Home Office Listed Property

[Snaggletooth]

Some time ago I made the remark that I limit deductibility of computers, peripherals, and related supplies to 80% if the computer is actually physically located in the home.

Some hoary-headed swain reminded me that if I did this, the customer would lose deductibility on his home office.

This was news to me, but the aforementioned greybeard was probably right. But why? Is it because the "exclusive" nature will get thrown out at the very mention that 20% could be personal use? If so, this may be correct, but certainly not fair.

Why?

[Bees Knees]

Regulation Section 1.280F-6(b)(5) says:


“EXCEPTION FOR COMPUTERS. The term "listed property" shall not include any computer (including peripheral equipment) used exclusively at a regular business establishment. For purposes of the preceding sentence, a portion of a dwelling unit shall be treated as a regular business establishment if (and only if) the requirements of section 280A(c)(1) are met with respect to that portion.”

Section 280A(c)(1) is your exclusive use test for office in home. So basically the rule is saying that if you qualify for a home office deduction, your computer used in the home office is NOT listed property and therefore 100% of its cost is deductible through depreciation.

The reverse should also be true then: If you can’t claim 100% business use of a computer in a home office, then you must be admitting that the section 280A(c)(1) requirements were not met, and so your home office is disqualified under the exclusive use tests.

I remember years ago being told that you can’t even have a radio in your home office, because anything in there that is not strictly for business can disqualify your office. I would argue that is being ridiculous, but I think it is good advice to have clients empty their home offices of personal stuff and nick knacks if auditors ever come to inspect their home office for evidence of personal use.

[Gene V]

Computer

Snaggletooth, it wasn’t me, but I agree, if your computer is used exclusively in a qualifying office in your home, then it is not a listed property. You do not have to use the listed property rules. But if you do not have a qualifying home office, then your computer becomes listed property and you must keep records of business and personal use.

So if you use your computer 20% for personal use in your home office, then this would disqualify you for the Exclusive Use test, and disqualify your home office deduction.

I think the only exceptions to not meeting the Exclusive Use test is, if you use part of your home for the storage of inventory or you use part of your home as a daycare facility.

Gene

[Snaggletooth]

Thanks

Thanks guys for clearing this up. The notion that someone's kid could go into the home office and play computer games during the daytime, and that 20% of the loaded software could be personal, should not by itself disqualify the home office, but I do understand the reasoning behind the answers given by Gene V and Bees Knees. They may in fact be reflecting the IRS position, but it's not fair.

And by the way, the original "hoary-headed swain" referred to was none of than "J G" - one of our more respected members. I hope no one takes offense to the occasional use of allegory and fun. Wait 'til Black Bart comes out of hibernation!

Regards, Ron J.

[Armando Beaujolais]

"hoary-headed swain"

Accountants talking trash.

Oh boy.

[Mark Goldberg]

Disagree with Bees

If you have a home office and in one corner of the room is a computer and the computer is used 60% for self employment, and 40% for employment (but not required by employer) then you can't just say that it is 100% self employment because it is in a home office. What you have here is a situation where 60% of the computer is deductible and a few square feet of the office is non deductible because it is not exclusively used. Remember the home office space can be part of a room.

[Armando Beaujolais]

The use has to be exclusive use in a trade or business. It doesn't have to be in one business. In your scenario, the computer is 100% business use. Not a problem.

Yes, it would be an audit flag because the computer would be listed as less than 100% business use on Schedule C.

An office doesn't have to have four walls around it, but it still has to be an area. You can't create a checker board pattern of business use, not business use.

[Donanita]

80% Use

Why do you only take 80%. Has the client told you the use is 80%.I use my computer in a home office 100% for tax & accounting and would like to see the IRS prove otherwise.I also have games,which were preinstalled on the computer when I bought it but does not mean I play the games or use my computer less than 100%.
There is a taxpreparer in my location that will not take OIH for clients because ot the IRS past stand on OIH deduction.They tell the clients that this will trigger an audit.If this is so then why did the IRS give the deduction and If you don't have OIH then the clients will lose mileage from home to job sites.So if the OIH is 100% when why take the computer as 80%.

