ROBERT L. SOMMERS
Note: This exercise is for educational purposes only and is not intended to be legal or tax advice. Your particular facts and circumstances must be considered when applying the U.S. tax law. You should always consult with a competent tax professional with respect to your particular situation.
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"Business use" occurs when you engage in a profit-making trade or business. You should (1) maintain records systematically; (2) represent yourself as a business; (3) generate gross receipts; and (4) have an actual profit or a reasonable expectation of profit from these activities.
Students and employees are not engaged in a profit-making trade or business. Employees, however, may expense a home computer, provided your employer requires you have it as a condition of current employment and it is used for the employer's convenience. Your home computer is considered a condition of your employment only if it is a prerequisite for your job.
The "listed property" limitation prevents the deduction of your home computer and its software unless it is used "predominantly" (greater than 50 percent) for business during its first year of service. If the predominant-use test is met, you may expense that portion of the computer's cost allocated to business. For example, an $8,000 computer used 60 percent in a trade or business in its first year of service can be expensed up to $4,800.
These limitations do not apply if you use the computer you paid for exclusively at a business establishment owned or leased by the person operating the establishment. Nor do they apply if you use your computer only in an area of your home that you use solely as the principal office of your trade or business.
A Section 179 election to expense is made on Form 4562 and must be attached to your original return (including a late-filed original return), or on an amended return filed by the due date of the original return (including extensions) for the year the property is placed in service. It may not be revoked without IRS consent. Employees may make an election on Form 2106. The limitation for expensing business equipment is $17,500 per year.
Qualifying education means education or training that: (1) is mandated by your employer; or (2) maintains your present skills, but does not include either entry-level education to qualify you for your job or "upward-bound" education to qualify you for a new trade or profession. See the February 17, 1996 column for details of the deductibility of education expenses.
An accountable plan requires that: (1) your education expenses be business related; (2) you adequately account for expenses to your employer within a reasonable time; and (3) you return any excess reimbursement to your employer within a reasonable time. If your expenses exceed the reimbursements, you can deduct the excess on Form 2106 (Employee Business Expenses). This form is not required if your expenses equal your employer's reimbursements.
A non-accountable plan covers all other reimbursement. The reimbursed will be added to your wages, unless the educational expenses are considered "working condition fringe benefits." Under this exception, any service provided to you by your employer, costs which would otherwise be deductible by you as an ordinary and necessary business expense, is not included in your gross income. An example of a working condition fringe benefit is employer expenditures for on-the-job training.
Even if an educational reimbursement under a non-qualified plan is added to your wages, you may deduct qualifying education expenses as a miscellaneous itemized deduction.
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**NOTE: The information contained at this site is for educational purposes only and is not intended for any particular person or circumstance. A competent tax professional should always be consulted before utilizing any of the information contained at this site.**