Since most people in this industry are paid by 1099, the IRS gives you a chance to write off some of your expenses. Expenses like computers, office space, possibly your car. If you have a CPA they can point out some things that can be written off that you might not expect. When I worked at home, my CPA showed me how I was eligible to write off a portion of my electric and a few other bills. You have a chance to write off expenses in one year, or you might opt to write off the depreciation over several years. I put together a bit of information that you might find useful when you go to file your taxes this year.

Depreciation means you can deduct the cost of business property over several years instead of all at once. If you bought a new computer for $1,500, you could deduct the whole amount in year one. Or you could deduct a portion each year you use the computer, which would help even out your income from year to year.

For income taxes, you have to use the depreciation method proscribed by the government. The IRS uses the modified accelerated cost recovery system (MACRS), which was modified from an earlier system called ACRS. MACRS is pronounced like “Makers.”

• Under MACRS, each type of business property is assigned a property class according to its useful life in terms of years.
• The classes determine how many years it takes a business to recover the cost of the property. This is referred to as a "cost recovery allowance."
• Property is assumed to have been purchased in the middle of the year.
• There is no salvage value under MACRS. Property is depreciated all the way to zero, even if you could sell it at the end of the time period.

Computers are assigned to the 5-year property class while boats are assigned to the 10-year property class. Most computers probably will need to be replaced before they are five years old to keep up with the current technology, and many boats can last longer than ten years.

Depreciation deduction = Original basis (Cost) x Cost recovery percentage.

Let’s calculate the depreciation deduction for a personal computer costing $1,500. Computers are considered five-year property under MACRS. Remember MACRS assumes the property was purchased in the middle of year one, so we have to calculate all the way through to year six.

1. YEAR ONE
Depreciation deduction = 1,500 x .20
Depreciation deduction = $300
2. YEAR TWO
Depreciation deduction = 1,500 x .32
Depreciation deduction = $480
3. YEAR THREE
Depreciation deduction = 1,500 x .192
Depreciation deduction = $288
4. YEAR FOUR
Depreciation deduction = 1,500 x .1152
Depreciation deduction = $172.80
5. YEAR FIVE
Depreciation deduction = 1,500 x .1152
Depreciation deduction = $172.80
6. YEAR SIX
Depreciation deduction = 1,500 x .0576
Depreciation deduction = $86.40

The cost recovery is accelerated in the second year when the depreciation jumps to $480. Then it declines after year three, and remains the same for years four and five. Depreciation for year six is only half a year since the property was assumed to have been purchased in the middle of year one.

The tables for MACRS are published in IRS Publication 17, which is available free of charge to all taxpayers. You can order one online at www.irs.gov.