[Armando Beaujolais]

Why do you only take 80%. Has the client told you the use is 80%.I use my computer in a home office 100% for tax & accounting and would like to see the IRS prove otherwise.I also have games,which were preinstalled on the computer when I bought it but does not mean I play the games or use my computer less than 100%.
There is a taxpreparer in my location that will not take OIH for clients because ot the IRS past stand on OIH deduction.They tell the clients that this will trigger an audit.If this is so then why did the IRS give the deduction and If you don't have OIH then the clients will lose mileage from home to job sites.So if the OIH is 100% when why take the computer as 80%.

This gets back into the discussion of many tax preparers who are afraid of what a revenue agent might say and prepare returns accordingly. They might as well be on the government's payroll in my opinion.

Schedule C's have a high audit risk too. I wonder if that practitioner also refuses to do Schedule C's.

This issue is going to come up a lot. How much work in home offices is done without a computer? I'm not saying every home office must have a computer in it, but it's going to be a high, and ever-increasing percentage. There's no "sort of" phrasing in the exclusive use test.

The IRS never has been thrilled about allowing business use of the home. I'll bet there will be a wave of audits at some point. Easy pickins.

[Snaggletooth]

80% is good

Why 80%? Isn't this going to cause my clients loss of home office, tax dollars, and all manner of other weeping & gnashing of teeth?

Rest assured, if someone had a computer in their home and there were even as much as a shred of evidence that they were using it 100% for business, I would deduct 100%. I suppose I've become oblivious over the years to customers buying things for themselves and wanting to deduct the whole thing. Boats. Trips to Las Vegas. Christmas parties. And yes, in recent years, computers. PCs for the Business, including a whole wall full of music CDs for the CD-Rom. PCs for the kiddies, too. And in two years, a brand new PC. Home office issues aside, let's be real folks. You do NOT do your customers a service when you allow them to reap where they haven't sown - not moralizing here, but you and your clients are better off with reality checks here and there.

I could start a thread about the answers we get when we ask our clients: "What happened to the computer we deducted 3 years ago, before you bought the new one?"

By the way, how DO you handle the old computer (section 1245 stuff) when your client buys a new one every 2 years, and gives you this sheepish look when you ask what they did with the old model? Does anyone believe them when they tell you they are "gone" but cannot tell you how or when they disposed of same?

[RLymanC]

Home Office Computer

Bees,
What if the computer is a laptop and you remove it from the home office area to use it for personal use, when finished back it goes to the home office area? I would think that you still have a home office and a partly deductable computer.

[JG EA]

I'm so insulted.

Some hoary-headed swain reminded me that if I did this, the customer would lose deductibility on his home office.

I resemble that remark.

(Not really - joke, kidding, etc.)

[Bees Knees]

Bees,
What if the computer is a laptop and you remove it from the home office area to use it for personal use, when finished back it goes to the home office area? I would think that you still have a home office and a partly deductable computer.

The reg I quoted said "used exclusively at a regular business establishment." So in your example, the computer would be listed property because it is not 100% business, but then it would also not disqualify the home office because it is always 100% used in business while in the home office.

[Cherie70]

Home Office

In all the responses I have read to this situation, I have a quesiton. I have been in Business since 2001 and I have a home office. I meet with regular clients here and have a personal computer that I use for my business. In order to keep up with the changes in the accounting field, I upgraded my system (600.00) bought a new monitor and upgraded my accounting programs( I used three). I have a TV (which stays on CNBC or Bloomberg) From 8 to 6 Mondy thru Friday. So my question is since I meet with customers in my home office and do 100% of my business from there could I still deduct my home office as a business? A tv is not really needed but I expensed it in one month against my business. Everything in my home office is directly used for my business, but sometimes I use the computer to print out certain things my laptop printer is incapable of doing. Those few times would consitute exclusion from the home office deduction?

[Snaggletooth]

Mon Cherie

Ah yes, the mere mention of Solitaire on your computer, or a TV in the room, etc. evokes fear of home office disallowance. And this is what is so ridiculous. However, if IRS makes a trip to see you, move the TV out.

The "exclusive" reference is causing needless concern, and I believe aggressive IRS people can get a lot more worked up about a video game on the PC than they would a "Penthouse" magazine laying around at a "Rented" office (not OIH). One is no more "non-business" than the other.

The existence of a couple personal items like a sewing basket in a home office should not allow them to invoke a violation of the "exclusive" nature. Ridiculous. But I do tell my OIH clients to move that sewing basket out of the room if IRS pays a visit.