Bryant v. Commissioner, T.C. Memo. 1993-597
Many ministers have purchased a personal computer. Is the cost of a computer a deductible business expense? Can a church reimburse such a purchase under an accountable expense reimbursement arrangement? These are important questions that many church treasurers have asked. A recent Tax Court ruling provides some helpful guidance.
Facts. A public school required that all teachers prepare report cards in a new computerized format. The school purchased several personal computers and made them available to teachers. One teacher purchased her own personal computer (at a cost of $3,200) so that she could prepare report cards and evaluations at home. She deducted the full cost of the computer as a business expense. The IRS audited the teacher and denied the deduction. The IRS pointed out that the cost of a personal computer cannot be deducted by an employee as a business expense unless the computer is required “as a condition of employment” and is “for the convenience of the employer.” The teacher claimed that she satisfied these requirements since the school had not purchased an adequate number of computers and that the only time she could use school computers was after hours (when it was unsafe to remain on school premises). Further, the school had encouraged teachers to buy their own computers.
The court’s ruling. The Tax Court agreed with the IRS that the teacher was not entitled to deduct the cost of her computer as a business expense. For an employee’s purchase of a personal computer to be a deductible business expense, both of the following tests must be met:
- Use of the computer in your home must be “for the convenience of your employer”. This means that you can clearly demonstrate that you cannot perform your job without the home computer. The fact that the computer enables you to perform your work more easily and efficiently is not enough. Further, you must prove that the computers available at your place of employment are insufficient to enable you to properly perform your job.
- Use of the computer in your home is required as a “condition of your employment”. This means that you must not be able to properly perform your duties without the computer. It is not necessary that your employer explicitly requires you to use the computer. On the other hand, it is not enough that your employer merely states that your use of the home computer is a condition of your employment.
If you are an employee and you meet both tests described above then you can claim a “section 179” deduction in the year of purchase for the cost of the computer (up to $17,500) attributable to business use if you use your home computer more than 50% of the time during the year in your work.
The Tax Court concluded that the teacher did not satisfy these tests. It observed: “Although a computer was needed for [the teacher] to file her reports and evaluations, the school had computers which could be used for this purpose. Furthermore, we note that … there were several … teachers who did not own personal computers and, nonetheless, they were able to file timely reports and evaluations. In short, it is amply clear on this record that a personal computer was not required for the proper performance by lower school teachers of their employment duties. Although it may have been more convenient for [the teacher] to use her own personal computer, we must, as the statute requires, focus on the convenience of the employer and not the convenience of the employee.”
Application to churches and clergy. Ministers who purchase a personal computer for in-home use will not be able to deduct any of the cost as a business expense unless they meet both the “condition of employment” and “convenience of the employer” tests summarized above. The Tax Court cautioned that these tests cannot be met by a self-serving statement from a church. It noted that “a mere statement by the employer that the use of the property is a condition of employment is not sufficient.” On the other hand, if both tests are met, then that portion of the cost of the computer attributable to business use is a legitimate business expense. If it is paid by a minister, then this cost can be reimbursed by the church. If the church has an accountable expense reimbursement arrangement (it only reimburses business expenses that are adequately substantiated within a reasonable time) then the amount of the reimbursement need not appear on the minister’s W-2 form and the minister will not claim any deduction on Schedule A. The minister is reporting to the church rather than to the IRS. If the church reimburses the cost of the computer without adequate substantiation, then the reimbursement is nonaccountable and the full amount must be added to the minister’s W-2. The minister can deduct the cost of the computer as a miscellaneous employee business expense on Schedule A (to the extent such expenses exceed 2 percent of adjusted gross income). If a minister receives no reimbursement from the church for the cost of the computer, then a deduction is available only as a miscellaneous employee business expense on Schedule A. Similar rules apply to self-employed ministers (except that they deduct nonaccountable expenses and unreimbursed expenses directly on Schedule C).
Section 179 of the Internal Revenue Code permits the full cost of a computer (up to $17,500) to be deducted in the year of purchase, but only if the computer is used more than 50 percent of the time for business use. Obviously, it is essential for ministers to keep records (such as a time log) documenting the percentage of business use if they plan to claim a section 179 deduction.
If the purchase of a personal computer satisfies the “condition of employment” and “convenience of the employer” tests summarized above, then the business expense deduction is limited to the actual business use of the computer. It is essential for the minister to maintain records substantiating the percentage of time the computer is used for business as opposed to personal purposes. A business expense deduction is limited to the business use percentage. For example, if the computer costs $3,000, and it is used 70 percent of the time for business use, a deduction (or business expense reimbursement) is limited to $2,100 ($3,000 x 70 percent). Obviously, for a church to reimburse a minister’s purchase of a personal computer under an accountable arrangement, it will need substantiation of the business use percentage.
Key point. Church treasurers should be familiar with the following rules:
- If your church has an accountable expense reimbursement arrangement (you only reimburse those business expenses that are adequately substantiated), do not reimburse a minister’s purchase of a personal computer unless the “condition of employment” and “convenience of the employer” tests are satisfied, and the minister substantiates the business use percentage with written records. Reimburse only the cost of the computer (up to $17,500) multiplied times the substantiated business use percentage. This amount is not included on the minister’s W-2 or Form 1040.
- If your church does not require adequate substantiation of reimbursed business expenses (a “nonaccountable” reimbursement arrangement), then any reimbursement of the cost of a minister’s personal computer must be added to his or her W-2 (1099 if self-employed) as taxable income. A deduction is available only as a miscellaneous business expense on Schedule A (or Schedule C for self-employed clergy).
- If both the “condition of employment” and “convenience of the employer” tests are not satisfied, then any reimbursement of the cost of a personal computer is taxable income and must be added to the minister’s W-2 (or 1099 if self-employed). The minister will not be eligible for any business expense deduction.
This article originally appeared in Church Treasurer Alert, April 1994.