If you're a solo lawyer or co-owner of law practice whose income passes through to you as an individual, you're probably aware that you can claim a deduction from gross income on your federal income tax return for office equipment and software that you purchase during the year. Let's make sure you understand the rules surrounding the deduction so you're not leaving any money on the table, or getting in trouble for taking too much money off.
How Much of the Purchase Price Can I Deduct This Year?
If the item qualifies, you don't need to amortize the cost. You can deduct the entire purchase price in the year you placed the item in service, rather than spreading the deduction out over a number of years. There are caps, however. For 2012, you can't deduct any more than $139,000. Also, for every dollar you spend over $560,000, your deduction is going to be reduced below $139,000. Nice problem to have.
If you lease under a properly structured equipment lease or equipment finance agreement, you can deduct the full amount of the item, without actually having paid the full amount in the tax year. Yes, the amount you save in taxes can actually exceed the payments.
If you use equipment for partial business use and partial personal use, your deduction generally must be pro rated. You must use the equipment at least 50 percent of the time for your business.
What Office Equipment Qualifies for the Deduction?
You can deduct the cost of computers, tablets, phones, copiers, fax machines, scanners, and any other hardware that you use for your law practice. You can also deduct the cost of software, as long as it's "off-the-shelf" and not customized for your use. The equipment can be new or used--think in terms of "new to you." It bears repeating that you can deduct only equipment or software that you acquired and first put into use during the tax year.
The deduction for office equipment is part of a broader deduction for certain depreciable business assets, which include office furniture and any tangible personal property used in your practice.
You can't deduct the value of office equipment you inherited or purchased from certain related parties. You can't play games by "buying" equipment from yourself.
How to Claim the Deduction
In Internal Revenue Service (IRS) parlance, you are making an "election to expense certain property under section 179." To claim your deduction, you must file IRS Form 4562 along with your return. In part 1 of this form, you'll need to enter a brief description of each item of property you elect to expense, along with its cost. If you did a trade-in, subtract out what you received from the seller. You don't have to expense the entire amount, if you'd like to amortize some of the cost. Also, if you use the equipment in both your law practice and another business, you can allocate your deduction among the businesses.
If you need to take the deduction for a previous tax year, file an amended return with Form 4562 and specify the item of section 179 property to which your election applies and the part of the cost of each such item to be taken into account. The amended return must also include any resulting adjustments to taxable income.