Home Computer Deduction

 

 


It has become a common occurrence for many employees to work at home doing company work on their home computer.   Even though you might think that the cost of using your personal computer for your employer is a deductible employee business expense, that is not the case.  The IRS will usually disallow this deduction for the vast majority of employees who claim the deduction. 

Employees can write off their home computer if they satisfy BOTH of these requirements:

1.   The computer MUST be required as a “condition of employment.”  This means the home computer must be essential for you to properly perform your job.  The IRS will need evidence that describes in detail the requirements of your job and that a computer is required for you to properly perform your work.  

2.   The second requirement trips up most employees.  The computer MUST be for the “convenience of the employer.”  Most employees buy a computer for their convenience, not for their employer’s.  Using a home computer just so you do not have to stay late at the office, to prepare reports for your employer, or other job-related projects, does not qualify.  Despite legitimate business use, employees generally may not write off the cost of the computer as a tax deduction. 

The IRS interpretation of the rules makes it difficult to deduct depreciation and  operating costs for a computer - even if the computer is used only for company work.  If the purchase of the computer is optional and not absolutely required by the employer as a condition of employment, it is not deductible. 

To illustrate this point, the IRS has denied a deduction when an employer offered to help pay for a computer, provided an interest-free loan, offered instruction courses for using it, and restricted its sale.  The IRS also has ruled against a college professor and an insurance agent since their home computers were not absolutely required by their employers.

By contrast, a deduction was allowed in the case of a sales manager after her supervisor testified that the taxpayer used the computer to prepare reports and keep up-to-date, AND had a heavy caseload, AND could access the office computer at home through a modem, AND was not allowed access to the office computer after business hours.

Even if an employee can meet the strict requirements discussed above, the deduction for the depreciation and operating expenses of the computer is an “Other Expense” deduction on Schedule A, Itemized Deductions, and that deduction category is limited to expenses exceeding 2% of the taxpayer’s adjusted gross income.  Since this is an itemized deduction, some taxpayers do not have sufficient other deductions when combined with the computer deduction to exceed the standard deduction, even if the computer does qualify.

Further, a computer at home, even if used exclusively for the employer’s work, is subject to the so-called “listed property” deduction-limitation rules (unless you qualify under the “Office-at-home” rule, explained below, and the home-office is also a “regular business establishment”). Briefly this means that to the extent you use the computer for your employer’s work:

(1) If you use your computer MORE THAN 50% of the time for qualified business use, you can take as that percentage of the total cost as accelerated depreciation over 6 tax years, or (in the first year you place the computer in service) an expense deduction under a Code Section 179  - plus the same percentage of the computer's total operating expenses .  If your qualified business use is  50% or less,  you can ONLY take that percentage of its cost for straight-line depreciation and operating expenses.   Unless the qualified business usage percentage is more than 50%, you do not qualify for the immediate expense deduction under Section 179 for its cost.

(2) Your allowable deductions in (1), above, must be reduced by 2% of your adjusted gross income.

Here are some more examples of employees who had their computer deduction challenged by the IRS.  The Internal Revenue Service refused to allow a teacher to deduct the home computer she used to evaluate students. The school required computerized evaluations.  However, the IRS said she could use the equipment furnished at school.

A university hired a person to apply for grants.  The documentation required long hours, so she bought a computer to speed the process.  Even though the computer benefited the university, the deduction was disallowed.  The IRS said the school didn't require her to buy it.

Similarly, a salesman did not get a deduction even though his employer wanted the sales force to analyze insurance plans with computers.  The IRS said the company didn't penalize those without them.

An aerospace engineer bought a computer to avoid long lines at the one at his office.  His employer even wrote a letter saying the company conditioned his employment on the purchase.  The IRS said the engineer could do his job without it.  The agency added that the self-serving letter from the employer didn't convince the IRS otherwise.

In this particular case, if the engineer had gone to court, he might have won.  The agency's over-conservative attitude stems from concern for potential abuse inherent in an employee's personal use of computers at home.  The Courts have taken a somewhat more liberal interpretation of the statute.

A professor's psychology research project required massive amounts of data. Because the university had no computer, he bought one to use at home. The IRS disallowed the deduction.   In this case, the court  ruled for the professor and stated that the taxpayer need not prove job performance is impossible without a computer.  It was enough to show work would be significantly benefited.

If your home computer meets all of the following tests, then you are probably safe in deducting its cost and maintenance:

  • It is necessary for proper job performance.
     
  • Your employer virtually requires it.
     
  • It is for the employer's convenience, not yours.

