If you're reading this, it's virtually certain that you're doing so on a computer. It might be at your office, your school, or at home. The computer might have been provided for you, or it might be a computer you purchased yourself. For those of you who purchased your own computers, the question always arises: Can I take a deduction for my home computer? Or my laptop?
In many cases, we're not just talking about the computer. There is also related equipment such as a printer, scanner, modem, Zip drive, docking station, etc. How are the costs and expenses associated with the computer handled for tax purposes?
Not surprisingly, what the computer and related components are used for will drive the tax issues involved. Each type of use will have different tax rules. Let's take a quick look at them.
Strictly personal use: As you might have guessed, you will receive no tax deduction whatsoever if you use the computer for entertainment, education, avocation, hobbies, or other personal purposes.
Strictly for your employer's work: You can deduct the operating expenses and depreciation for a computer that you buy and use for your employer's business if certain conditions are met:
The computer is required as a condition of your employment; and
It is used for the convenience of your employer.
Example: Jim does a lot of his employer's work at home at night. He buys a computer and uses it only for his employer's duties in the evening. This saves Jim a lot of time. But, since the computer was not required as a condition of employment, and since the computer is for Jim's convenience (not his employer's), the cost of the computer is not deductible.
Even if the computer is required by your employer as a condition of your employment and is used exclusively for your employer's work and convenience, it is subject to the so-called "listed property" deduction limitation rules (unless you qualify for the "office at home" rules discussed below). Briefly, the "listed property" rules mean that:
You can take accelerated depreciation over five tax years if the computer is used more than 50% for business purposes; or
You can take a special Code Section election (Section 179) to expense the cost of the computer all in one year (the year in which the computer is purchased and placed into service). Again, this election is only available to you if the computer is used more than 50% for business.
If you use the computer 50% or less for qualified business purposes, you are required to use a straight-line method of depreciation, and you completely lose the expensing election under Code Section 179.
Not only that, your deductions will be treated as a "miscellaneous itemized deduction" and, as such, will be required to be reported on Schedule A. As a result of this requirement, these deductions will be reduced by 2% of your adjusted gross income, just like all other miscellaneous itemized deductions.
Finally, you will be required to maintain a record or log of your business and personal use. The business use will be deductible, as noted, but the personal use will be completely non-deductible.
Investment or income-producing use: You can deduct operating expenses plus depreciation if you use your computer to:
Produce or collect income (for example, to keep track of your investments and to visit the Motley Fool website), even though this activity doesn't qualify as a trade or business for you; or
Manage, conserve, or maintain property held for producing income (such as rental property); or
Determine, contest, pay, or claim a refund of any tax.
If you use your computer for investment or income-producing purposes, the same deductions that apply to an employee (discussed above) will also apply to you, except that the special election to expense the cost of the computer under Code Section 179 will not be allowed.
Example: Dave uses his home computer 30% of the time to track and record his investments; 20% of the time for stock and investment research; and 10% of the time for tax-planning and tax-preparation purposes. Since Dave is using his computer more than 50% of the time for investment purposes, he will be able to depreciate 60% of the computer and related components, and will be able to claim 60% of the operating supplies as investment expenses -- a miscellaneous itemized deduction. The remaining 40% for personal use is considered completely non-deductible.
Home office business use: If you use the computer in an office at your home that qualifies as your "regular business establishment," you get the maximum deduction. You get the same deduction as the employee (as discussed above), but the 2% "miscellaneous itemized deduction" rules do not apply. In addition, the listed property rules also don't apply. Any depreciation and associated expenses that you claim will be reported on your Schedule C as a business expense to offset business income.
Please remember that the above is simply an overview of general guidelines that you can use to help determine the deductibility of your home computer. As you can imagine, the rules can get even more complex when your get down to the nuts and bolts of things. So, while it can be difficult to grab that deduction for your computer, it's certainly not impossible. Make tax-smart decisions and get all of the facts before you place your order.
This forum and the information provided here should not be relied on as a substitute for independent research to original sources of authority. The Motley Fool does not render legal, accounting, tax, or other professional advice. If legal, tax, or other expert assistance is required, the services of a competent professional should be sought. In other words, if you get audited, don't blame us.