How to deduct your home PC. (Compute's Getting Started with Personal Money Management)
by Richard O. Mann
Almost everyone with a personal computer at home has used it, at some time or another, for work-related activities. It's easy to believe this makes at least part of the computer's cost deductible on your tax return, but it isn't necessarily so.
Laws concerning tax deductions for PCs are stringent, and the Internal Revenue Service is extremely picky about enforcing them. Somehow, the IRS doesn't want us deducting machines we use to write to Aunt Gladys, play Kings Quest, and do the kids' homework. The fact that we also use it to track personal finances and prepare tax returns doesn't cut much mustard with them either.
The laws state that home computers are deductible under only three circumstances:
* It's used in a trade or business.
* It's used to track income-producing investments.
* It's required by your employer as part of your job.
Trade or Business
The phrase, trade or business, is used in tax law to refer to a legitimate business activity pursued for a profit. Generally, it requires your continued time and effort; it's not a passive investment that produces income regardless of your attention.
The IRS has seen myriad home-based activities that generate phony deductions. One test they use to determine what's a business is: Does the activity produce income at least three years out of five? If it doesn't, the IRS presumes it's a hobby and isn't deductible. (This is just a guideline; you can overcome this presumption, but it's not easy.)
The deductible portion of computer costs is the percentage of PC use for business. The IRS expects you to track the time you use the computer for business and the time you spend on non-business use. Divide the business hours by the total of all the hours of use to get the percentage you can deduct.
To prove these hours--an unsupported estimate is not acceptable--get a menu program that creates user logs. MenuWorks Advanced and Direct Access are well-known menu programs that will create the necessary logs.
Using the computer for the passive activity of tracking and controlling income-producing investments is deductible. You'll need to track the percentage of the computer's use devoted to investment work. It's hard to imagine it would be a large percentage, but you should deduct everything you're entitled to.
Deductions under this reasoning fall under Schedule A in your return. They are "miscellaneous deductions," which are subject to a two-percent floor. In tax parlance, that means that if your income is $40,000, the first two percent of that in miscellaneous deductions ($800) isn't deductible. Only the amount that exceeds the $800 floor is deductible.
The law is very specific here. The computer must be solely for the convenience of the employer, and it must be required as a condition of employment. These situations are rare.
The IRS has been burned on this so many times that it almost never believes the PC is really required. A simple letter from your employer saying he or she wants you to have a computer won't do the trick. You must prove that you'd be fired if you didn't have the computer.
In your return, this deduction is entered on Form 2106, Employee Business Expenses, and is again subject to the two-percent floor. And again, only the percentage of business use is deductible.
What Costs Are Deductible?
The largest item is the cost of the computer and peripherals, which are deducted through depreciation. The IRS insists that all computers be deducted over 5 years. In most situations, you would deduct one-fifth of the cost each year.
Deductible operating costs include paper, ribbons, maintenance, disks, cables, and so forth. Except for large purchases, software usually can be deducted in full in the year you buy it. If you make a large purchase, however, you may be required to spread the deduction over three years.
If you lease the computer, the entire lease payment is deductible (instead of depreciation).
If you run a trade or business, you also can take what is called a Section 179 deduction. Under Section 179, businesses can directly deduct up to $10,000 of otherwise depreciable assets, as long as it doesn't throw them into a loss. If you qualify here, you can deduct the entire computer cost in the year you buy it.
All of these deduction amounts, you must remember, are multiplied by the percentage of business use.
Final Words of Advice
Documentation is the key to any tax deduction, but it's particularly important in areas the IRS likes to question, such as home computers. You must be able to prove your claims are accurate and true.
So be truthful. Take the deductions if you qualify, but be prepared to be questioned on them.