IRS Useful Life of a Laptop Computer
I own an IT/software company. I'm getting ready to ramp up a new venture and want to purchase some new laptops for my remote employees and myself.
According to IRS publication 945, chapter 4 (https://www.irs.gov/publications/p946/ch04.html), "Computers and peripheral equipment" are classified as 5-year property and must be depreciated over that time span using IRS Form 4562.
My concern is that laptops I purchase don't actually have a useful lifespan of 5 years. The maximum warranty dell provides is 3-4 years. I dislike holding onto equipment "out of warranty"... so I get rid of it after the warranty expires. Plus computers break over time, or just become outdated with the operating system changing every 2-3 years.
Question 1: Can I adjust the lifespan of depreciation property if its useful life is shorter then that specified in the IRS pub? If I have documentation, and prove we no longer use the laptop after 3 years... Could I take the depreciation over 3 years instead of 5 years. (We typically donate the laptops after 3 years of use to goodwill or a related organization. We scrub the hard-drives before doing so.)
I assume we can't change the depreciation... but I thought I would ask. I could see how many organizations could prove their property in fact has a shorter lifespan.
Question 2: Also, I typically just do straight light depreciation for convenience of computation. Is there more value out of another method of computing depreciation.
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You are right that computers are depreciated over 5 years. You would normally use MACRS GDS (5 year 200% declining balance) to depreciate. ADS is another option, but as you might have already seen, the recovery period is the same 5 years. However, you will depreciate it on a straight line. So to answer your first question, no, you cannot use your own lifespan.
The value of MACRS GDS over straight-line is that it allows you to recover the cost much faster (you get more deduction early on). You could also argue declining balance more closely reflects the real-life depreciation of the computers compared to straight-line.
I'm not familiar with what happens when you donate business use assets, so I will leave that out for someone else to answer. However, when you dispose (at [CO] sales price) assets that are not fully depreciated, you will incur an ordinary loss in the year of disposal. So in the end it is just a timing difference of when you get the deduction.
There are code sections that can accelerate the depreciation deduction, much faster than book. For example, you are probably eligible to elect Section 179 to fully expense the cost of computers in the year they are placed in service. Bonus depreciation (50% additional depreciation in 2016 - phased out through 2019) is also available beyond that.
See below for different depreciation expense for a 00 laptop.
200DB column is using 5-year half-year convention table with 50% bonus.
+------+------+-------+---------+
| Year | Book | 200DB | Sec 179 |
+------+------+-------+---------+
| 1 | 667 | 1200 | 2000 |
| 2 | 667 | 320 | |
| 3 | 666 | 192 | |
| 4 | | 115 | |
| 5 | | 115 | |
| 6 | | 58 | |
+------+------+-------+---------+
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