When a PC at home isn't a home PC
I don't make up these rules. I just write about them.
That's my preface to the IRS regulations about deducting computers used in your business. They can take on an almost Alice-in-Wonderland quality.
But if you hope to write off the purchase of PCs for your small or home-based business, you need to know something about these rules. So bear with me here as I muddle through some of the high points.
The world of listed property
Computers, along with passenger autos, cell phones, cameras and some other types of equipment, are generally subject to more record-keeping and substantiation for tax deductions. These types of items are known as "listed property." In fact, there's a special section for them on the tax return: Part V of Form 4562, Depreciation and Amortization.
It makes sense for the IRS to want more record-keeping than usual for these types of business purchases. Cameras, video equipment and other high-tech toys are widely used for personal purposes and entertainment. The IRS is well aware of this. So it wants to make sure that you'll include as a business expense only 90% of the cost of your hand-held camcorder, if you're using it 10% of the time for vacations and parties.
Typically, you're supposed to keep track of the business use of each of these types of property. The most common way of doing this is by keeping a usage log. For your computer, the most complete method of record-keeping would involve noting on a daily basis how much time you've spent using the computer and how much of that time was business usage.
An exception to the rule
However, there is an exception to these requirements for some computers. (You must know that a tax professional's list of five favorite phrases always includes, "But there is an exception to that rule.")
If you use your computer exclusively at your business location, then the computer does not have to be considered "listed" property. Therefore, you would not include it with cell phones, automobiles and other listed property on your tax return.
This doesn't mean that you won't include the computer expenses on Form 4652 of your tax return. But if you're depreciating a new computer, the equipment will be included with expenses in Part II of the form, instead of Part V.
So far, so good. You have your computer in your home office, you don't take your computer out of your home office, and you get out of some of the more onerous record-keeping requirements attached to deducting a business computer.
When home PCs aren't home PCs
Here's where things get a little weird. Let's say that you're one of the many small-business owners or small proprietors with a home office. You have a computer in your home office, and you use the computer exclusively for your business.
You think of this equipment as your "home computer." The folks who sold it to you probably referred to it as a home computer. But in the lingo of the tax world, it is not a "home computer." It is a computer being used in a regular business location, and thus is not subject to the difficult record-keeping requirements of home computers.
Now, let's consider that six-pound, two-inch-thick high-tech machine that you lug with you when you go to see clients or have other business meetings. You probably think of that as your laptop PC. You paid a lot for it — probably more than you would pay for a desktop PC — precisely because it is lightweight and portable and allows you to work from just about anywhere, instead of being tethered to your office desk.
You probably wouldn't have even bought this laptop if you didn't have a business. So you surely think of it as a fully deductible piece of business equipment. But when it comes to tax returns, that laptop is subject to the rules in place for home computers. That's right — it is "listed property," which means you're supposed to keep track of and report the business use of the computer on your tax return.
Employees get different treatment
Don't use this story as a guide to deductions if you are an employee trying to write off a personal computer that you use to do work at home for your boss. The rules on deducting those kinds of purchases when you are an employee are much stricter — most employees don't get to deduct anything for home computer purchases.
Finally, a warning: While computers used solely in a home office or other business setting are not considered listed property, there has been at least one tax court case in which a taxpayer's deduction for computer equipment used in a home-based business was denied, at least in part because there was no evidence offered about the business use of the computer.
So despite the way the tax laws read, I still tell clients who want belt-and-suspenders security to keep some type of a log. You also should be careful to note in your records the dedicated home-office space and the computer's placement within that space.
As I said, I didn't make up these rules. But they are the rules.