Even if your computer usage meets the tests, remember that you can deduct it only to the extent the deduction plus other miscellaneous expenses exceed 2 percent of your adjusted gross income.

Internal Revenue Code Section 280F

For those of you interested in the technical language of the law, Internal Revenue Code Section 280F contains special requirements for depreciating or expensing "listed property," which includes computers, passenger automobiles, cellular phones, and any property used for entertainment or recreation.  For your information, Computers used exclusively at a business, including a home office deductible under the stringent requirements of Sec. 280A(c)(1), are not considered as listed property.

To be depreciated, listed property must be used in a taxpayer's trade or business. Accelerated depreciation or expensing is allowed only if the property's business use exceeds 50% for each year of its life; and, for employees, it must be used "for the convenience of the employer and required as a condition of employment."

Temp. Reg. Sec. 1.280F-6T(a)(2)(ii) indicates that the "condition of employment" test is satisfied if the property's use is "required in order for the employee to perform the duties of his or her employment properly." The employer's explicitly requiring the employee to use the property is neither necessary nor sufficient in this regard.  Instead, all of the facts and circumstances are relevant in determining if the property is necessary for the employee to do his or her job properly.

There is an example in Temp. Reg. Sec. 1.280F-6T(a)(4)(Ex. 5) that disallows a home computer deduction where the employee, an engineer, "occasionally takes work home at night rather than working late in the office."

In addition to the Sec. 280F requirements, Sec. 274(d) prohibits any deduction for listed property unless the taxpayer substantiates "by adequate records or by sufficient evidence corroborating the taxpayer's own statement" the property's cost, the time and place of its use, and its business purpose. Temp. Reg. Sec. 1.274-5T elaborates on these requirements.

TAX COURT ALLOWS EMPLOYEE DEDUCTION FOR HOME COMPUTER

In Mulne v. Commissioner, the Tax Court ruled that an employee with a demanding job could deduct the cost of a home computer used to prepare required reports which she was unable to complete at work during business hours. Her employer did not allow her to use her office at work after business hours. The Tax Court applied the strict "condition of employment" test in this ruling.  Covering computers and certain other property, Mulne affects millions of taxpayers.

In Mulne, Sherri Mulne was a sales manager for Pacific Bell who was required to train and supervise sales representatives, develop sales strategies, handle customers, review paperwork, and prepare reports. However, she had insufficient time to prepare the reports during business hours, and she did not have access to her office at Pacific Bell after business hours. A Pacific Bell supervisor testified that home computers permitted sales managers to work more efficiently and effectively. During 1991, Mulne purchased an old IBM computer and printer for $3,689 for her home office, which she testified she used exclusively for business purpose. Using a modem, she accessed information from Pacific Bell and completed various required reports at home. She expensed the computer, and the IRS disallowed the deduction.

Finding that Mulne's large volume of work required her to use a computer in her home, the Tax Court ruled that Mulne's home computer was for the convenience of her employer. Also, the court ruled that the convenience of the employer and the condition of employment tests were essentially the same. Regarding the Sec. 274(d) substantiation requirements, the court simply stated that Mulne was a credible witness. Therefore, she could deduct the computer's cost.

Mulne establishes that employees can deduct home (or laptop) computers that are listed property if a computer is required to do their job properly and they do not have access to their office computer at work after business hours. Of course, the IRS and the Tax Court have leeway in interpreting "properly." Also, it is not clear if the court would have denied the deduction if she had greater access to her office computer at Pacific Bell. Given these uncertainties, taxpayers should maintain a log of the business use of their home computer, emphasizing the importance of this use to their job as well as its frequency. Also, taxpayers should use their home computer during times when they do not have access to their office computer.

Source: Mulne v. Commissioner, T.C. Memo 1996-320 (July 15, 1996).

Here are a couple of other examples where the deductibility of a home computer was not allowed:

 

1.  Where the employee buys a  home computer because the office computer is often used by others during work hours. This is true even though the home computer is used exclusively for work and the employer provides the employee with a written statement indicating that the purchase of the home computer is a condition of employment.  (Rev. Rul. 86-129 , 1986-2 CB 48 )

 

2.  Where the employee (a teacher) bought a home computer because she determined that her employer didn't provide its employees with enough computers for the employees to use during their normal working hours. Although a computer was necessary for the teacher to perform her duties, and the employer encouraged its employees to purchase home computers by offering interest-free loans, the employer did not make purchasing a computer a required condition of employment. The fact that it was inconvenient for the teacher to use the computers provided by her employer didn't make a computer a required condition of employment.  (Bryant, Robert v. Com., (1994, CA3) 39 F3d 1168 , affg(1993) TC Memo 1993-597 ).