If you are reading this, it is virtually certain that you are doing so on a computer. It may be at your office, your school, or at home. The computer may have been provided for you, or it may be a computer you purchased yourself. For those people who have purchased their own computers, the question always arises: Can I take a deduction for my home computer? Many times, not just the computer is involved. In most cases you are dealing with related equipment such as printers, scanners, modems, Zip drives, etc. How are the costs and expenses associated with this purchase handled for tax purposes.

Not surprisingly, the deductibility of the computer and related components will depend on how you use them. 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 home computer that you buy 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 night at home. 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.

But a home computer, even if required by your employer and used exclusively for your employer's work, 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 6 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 lose completely the expensing election under Code Section 179.

Not only that, your deductions will be treated as a "miscellaneous itemized deduction" and will be required to be reported on Schedule A as such. 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 above, 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 sites) even though this activity doesn't qualify as a trade or business for you; or
• To manage, conserve, or maintain property held for producing income; or
• To determine, contest, pay, or claim a refund of any tax.

If you do 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 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 as a miscellaneous itemized deduction. The remaining 40% 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.

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. For additional information regarding the deductibility of home computers, see IRS Publication 529. To find out more about the "listed property" rules and the depreciation tables, check out IRS Publication 946. You can find these IRS Publications at the IRS website by pointing your web browser to: http://www.irs.ustreas.gov

- 03/26/98

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