As you explore your options for equipping your business, don't overlook the possibility of using items that you already own. 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.
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. 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. Depreciation deductions are allowed only with respect to the business use of the assets.
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Let's assume you own a laptop computer that you decide to use in your business. You purchased the computer for $3,500, and have determined that its fair market value on the date you convert it to business use is $2,000. You primarily use the computer for business purposes, but continue to use it occasionally to monitor your household finances and to write personal letters. In percentage terms, you figure your usage is split 90 percent business and 10 percent personal.
Your depreciation deductions for the computer will be computed on the basis of the $2,000 amount. Assume that based on this amount, you would be entitled to a deduction of $400 if you used the computer solely for business purposes. Because your business use represents only 90 percent of the total usage, you would only be entitled to a $360 deduction ($400 x 90%).
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