Can the cost of a home computer be written off?

• Author: Frankel, George

EXECUTIVE SUMMARY

A taxpayer who buys a computer for home use in a trade or business, for investment use or use as an employee faces a barrage of Code provisions and regulations designed to restrict the ability to depreciate or expense such equipment. To increase complexity, even if a deduction is currently available, it may have to be recaptured later on. This article provides a detailed explanation through the minefield of rules and offers planning suggestions so that available deductions can be maximized.

The proliferation of home computers raises the inevitable question of whether the cost of such equipment can be expensed or depreciated. The answer depends on whether the computer is used for:

1. Business use.

2. Investment use.

3. Use as an employee.

4. Personal use.

Deductions are not permitted for personal use of a computer; however, a computer may be depreciable if put to one of the other uses. In addition, if certain requirements are met, Sec. 179 allows the expensing of up to $17,500 of the cost of the computer in the year placed in service. Any amount not written off under Sec. 179 may be eligible for the double-declining balance (DDB) method with a five-year useful life, under the modified accelerated cost recovery system (MACRS).(1)

Depreciating a Home Computer

Sec. 280F restricts the use of accelerated depreciation and the ability to make a Sec. 179 election for "listed property." Sec. 280F(d) (4) (A) (iv) includes in the definition of "listed property" any computer or peripheral equipment.

A computer used more than 50% of the time for a "qualified business use" (QBU) of the taxpayer can be depreciated using the DDB method and a five-year life; alternatively, the cost can be expensed under Sec. 179.(2)

If the computer is used 50% or less of the time in a QBU, it must be depreciated using straight-line over five years under the ADS and is not eligible for Sec. 179.(3) A taxpayer using MACRS whose QBU falls to 50% or less may be required to recapture part of the deductions previously taken, under Sec. 280F(b) (2) (A).

The percentage of time the computer is used for a QBU is determined in the year it is placed in service, according to Sec. 280F(d) (6) (A). Even if the QBU increases from 50% or less in the year placed in service to more than 50% in a later year, the taxpayer will nonetheless be required to continue using straight-line depreciation and cannot elect Sec. 179. Consequently, the taxpayer should consider purchasing the computer in a year in which the greater-than-50% requirement can be met.

Sec. 280F(d) (6) (B) and Temp. Regs. Sec. 1.280F-6T(d) (2) (i) define a QBU as any use in a trade or business of the taxpayer, but not an investment use, a distinction discussed below.

Example 1: J purchases a computer on Feb. 1, 1996, which he uses 40% of the time in his business, 20% of the time to manage his investments and 40% of the time for personal use. The time J spends managing his investments and on personal use does not count as a QBU. Consequently, J must use straight-line depreciation and cannot elect Sec. 179 treatment.(4)

Depreciation for Business and Investment Use

The taxpayer first must determine whether accelerated or straight-line depreciation is appropriate, based on the QBU. Once the appropriate method is determined, the taxpayer may depreciate the computer for both the business and investment uses, as defined in Temp. Regs. Sec. 1.280F-6T(d) (3) (i). Business depreciation is reported on Schedule C, Part II, line 13; investment depreciation is reported on Schedule A, line 22 as a miscellaneous itemized deduction. The investment use portion of depreciation will be deductible only if the taxpayer itemizes and then only to the extent such depreciation, when added to other miscellaneous expenses, exceeds 2% of adjusted gross income.

Example 2: P purchases a computer in February 1996 for $5,000. He uses the computer during 1996 as follows: 40% for business, 30% for managing investments, and 30% for personal use. Because P's QBU is less than 50%, he cannot make a Sec. 179 election and must use straight-line ADS depreciation. If P purchased no other equipment in 1996, he would use the mid-year convention and depreciate the computer based on the 70% mixed business and investment use. Thus, in 1996, the depreciation deduction is $350 (70% X $5,000 X 1/5 (five-year life) X 1/2 (half-year convention)); $200 is deducted on Schedule C and $150 is deducted on Schedule A.

In 1997, P increases the business use to 60% and the investment use to 35%. P cannot switch to accelerated depreciation or elect Sec. 179. The only relevant year to determine QBU is 1996, the year the computer was placed in service. The depreciation for 1997 is $950 ($5,000 X 95% (business/investment use) X 1/5 (five-year life, straight-line depreciation).

Thus, P should have considered limiting the personal or investment use of his computer in 1996 so that he spent more than 50% of the time in a QBU, allowing the use of accelerated depreciation or Sec. 179. However, if at any time during the recovery period the QBU falls below 50%, the deductions taken will be subject to recapture.

Depreciation after the end of the recovery period: Although computers have a five-year MACRS life, because either the half-year or midquarter convention is used in the year of purchase and in the year of disposition, the computer is actually depreciated over...