Can I Claim A Deduction For My Computer?
There are different rules for deductions of expenses for purchase and use of a computer, depending on whether the use is for your own business (Schedule C or Schedule F), connected with a rental
activity (Schedule E), for use as an employee (Form 2106) or in management of your investments (Schedule A).
In general, the use of the computer in the activity, and the costs incurred, must be reasonable for the circumstances. For example, hardware upgrades that are not needed to operate the software that
you use for the activity, as well as software or online services that have no legitimate use for the activity, cannot be depreciated or deducted in any percentage.
Deductions for use of a home computer by an employee have two strict tests: The employer must specifically require that you own a computer of your own, AND must require that the computer be used
in your home. The fact that the computer simply "helps" you do your job is not sufficient.
If you buy a computer for qualified deductible use, you generally depreciate that percentage of its cost over five years using MACRS. However, you can elect to write off in the first year, under Sec. 179, the percentage of the cost attributable to business or employee use (not rentals or investments). However, if the TOTAL deductible use of the computer (including investments and rentals) is not more than 50%, Sec. 179 is not permitted, and straight line depreciation must be used rather than MACRS.
Software that is purchased with a computer (whether pre-loaded or just bought with the hardware) can be depreciated as if part of the cost of the hardware. Software bought separately is generally amortized over a three year period. Exception: Software that has a useful life of one year or less, such as tax preparation
software, may be deducted currently.
A home computer is classified as "listed property" under current tax laws, meaning that written records must be maintained to substantiate the time spent on qualifying deductible use, as opposed to use for personal purposes. If the same computer is used for more than one deductible use, the expenses are apportioned separately. (Note: A computer used in a principal place of business, which would include a qualified home office, is exempt from the listed property designation.)
Comprehensive Example: John buys a new computer and printer for $2,000. He adds a sound card and speakers for $300. He later buys the following software: two computer games for $100, investment software for $150, word processing software (which he will use 75% for his business) for $120, and an accounting package for his business for $100. His supplies, attributable to all uses, come to another $100. His log book shows that the computer was used 75% for his business, 10% investment use, and 15% personally. His deductions are as follows:
There are no deductions allowed for the sound card or speakers, or the computer games, which are unrelated to any deductible use. (However, if the sound card and speakers had come as part of his system when he bought it, he would not have to subtract their value from the purchase price).
Schedule C: Elects Sec. 179 on 75% x $2,000 is $1,500. Amortizes 75% of the $120 software and 100% of the $100 accounting software over three years. Deducts 75% of the supply costs.
Schedule A: Depreciation on $200 (10% of $2,000) over five years using MACRS. 10% of the supply costs deducted currently.