Self Employed Clients this Accounting Web Article is for you. Remember when you are capitalizing (for depreciation) your business equipment, computer equipment and vehicles – if you are not using that item 100% for your business, you need to prorate the business use %.

Tax Court Rules on Home Computer Deductions

As many taxpayers continue to work from home, use of home computers for business activities are more commonplace. In a new Tax Court case, Coleman TC Memo 2020-146, 10/22/20, a taxpayer was denied a deduction for a home computer under prior law.

Jan 21st 2021
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Despite the tax law change, the key principles remain relevant today. In the new case, a Maryland taxpayer had an insurance consulting business. He claimed deductions for a laptop he purportedly used at home for business purposes. The IRS denied the deductions and the case, which also involved contested gambling loss deductions, wound up in the Tax Court.

After reviewing the evidence, the Tax Court sided with the IRS. It stated that the taxpayer didn’t show that any portion of the home was used regularly and exclusively for business. Also, the taxpayer didn’t provide any records documenting business use of his laptop nor could his wife corroborate that he used it solely for work. Furthermore, the taxpayer failed to meet the substantiation requirements for listed property. Case closed.

Background: Certain types of business property are treated as “listed property” for purposes of depreciation deductions and the Section 179 expensing allowance. Notably, this designation applies to vehicles used for business driving. Prior to 2018, a home computer, as well as any peripheral equipment, also fell under this umbrella unless it was used in a regular business establishment or a part of the taxpayer’s home qualifying as a home office.

Under the rules for listed property, strict recordkeeping requirements and other special restrictions apply, depending on business use. For instance, if your client used a home computer for business 75 percent of its overall use in the year it was placed in service, the Section 179 deduction was limited to 75 percent of the cost. Listed property must be used at least 50 percent for business.

Special exception: If the computer was located at a regular business establishment, it wasn’t treated as listed property. Usually, a home computer qualified for this exception if your client was self-employed and maintained a home office as their main business location.

Fortunately, the Tax Cuts and Jobs Act (TCJA) which went into effect in 2018 removed computers and peripheral equipment from the listed property classification. But there’s an extra tax wrinkle when computers are used in a home office. Technically, the home office must be used “regularly and exclusively” for business purposes. So, any personal use of a computer might taint home office deductions.

But what about deductions for computers acquired after 2017? Even though a home computer is no longer treated as listed property, taxpayers must still establish that they meet the requirements for home office deductions.

Tax bonus: A home computer placed in service after 2017 may qualify for bonus depreciation even if the computer is used for less than 50 percent business use. As a result, taxpayers can deduct 50 percent of the computer’s cost in the year it was placed in service.

To avoid any tax disputes with the IRS, you might encourage clients to acquire a computer or laptop that is used strictly for business in a home office and use other devices personally. The extra cost may be worthwhile.