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Text File | 1996-08-23 | 8KB | 166 lines

           ┌─────────────────────────────────────────┐
           │DEDUCTING COSTS OF A HOME OFFICE COMPUTER│
           └─────────────────────────────────────────┘

A very large and growing percentage of the U.S. population
now has computers in the home, many of which are used, at
least part of the time, for business purposes.  If you are
using a computer at home for your business (other than as an
employee, which is not discussed here), the following section
will give you a number of guidelines on when and what you may
deduct, and how to maximize your tax deductions.

There are 5 main ways in which the tax law categorizes your
use of a computer in your home:

   . Business use, in your business
   . Employee use, for employer's work (not discussed here)
   . Business education use
   . Income-producing or investment (non-business) use
   . Personal use

BUSINESS USE.  If you use the computer solely for business
(which may include some use as employee if you also have
a job), and the computer is not considered "listed property,"
you may expense up to $17,500 of the cost of it and other
business tangible personal property you acquire, in the
year of purchase.  Or, if you do not elect the first-year
deduction, you may depreciate your computer under MACRS as
"5-year property," using double-declining balance
depreciation, and switching to straight-line depreciation
in the year in which it becomes more advantageous to use
straight-line.  If you depreciate your computer, you take
only a half year of depreciation in the first and sixth
years it is owned.  Note that if your computer is used,
say, 40% of the time for playing computer games and for
other personal, non-business purposes, only the 60%
business portion of its cost is deductible or depreciable,
even if it is not "listed property."

The cost of the computer will include the cost of peripheral
devices, such as monitors, printers, modems, and the like,
which are under the control of the PC.  Obviously, you
won't be able to depreciate or expense the cost of certain
peripherals, such as a game-playing joystick -- unless you
are a game developer or tester who uses a joystick for
business purposes.

If the computer is "listed property," you will still be able
to depreciate it, or at least part of its cost, but will not
be able to elect first-year expensing.  A home computer will
be considered listed property if it is not used exclusively
in a qualifying home-office, which is also a "regular business
establishment" that is not owned or leased by the person
operating the establishment.  NOTE:  Just because you don't
have a qualifying (exclusive business use, etc.) "home office,"
you won't be denied deductions for using your PC.  But you
will be subject to the listed property deduction limits and
required to meet strict substantiation rules.

If the computer is considered "listed property" (not used in
a qualifying home office, etc.), but is used more than 50%
each year for business purposes, which you substantiate, you
can't take the first year expensing deduction, but can take
accelerated (double-declining balance) depreciation on the
business portion of the cost, over 5 years, as for non-listed
property.  If used less than 50% for business, you must use
straight-line depreciation over 5 years.  (In all cases, only
1/2 year of depreciation is allowed in the first and sixth
tax years.)  If you start off with accelerated depreciation,
and business use drops to below 50%, you will be required to
"recapture" the excess depreciation taken in prior years, to
the extent it exceeded straight-line depreciation.

RELATED BUSINESS COSTS.  Your home computer deductions can
include other related costs, such as:

  . phone charges, other than the charge for basic local
    phone service for the first telephone line to your home;

  . charges for on-line or Internet services, if used for
    business purposes;

  . computer software costs, which generally must be
    amortized (straight-line) over a period of 60 months,
    unless acquired as part of the purchase of a business.

If your computer is considered "listed property," you will
be subject to strict substantiation requirements, in order
to claim any depreciation deductions.  The business use
percentage of your PC must generally be substantiated by
adequate records or by sufficient evidence to substantiate
your statements.  You must keep not only a record of the
cost of the PC, but you should also keep a contemporaneously
maintained usage log, in which you record the hours of
business and investment use, or personal non-business use.
You can keep a written log, or use certain software programs
that create a computer-generated log of what you are doing
on the computer each time you turn it on and off.

BUSINESS EDUCATION USE.  If you use your PC to prepare
assignments, do research, or for other uses in your business
education, where the costs of such education qualify for
tax deductibility, you will be able to deduct such costs
as a business expense on your Schedule C (for a self-employed
person).  If you are an employee, the costs will be an
itemized deduction, and will thus be subject to the 2% of
adjusted gross income (AGI) reduction of all such
"miscellaneous itemized deductions."

Note that educational costs are generally allowed as
deductions only if the education is to meet the express
requirements of your employer, or to sharpen or maintain
your business skills.  Education that leads to a new trade
or business, such as getting a law degree or Ph.D., is not
a deductible expense, so that use of a PC in such courses
would also be non-deductible.

INVESTMENT OR INCOME-PRODUCING USES.  Use of your PC to
monitor investments, manage, conserve or maintain property
that is held for the production of income, or to determine
or contest any tax, is a deductible use, even though the
activity does not qualify as a trade or business.  Thus,
using a program like Turbo-Tax (R) or Tax Cut (R) to do
your own tax return should be a qualifying use, but merely
using Quicken (R) to pay your bills or maintain your personal
bank accounts probably would not qualify.

However, such investment/income-production/tax uses qualify
only for depreciation, as for "business use" discussed
above, but not for the first-year expensing deduction.
Also, all such depreciation is subject to reduction, as a
miscellaneous itemized deduction, by 2% of your adjusted
gross income (AGI).  Thus, if your AGI for the year is
$100,000, only your miscellaneous deductions that are in
excess of $2,000 (2% of AGI) will be potentially allowable
as deductions, and then only if you itemize deductions.

PERSONAL USE.  Personal use of a computer is not deductible,
whether you use it for entertainment, hobbies, balancing
your checkbook, keeping track of personal expenses and
appointments, "surfing the Net," personal e-mail, playing
"Doom," or for education (except for certain tax-deductible
types of education, as described above).

Thus, regardless of whether the business use of your computer
is for a trade or business, your employer's business,
business education costs, or investment/tax-related uses,
if a certain percentage of your use of the PC is for
personal, non-deductible activities, then that percentage of
the cost of your PC will not be deductible or depreciable,
in any case.

          ┌───────────────────────────────────────────┐
          │BOTTOM LINE:  Unless you have a qualifying │
          │home-office in which you use your home PC, │
          │you will need to keep a contemporaneous log│
          │or have other good evidence to support your│
          │business use percentage that you claim when│
          │you deduct or depreciate the cost of your  │
          │home PC, under IRS substantiation rules.   │
          │   KEEP A LOG!  OR LOSE YOUR DEDUCTIONS... │
          └───────────────────────────────────────────┘