Last year I bought a laptop computer. I use it for work and for schoolwork. Can I write off the cost?
The short answer is "yes." You may indeed be able to deduct at least part of that $2,000 laptop computer. But consider yourself warned: Figuring out whether you qualify, not to mention just how much you can deduct, will take a fair amount of work and a heap of patience. Got some aspirin handy?
The first thing you should know is that business-related expenses like your computer fall under a vague IRS heading called miscellaneous itemized deductions. The deal is that you can deduct these types of expenses, provided that when you add them all up they represent more than 2% of your adjusted gross income, or AGI. If they do, you can deduct the amount in excess of 2%. If they don't, you're flat out of luck. Also, for tax year 2001 the ability to take these deductions starts phasing out for single and joint filers with AGIs above $66,475 and $132,950, respectively.
This 2% floor can be difficult to meet, which is why many people aren't able to deduct work-related expenses like, say, the cost of looking for a new job, which also falls under the heading of miscellaneous itemized deductions. In your case, however, it sounds like you may qualify, since you've already said that you can write off your tuition as a miscellaneous deduction (and MBA programs are anything but cheap). Just keep in mind that you can't deduct any expenses your employer already reimburses.
Still with us? Good, because there's more. You can only deduct the percentage of the cost of your computer that relates to your MBA program and work. In other words, anything for personal use is off limits. So, if, for example, 50% of the time spent on your laptop is related to work and 25% is related to school, you could deduct a maximum of $1,500 of your $2,000 laptop. To complicate matters further, you need to break out these deductions by activity — and you may need to deduct each portion somewhat differently, says Joe Machara, a CPA at Grant Thornton in Chicago. Granted, you probably won't have to show any proof to the IRS of exactly you use your computer — that is, unless you're audited. And audits are quite rare — although taxpayers who file these kinds of deductions are more likely to fall into this unfortunate camp. (Are we having fun, yet?)
Now, the first step in deducting the portion of your laptop that you use for work is making sure that it is indeed a business expense. To qualify for this deduction, the computer must be required by your company as a condition of employment. For example, a traveling salesman who inputs data into his computer and communicates via email with his clients and employer while on the road could most likely deduct the cost of his laptop computer. But if the laptop is simply for your own convenience (that is, for working at home when you don't want to stay at the office late), then you won't be able to deduct the expense.
Assuming you pass this test, you'll be able to deduct the laptop as a capital expense on Form 4562. If you devote 50% or more of your laptop time to business activities, you'll be able to deduct the entire amount on this year's tax return. So, if 60% of the time on your laptop is work-related, you'll be able to write off $1,200 (60% of $2,000) of the cost of your computer as a business expense. If less than 50% of the use is devoted to business activity, however, you'll have to depreciate the cost over a five-year period, says Art Ford, a CPA at Sullivan Bille in Tewksbury, Mass. In that case, once you've determined the depreciated value from Form 4562, transfer the amount to line 20 of Schedule A as an unreimbursed employee business expense.
OK, on to your school expenses. As you probably already know, education expenses are fully deductible, provided that the coursework is related to improving or maintaining the skills related to your current job. Assuming your degree meets that criterion, you can deduct the cost of tuition as well as books, supplies and any other related fees. And while the IRS doesn't directly address the deductibility of a computer for these purposes, there is a strong case that a computer is an integral tool for most students these days, says Ford.
Here again, you'll want to figure out what portion of time spent on the laptop is related to your studies. Since your education is work-related, it qualifies as a business expense and the cost of the computer must be depreciated appropriate on Form 4562. The same 50% cutoff is used here, and the value must also be transferred to line 20 of Schedule A. Unfortunately, you can't simply add your school-related computer use to your work-related computer use to meet the 50% mark — each activity must qualify on its own. If 50% or more of laptop time is work-related and school-related use is less than 50%, then the work-use proportion can be written off in full while the school-use proportion must be depreciated over five years.
Finally, keep in mind that in order to take miscellaneous itemized deductions, you need to itemize your taxes. It sounds as if you'll probably have enough expenses to make this worth your while, but just make sure that all your deductions are worth more than the standard deduction, which is $4,550 for 2001. If you find that it makes more sense not to itemize, consider taking the lifetime learning credit instead. (You don't need to itemize for the break.) For qualified education expenses relating to your MBA, you can receive a tax credit of up to $1,000, says Ron Hegt, a CPA at New York accounting firm Hays & Co. Eligibility for this credit begins phasing out at $40,000 for singles and $80,000 for joint filers. Granted, $1,000 is probably a small amount compared with how much this degree is costing you. But it certainly helps — and once you have that degree in hand, you'll be making the big bucks anyway.