?

Only property used in a trade or business or to produce income can be depreciated. Additionally, the property must be something that wears out or becomes obsolete and it must have a determinable useful life substantially beyond the tax year. The kinds of property that can be depreciated include machinery, equipment, buildings, vehicles, and furniture. Depreciation is a very complex subject. For more information, refer to Tax Topic 704, Depreciation, or Publication 946, How to Depreciate Property, or Publication 534, Depreciating Property Placed in Service Before 1987.

References:

• Publication 534, Depreciating Property Placed In Service Before 1987
• Publication 946, How to Depreciate Property
• Tax Topic 704, Depreciation

Can the entire acquisition cost of a computer that I purchased for my business be deducted as a business expense or do I have to use depreciation?

The computer that you purchased for your business would be reported on Form 4562, Depreciation and Amortization, Part V. A computer is depreciated over a 5-year period. If the computer is used more than 50% for business, then you also have an option to expense it in one year (a section 179 deduction) on the business portion, Form 4562 Part I if the business had taxable income at least as great as the section 179 deduction claimed. For more information on depreciation, refer to Publication 946, How to Depreciate Property.

References:

• Publication 946, How to Depreciate Property
• Form 4562, Depreciation and Amortization

I purchased a computer last year to do online day trading part-time from home for additional income. Can I deduct or depreciate the cost of the computer or internet connection from my investment income?

You may deduct investment expenses (other than interest expenses) as miscellaneous itemized deductions on Form 1040, SCHEDULE A, Itemized Deductions. This would include depreciation on the portion of your computer used for investment purposes, and the portion of your internet access charges used for investment purposes. Use Form 4562, Depreciation and Amortization to compute the depreciation for the portion of your computer used for investment purposes. You cannot claim section 179 expensing of the computer since it is not a business asset.

References:

• Form 1040, SCHEDULE A, Itemized Deductions
• Form 4562, Depreciation and Amortization
• Publication 946, How to Depreciate Property

I purchased a computer to support my job related activities. I understand what percent of the computer I can deduct as an employee, but I do not understand if I can write off the entire allowed cost or if I have to depreciate it over a few years?

You can claim a depreciation deduction for a computer that you use in your work as an employee if its use is:

1. For the convenience of your employer, and
2. Required as a condition of your employment.

You meet the more-than-50%-use test if you use the computer more than 50% in your work. If you meet this test, you can take a section 179 deduction for the item and claim accelerated depreciation. The section 179 deduction and depreciation deductions are explained in Publication 946, How to Depreciate Property.

References:

• Publication 946, How to Depreciate Property

Can I deduct my investment expenses as business expenses?

The proper classification is important to determine how income and expenses are to be reported. Investors trade solely for their own account and do not carry on a trade or business. Their securities sales result in capital gain or loss and their deductible expenses are itemized deductions. Dealers sell securities to customers in the ordinary course of trade or business. Their sales result in ordinary gain or loss and their deductible expenses are trade or business expenses. Traders buy and sell securities frequently but have no customers. Their purchases and sales result in capital gain and loss, and their deductible expenses are trade or business expenses.

Even if you engage in extensive securities activities, you are an investor, not a dealer or trader, if you do not seek profit primarily in swings in daily market movements, and do not personally engage in or direct the purchases or sales. An investor trades for profit-motivated reasons such as long-term appreciation, dividends and interest. Whether the activities of an individual constitute trade or business or investment is determined from the facts in each case. These distinctions have been established through court cases.

If your trading activity is a business, your trading expenses would be reported on Form 1040, SCHEDULE C, Profit or Loss from Business (Sole Proprietorship) instead of Form 1040, SCHEDULE A, Itemized Deductions. Your gains or losses, however, would be reported on Form 1040, SCHEDULE D, Capital Gains and Losses, unless you file an election to change you method of accounting.

If your trading activity is a business and you elect to change to the mark-to-market method of accounting, you would report both your gains or losses on Part II of Form 4797, Sales of Business Property.

A change in your method of accounting requires the consent of the Commissioner and can not be revoked without the consent of the Secretary. Though there is no publication specific to day traders, the details for traders in securities and commodities are covered in Internal Revenue Code Section 475(f) and Revenue Procedure 99-17.

References:

• Publication 535, Business Expenses
• Form 3115, Application for Change in Accounting Method

I buy and sell stocks as a day trader using an online brokerage firm. Can I treat this as a business and report my gains and losses on Schedule C?

A business is generally an activity carried on for a livelihood or in good faith to make a profit. Rather than defined in the tax code, exactly what activities are considered business activities has long been the subject of court cases. The facts and circumstances of each case determine whether or not an activity is a trade or business. Basically, if your day trading activity goal is to profit from short-term swings in the market rather than from long-term capital appreciation of assets, if your income is primarily from the sale of securities rather than from dividends and interest paid on securities, and if you expect this income to be your primary income for meeting your personal living expenses, i.e. you do not have another regular job, then your trading activity might be a business.

For details about not-for-profit activities, refer to chapter 1 in Publication 535, Business Expenses. That chapter explains how to determine whether your activity is carried on to make a profit and how to figure the amount of loss you can deduct.

If your trading activity is a business, your trading expenses would be reported on Form 1040, SCHEDULE C, Profit or Loss from Business (Sole Proprietorship) instead of Form 1040, SCHEDULE A, Itemized Deductions. Your gains or losses, however, would be reported on Form 1040, SCHEDULE D, Capital Gains and Losses, unless you file an election to change you method of accounting.

If your trading activity is a business and you elect to change to the mark-to-market method of accounting, you would report both your gains or losses and your trading expenses on Form 1040, SCHEDULE C, Profit or Loss from Business (Sole Proprietorship).

A change in your method of accounting requires the consent of the Commissioner and can not be revoked without the consent of the Secretary. Though there is no publication specific to day traders, the details for traders in securities and commodities are covered in Internal Revenue Code Section 475(f) and Revenue Procedure 99-17.

References:

• Publication 535, Business Expenses
• Form 3115, Application for Change in Accounting Method

Tax Stats | Tax Info For You | Tax Info For Business
Electronic Services | Taxpayer Help & Ed | Tax Regs In English
IRS Newsstand | Forms & Pubs | What's Hot | Meet The Commissioner
Comments & Help | How to Contact Us | Site Tree | IRS Jobs