You have three alternatives available for acquiring the equipment to fill your business needs: buying or leasing the equipment or using personal assets you already own in your business. Using assets you already own can be a big money-saver.
It's likely that most of your equipment needs will be met by leasing or purchasing the business assets you determine you require. In some cases, though, you may find that an asset your business needs is something that you already own. Using your personal assets in your business may not only reduce your acquisition needs, but may also help reduce your tax bill. And making do with what you have is a skill that every small business owner needs to cultivate!
Putting items such as your cars, office furnishings, and computer equipment to work in your business, even if only on a temporary basis, can free up dollars that you would have otherwise spent on acquisition costs. Furthermore, you'll enjoy the tax benefit of claiming depreciation deductions with respect to the items that you convert to business use.
Converting Personal Assets to Business Use
If you're conducting business as a sole proprietorship, there's really no trick to converting your personal assets. All it takes is to start using them in your business. Perhaps your only real concern will be confirming whether you'll lose insurance coverage for the converted items under your homeowners policy. If so, you'll want to be sure to have the items covered by your business policy.
For depreciation purposes, you'll need to know both the amount that you originally paid for each converted item and the fair market value at the time you started using it for business because your deductions must be computed on the basis of the lower of those two amounts. An item's fair market value is the amount for which you could sell it to a willing, arms-length buyer. Generally, the best measure of fair market value is a professional appraisal. In the absence of an appraisal, you may try to establish the fair market value by getting a written quote from a secondhand dealer or by making a reasonable estimate on the basis of listings for sale in print or online.
Also, if you continue to make some personal use of the assets, you'll need to keep track of how much time the converted assets are used for business purposes and how much time they are used for personal purposes.
Let's assume you own a laptop computer that you decide to use in your business. You purchased the laptop for $4,500, and have determined that its fair market value on the date you convert it to business use is $2,500. You primarily use the computer for business purposes, but continue to use it to monitor your household finances and your personal email, and for entertainment purposes. In percentage terms, you figure your usage is split 70 percent business and 30 percent personal. Your depreciation deductions for the computer will be computed on the basis of the $2,500 amount. Assume that based on this amount, you would be entitled to a deduction of $450 if you used the computer solely for business purposes. Because your business use represents only 80 percent of the total usage, you would only be entitled to a $315 deduction ($450 x 70%).
Because depreciation deductions are allowed only with respect to the business use of the assets, you should keep records of your business use.
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