Tax Questions: Asset Depreciation vs "Supplies"


I have a full time job, but I do some freelance work on the side… mostly to maintain relationships. Last year I had to file a schedule C, and I think I may have gotten some deductions incorrectly (filing some things under supply that may have been an asset). This year, I have a few questions about deductions for “Home Businesses” for those of you who may have some experience. I made less than $1000.

  1. What makes an asset an asset? What I mean is, last year I purchased a few parts to upgrade my computer; each part cost $100-$300, but together, they cost over $1100. I bought them individually, some on the same receipt, and put them all together myself along with parts from my existing PC. Would the parts be an asset and subject to depreciation as a single “PC” or separate supplies or something else I could deduct the whole price? The PC is used about 60% for business, 40% for personal.
  2. Later, I also bought a monitor… which is used part personally part business.
  3. Would the purchase of a $500 piece of software be an asset or supply, etc? It’s used almost all for business (though, not necessarily always something that generates income).
  4. The big one: What happens if I plan on upgrading most anything I purchased before it would fully depreciate. How does that work if something depreciates over 5 years, but I upgrade (and thus stop using it) after 1, 2 or 3 years…? If this year, I buy a new CPU… how does that work in to the “PC”? Or when I upgrade the software… etc?


An asset to the IRS is pretty much anything with a useful life of over one year that loses value over time. Computers (and monitors) are considered a depreciable asset, so I would think computer components would be too. You purchased each part separately, so you depreciate them separately (it’d be different if we were talking about buying 10 of the same video card, but I assume these are different components).

You continue depreciating the asset until you reach the number of years you estimated it would last. It doesn’t matter if you put it in a closet and stop using it. Again, you don’t have a “PC” to depreciate since you didn’t pay for a PC. You have those components.

Software used to be an amortized cost (it’s not an asset but would be written off over a number of years)… but as of 2003 you can deduct the full cost of off-the-shelf software and some other types of assets up to an annual limit. You can read more about that change here, including what additional tax forms to use.

Now, if you sell something you were in the process of depreciating, or something you took a full deduction for with the above exception before the end of its useful life, you may actually owe money back to the IRS…

You’ll have to ask an actual CPA, or the IRS, about that.

Thank you sir! Exactly what I was looking for.

Your response has generated a couple more questions. When you say:

It doesn’t matter if you put it in a closet and stop using it.
I was under the impression that if you aren’t using it for atleast 50% business, then you cannot claim it. So let’s say you are depreciating a computer monitor, and the following year you upgrade to a larger monitor and you are left with your old one. You can now start depreciating the value of the new monitor as an asset, but are left with the old one not in use:

  • Now, as you pointed out, if you sell it, you may owe the “recapture” back to the government.
  • Also, my understanding, is if you moved it to your personal computer, you may also owe the “recapture” back to the government.
  • But, if you just don’t use it at all (put it in the closet), you can continue to depreciate it’s value on your returns?

As per the link you provided, it looks like for software, although you can claim the entire cost, it’s still an asset that depreciates, and if you were to stop using it for more than 50% business before it completely depreciates, then you would still owe the “recapture” back to the government, even though you are no longer deducting the depreciated value.

The software I was talking about was Adobe’s CS3. So, if I claim it as an asset and deduct the entire cost (or even if not), and then let’s say next year (or even the year after, etc) Adobe releases CS4 and I upgrade (and thus stop using CS3 for business), how does that work out with the depreciation? I would owe the “recapture” simply because I upgraded my asset?

With as fast as technology changes and updates, both software and hardware, you would think that there would be shorter-term depreciation time frame, or the ability to deduct the entire cost upfront without worrying what happens next year, or the year after. It’s all so confusing, no wonder accountants get paid so much!


Specifically with CS3, use a section 179 deduction to expense the entire thing for 1 year. Same applies to hardware. Off the shelf software and ‘equiptment’ can be called an expense and taken in the year acquired. Its called a section 179 deduction. It has caps and limits, but for your scenario its a perfect match. Makes life a lot easier to just expense it.