Writing off a home computer.

Small machines, big tax issues.

People use home computers to balance their checkbooks, track their favorite team's standings and work on office projects. A major and confusing--issue is whether the costs associated with these computers can be recovered.

Depreciation. The primary way in which taxpayers can recover the costs of home computers is through depreciation.

An important issue is the level of the computer's business use. A computer used more than 50% of the time for a qualified business use can be depreciated under the double-declining-balance method with a five-year life. If used less than 50% in business, straight-line depreciation over a five-year life is required. A qualified business use is any use in a trade or business of the taxpayer; this does not include investment use.

Business versus investment use. Although the phrase "trade or business" is not explicitly defined, it has been read to mean the taxpayer is engaged in a regular and continuous activity with a profit motive; the taxpayer need not hold himself or herself out as engaging in the sale of goods or services and may have more than one trade or business.

Using a computer to manage one's own investments is generally considered an investment activity. However, taxpayers who can be classified as traders (rather than simply as investors) are considered engaged in a trade or business.

Expensing. Under Internal Revenue Code section 179, a taxpayer may elect to expense up to $17,500 of the cost of tangible depreciable personal property purchased for use in a trade or business. The taxpayer must use the property more than 50% of the time in the active conduct of a trade or business.

If business use falls to 50% or less in any year during the recovery period, the expensed amounts must be recaptured.

Expense treatment is available only in the year the computer is placed in service; if a computer is used solely for personal purposes and converted to business use in a later year, the opportunity to make the expense election is lost.

Limits. There are two limits to this expensing election:

Ceiling limit: The $17,500 maximum deduction is reduced if the amount of qualifying property placed in service during the tax year exceeds $200,000.

Taxable income limit: The deduction is limited to the aggregate taxable income from all the taxpayer's active trades or businesses. Any amount not deducted may be carried over to future years.

Recapture. If a taxpayer's business use of a computer falls to 50% or less, the taxpayer must recapture (and include in income) the excess depreciation previously taken; in addition, only straight-line depreciation will be available in future years. Recapture also applies if the taxpayer disposes of the property or stops using it in his or her business.

Substantiation. A taxpayer must keep track of the amount of time the computer is used for business, investment and personal use and substantiate the business and investment use with adequate records or other sufficient evidence. The taxpayer should maintain a log with entries made at or near the time the computer is used. While a contemporaneous log is not required, it will carry more weight than a statement prepared afterward.

Use of a computer by an employee. By definition, an employee satisfies the trade or business requirement; he or she is deemed to be in the trade or business of providing services to an employer. However, for the employee's computer to be depreciated or expensed, two other requirements must be met:

Convenience of the employer. The use must be for the convenience of the employer, as determined by all the facts and circumstances of the situation.

Condition of employment. The use of the property must be required for the employee to properly perform the duties of employment. The employer need not explicitly require the employee to use the property; however, a statement by the employer that its use is a condition of employment is not sufficient. In addition, the fact that the computer helps the employee perform his or her duties more easily and efficiently is not enough.

Note: These two requirements are interpreted very narrowly and are very difficult to meet.

For a more complete discussion of this issue, see "Can the Cost of a Home Computer Be Written Off?" by George Frankel, in the April 1996 issue of The Tax Adviser.

--Nicholas Fiore, editor

The Tax Adviser

Editor's Note 

The material discussed provides general information. Before you take any action in this area, the appropriate code sections, regulations, cases and rulings should be examined.