19.10 Computers Bought for Work
Computers (and peripherals) are treated as “listed property” subject to deduction restrictions: To get a first-year expensing deduction (42.3) or to claim any type of depreciation, the computer must be used for the convenience of your employer, which means your use of the computer satisfies a substantial business need of your employer. The computer must also be required as a condition of your job, which means that you cannot properly do your job without it. The IRS strictly interprets these requirements.
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Court Decision
Tax Court Allows Computer Deduction
The Tax Court allowed a first-year expensing deduction to a working couple who used the same home computer given these facts: The husband, a professor, used it to store historical data; the wife, a state transportation planner, used it to do extensive number crunching. What apparently won the decision for the couple was evidence that (1) the husband did not have access to a computer at the university, and (2) the state office in which the wife worked did not have funds to buy a computer. The court held that the use of the computer was necessary for them to properly do their jobs, and as the purchase of a computer spared their employers from having to provide them with computers, the purchase was for the employers’ convenience.
In a later case, a telemarketing sales manager was allowed a first-year expensing deduction for a home computer and printer used to prepare reports. The key to winning the deduction was her supervisor’s testimony that as a mid-level manager, she could not enter the office after regular hours to use a company computer, and that she was able to keep up with the volume of sales reports she was required to submit by using her home computer and accessing information via modem.
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Computer.
A letter from your employer stating that a computer is needed for your position does not by itself satisfy the deduction tests. Even where your employer encourages use of a personal computer that is used for basic job requirements, the IRS requires proof that you need your own computer to do your job because your employer does not provide one, or because the computer supplied by your employer is not adequate for your job. In the following Examples, the IRS disallowed depreciation writeoffs.
EXAMPLES
1. An electric company offered to help pay for its engineers’ personal computers where this would improve productivity. Qualifying engineers received extra pay and had to buy a computer meeting company specifications, take approved computer courses, and agree to restrictions on resale of the computer. An engineer bought a computer and used it 95% of the time for writing business memos and reports, and studying business flow charts. He did not use the computer for entertainment.
The IRS held that although the engineer’s computer was work related and benefitted his employer, buying a computer was not required for his job; it was not “inextricably related” to proper job performance. Further, his participation in the employer’s computer program was optional, not mandatory.
2. A professor of nursing, trying to keep her temporary position, bought a personal computer, needing a word processor for independent research papers and to document her qualifications for research grants. The research and external grant support were implied university requirements for faculty appointments. She did not have access to university word-processing equipment during regular work hours; and because of her classroom responsibilities, her research and grant development work had to be done on her own time. To help her pursue outside grants, the university bought her a modem that allowed a phone hook-up with its computer at night. Her computer was used 100% for research and grant work.
As in Example 1, the IRS held that use of the computer was not “inextricably related” to proper job performance and did not qualify for a depreciation writeoff. Furthermore, there was no evidence that employees who did not use computers were professionally disadvantaged.
3. The IRS held that an insurance agent could not deduct depreciation for a laptop computer he used to help develop insurance plans for clients. The insurance company encouraged its agents to buy the computer because office computers were not generally accessible. According to the IRS, it is not enough that the agent’s productivity increased or that he used the computer solely for business. Purchasing the computer was optional, not a mandatory job requirement. Employees who did not purchase computers were not professionally disadvantaged.
4. The IRS barred a third-grade teacher from deducting the cost of a Macintosh computer because it was not required for her job. She bought the computer using an interest-free loan from the school after the school decided that report cards and student evaluations would have to be prepared on a Macintosh instead of being written. The Tax Court and an appeals court sided with the IRS. It may have been convenient for the teacher to use a home computer but it was not required. Other teachers were able to timely complete their duties using school computers.
Claiming a deduction.
If you can meet the “convenience of the employer” and “job condition” tests for a computer that you purchased in 2012, and you have records to prove that you used the computer more than 50% of the time for your job, you may write off the cost using first-year expensing (42.3), bonus depreciation (42.20), or accelerated MACRS depreciation rates (42.5). If business use of the computer is 50% or less, you may not use first-year expensing, bonus depreciation, or accelerated MACRS but you may claim straight-line depreciation (42.9).
First-year expensing or depreciation is claimed on Form 4562 and then entered on Form 2106 or Form 2106-EZ along with other job-related costs. The deduction from Form 2106 or Form 2106-EZ is subject to the 2% AGI floor for miscellaneous deductions on Schedule A (19.1). If you use first-year expensing, bonus depreciation, or accelerated MACRS and business use in a later year falls to 50% or less, the deductions are subject to recapture (42.10).
