Computing an Equipment Deduction

If your business has yet to generate income, depreciating the cost over five years makes the most sense

Q: I started a business from my home in October, 1999. My wife and I are the owners of this company, and, for tax purposes, we declare it a partnership. This business is currently in research mode, which means that I am buying tools, equipment, and doing research. While I don't have any income from this business, I do have a regular engineering job from which I derive income. Last year, I bought a computer for exclusive business use in my company. Can I deduct this $3,500 computer from my regular income using pass-thru taxation (such as Form 1065)? Do I have to use Section 179 of Form 4562?

A: First, let me give you a little background on how the Section 179 deduction works. Section 179 of the Internal Revenue Code lets taxpayers elect to expense the cost of purchasing certain assets used in a trade or business in the year of purchase rather than depreciating them over time. Here are the limitations of Section 179:

1. You can only elect to expense personal property like furniture, equipment, machinery, and vehicles.

2. The amount of your available Section 179 deduction is reduced dollar-for-dollar for any purchases of personal property in excess of $200,000.

3. The amount of your available Section 179 deduction is limited to $20,000 in the year 2000 or the taxable income from your trade or business. Basically, you cannot use a Section 179 deduction to create or increase a net operating loss.

4. In the case of a partnership or S-Corporation, the maximum dollar limitation and taxable-income limitation apply at both the entity level and to individual partners and shareholders.

So let's look at your example. Your computer qualifies as Section 179 property. Unfortunately, your partnership did not generate any taxable income so you can't use the deduction this year. You have two options at this point: You can depreciate your computer over five years and receive a current deduction, or you can elect to expense it in 2000 using Section 179 and carry the deduction forward to a future tax year. I would recommend that you depreciate your computer over five years, unless you are expecting a profit this year. All of this activity should be reported on Form 4562 of your partnership return.

Since this is your first year in business, be sure that you identify all of your startup and organizational expenses, and elect to amortize them over 60 months, which is also reported on Form 4562.

Gavin H. Poppen, CPA

Poppen & Associates,

St. Louis, Missouri

Editor's note: While the information in Tax Adviser represents the opinion of an expert, it is not legally binding.

Do you have a small-business tax question? Tax professionals will answer your questions in the Tax Adviser column, appearing here Wednesdays. E-mail We will not print your name, address or phone number, but please provide this information.

Before it's here, it's on the Bloomberg Terminal.