Bookkeeping

How to calculate depreciation for computers as per IRS?

One of my clients recently purchased computers for $ 5200 and he is estimating the useful life of computers for 5 years.
I have calculated and recorded an accounting depreciation for him for the first quarter by dividing the cost by 20 assuming no scrap value.
Now he asked me should he report the same to IRS or should IRS treat it in a different way.
I know there is a difference between an accounting and tax depreciation so I want to know what would be the impact or adjustment he needs to do for the IRS in case of computers he recently purchased.

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Answer

  1. 29 Answers
    This answer is edited.

    This will be a book (GAAP) to Tax (IRS filing) difference. For GAAP reporting purposes, the computer can be depreciated of a 5 year period. For tax purposes, since this is such a small purchase, it would generally be expensed.

    The IRS website is always my go to for general rules and guidance, as most small business owners are concerned with tax (cash) basis accounting.

    The following is extracted from the IRS website here (in case you need a specific PPE listed below at another point in time). You can see in bold the computer costs useful life vs. how the total cost: https://www.irs.gov/irm/part1/irm_01-035-006

    1) Per SFFAS No.6, Accounting for Property, Plant, and Equipment, assets must meet the following criteria to be capitalized:
    a) Have an estimated useful life of two or more years.
    b) Not be intended for sale in the ordinary course of operations.
    c) Be acquired, constructed or developed with the intention of being used or available for use by IRS employees or contractors.

    2) Property and equipment categories consist of:
    a) IT equipment
    b) Internally developed software/internal use software
    c) Leasehold improvements (LHI)
    d) Major systems
    e) Vehicles
    f) Furniture and non-IT equipment
    g) Assets under capital lease
    h) Laboratory or forensic equipment

    3) The useful life of an asset considers factors such as physical wear and tear and technological changes that affect the asset’s economic usefulness. The thresholds represent the dollar value at which an asset is capitalized. Purchases less than the dollar value thresholds are recorded expense in IFS.

    4) The following summarizes the threshold value and useful life for each type of property and equipment:
    (Note: The IRS generally purchases IT equipment in bulk. All capitalization threshold levels consider this practice. Individual purchases lower than $50,000 are generally expensed.)

    a) Mainframe Computer Systems and Servers: Cost of equipment and other charges to put the asset into service is ≥ $50,000; 7 years useful life
    b) Laptops and Desktops: Cost of equipment and other charges to put the asset into service is ≥ $50,000; 3 years useful life
    c) Telecommunications Equipment: Cost of equipment and other charges to put the asset into service is ≥ $50,000; 7 years useful life
    d) Non-IT Equipment: Bulk purchases ≥ $50,000 or per unit cost ≥ $5,000 and that have a useful life of two or more years and are barcoded; 10 years useful life
    e) Furniture and Fixtures: Cost of furniture and fixtures and other charges to put the asset into service is ≥ $50,000 and the individual dollar amount of the specific item is ≥ $5,000; 8 years useful life
    f) Internal Use Software: Projects with an estimated cost ≥ $10 million per year or ≥ $50 million over the life cycle of the software; Assessed case by case based on varying criteria
    g) Software Licenses: When the dollar amount of the award line is ≥ $50,000
    i) Mainframe software licenses: 7 years useful life
    ii) Server software licenses: 7 years useful life
    iii) Laptop/desktop software licenses: 3 years useful life
    vi) Telecommunications software licenses: 7 years useful life
    h) Laboratory or Forensic Equipment: Cost of equipment and other charges to put the asset into service is ≥ $50,000; 10 years useful life
    i) Vehicles: All; 5 years useful life
    j) Leasehold Improvements: Amount of the award line is ≥ $50,000; 10 years useful life or the remaining life of the lease, whichever is shorter
    k) Assets under Capital Lease: Amount of the award line is ≥ $50,000; Useful life is assessed case by case based on varying criteria

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