Table of Contents
This chapter discusses the deduction limits and other special rules that apply to certain listed property. Listed property includes cars and other property used for transportation, property used for entertainment, and certain computers and cellular phones.
Deductions for listed property (other than certain leased property) are subject to the following special rules and limits.
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Deduction for employees. If your use of the property is not for your employer's convenience or is not required as a condition of your employment, you cannot deduct depreciation or rent expenses for your use of the property as an employee.
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Business-use requirement. If the property is not used predominantly (more than 50%) for qualified business use, you cannot claim the section 179 deduction or a special depreciation allowance. In addition, you must figure any depreciation deduction under the Modified Accelerated Cost Recovery System (MACRS) using the straight line method over the ADS recovery period. You may also have to recapture (include in income) any excess depreciation claimed in previous years. A similar inclusion amount applies to certain leased property.
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Passenger automobile limits and rules. Annual limits apply to depreciation deductions (including section 179 deductions) for certain passenger automobiles. You can continue to deduct depreciation for the unrecovered basis resulting from these limits after the end of the recovery period.
This chapter defines listed property and explains the special rules and depreciation deduction limits that apply, including the special inclusion amount rule for leased property. It also discusses the recordkeeping rules for listed property and explains how to report information about the property on your tax return.
Publication
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463 Travel, Entertainment, Gift, and Car Expenses
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535 Business Expenses
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587 Business Use of Your Home (Including Use by Daycare Providers)
Form (and Instructions)
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2106
Employee Business Expenses -
2106-EZ
Unreimbursed Employee Business Expenses -
4562
Depreciation and Amortization -
4797
Sales of Business Property
See chapter 6 for information about getting publications and forms.
| Capitalized |
| Commuting |
| Improvement |
| Recovery period |
| Straight line method |
Listed property is any of the following.
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Passenger automobiles weighing 6,000 pounds or less.
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Any other property used for transportation, unless it is an excepted vehicle.
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Property generally used for entertainment, recreation, or amusement (including photographic, phonographic, communication, and video-recording equipment).
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Computers and related peripheral equipment, unless used only at a regular business establishment and owned or leased by the person operating the establishment. A regular business establishment includes a portion of a dwelling unit that is used both regularly and exclusively for business as discussed in Publication 587.
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Cellular telephones (or similar telecommunication equipment).
A passenger automobile is any four-wheeled vehicle made primarily for use on public streets, roads, and highways and rated at 6,000 pounds or less of unloaded gross vehicle weight (6,000 pounds or less of gross vehicle weight for trucks and vans). It includes any part, component, or other item physically attached to the automobile or usually included in the purchase price of an automobile.
The following vehicles are not considered passenger automobiles for these purposes.
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An ambulance, hearse, or combination ambulance-hearse used directly in a trade or business.
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A vehicle used directly in the trade or business of transporting persons or property for pay or hire.
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A truck or van that is a qualified nonpersonal use vehicle.
For a detailed discussion of passenger automobiles, including leased passenger automobiles, see
Publication 463.
Other property used for transportation includes trucks, buses, boats, airplanes, motorcycles, and any other vehicles used to transport persons or goods.
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Clearly marked police and fire vehicles.
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Unmarked vehicles used by law enforcement officers if the use is officially authorized.
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Ambulances used as such and hearses used as such.
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Any vehicle with a loaded gross vehicle weight of over 14,000 pounds that is designed to carry cargo.
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Bucket trucks (cherry pickers), cement mixers, dump trucks (including garbage trucks), flatbed trucks, and refrigerated trucks.
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Combines, cranes and derricks, and forklifts.
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Delivery trucks with seating only for the driver, or only for the driver plus a folding jump seat.
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Qualified moving vans.
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Qualified specialized utility repair trucks.
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School buses used in transporting students and employees of schools.
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Other buses with a capacity of at least 20 passengers that are used as passenger buses.
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Tractors and other special purpose farm vehicles.
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It is owned or leased by a governmental unit or an agency or instrumentality of a governmental unit.
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It is required to be used for commuting by a police officer or fire fighter who, when not on a regular shift, is on call at all times.
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It is prohibited from being used for personal use (other than commuting) outside the limit of the police officer's arrest powers or the fire fighter's obligation to respond to an emergency.
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It is clearly marked with painted insignia or words that make it readily apparent that it is a police or fire vehicle. A marking on a license plate is not a clear marking for these purposes.
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No personal use of the van is allowed other than for travel to and from a move site or for minor personal use, such as a stop for lunch on the way from one move site to another.
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Personal use for travel to and from a move site happens no more than five times a month on average.
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Personal use is limited to situations in which it is more convenient to the employer, because of the location of the employee's residence in relation to the location of the move site, for the van not to be returned to the employer's business location.
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The truck was specifically designed for and is used to carry heavy tools, testing equipment, or parts.
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Shelves, racks, or other permanent interior construction has been installed to carry and store the tools, equipment, or parts and would make it unlikely that the truck would be used, other than minimally, for personal purposes.
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The employer requires the employee to drive the truck home in order to be able to respond in emergency situations for purposes of restoring or maintaining electricity, gas, telephone, water, sewer, or steam utility services.
A computer is a programmable, electronically activated device capable of accepting information, applying prescribed processes to the information, and supplying the results of those processes with or without human intervention. It consists of a central processing unit with extensive storage, logic, arithmetic, and control capabilities.
Related peripheral equipment is any auxiliary machine which is designed to be controlled by the central processing unit of a computer.
The following are neither computers nor related peripheral equipment.
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Any equipment that is an integral part of other property that is not a computer.
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Typewriters, calculators, adding and accounting machines, copiers, duplicating equipment, and similar equipment.
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Equipment of a kind used primarily for the user's amusement or entertainment, such as video games.
If you are an employee, you can claim a depreciation deduction for the use of your listed property (whether owned or rented) in performing services as an employee only if your use is a business use. The use of your property in performing services as an employee is a business use only if both the following requirements are met.
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The use is for your employer's convenience.
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The use is required as a condition of your employment.
If these requirements are not met, you cannot deduct depreciation (including the section 179 deduction) or rent expenses for your use of the property as an employee.
Example 1.
Virginia Sycamore is employed as a courier with We Deliver, which provides local courier services. She owns and uses a motorcycle to deliver packages to downtown offices. We Deliver explicitly requires all delivery persons to own a car or motorcycle for use in their employment. Virginia's use of the motorcycle is for the convenience of We Deliver and is required as a condition of employment.
Example 2.
Bill Nelson is an inspector for Uplift, a construction company with many sites in the local area. He must travel to these sites on a regular basis. Uplift does not furnish an automobile or explicitly require him to use his own automobile. However, it pays him for any costs he incurs in traveling to the various sites. The use of his own automobile or a rental automobile is for the convenience of Uplift and is required as a condition of employment.
Example 3.
Assume the same facts as in Example 2 except that Uplift furnishes a car to Bill, who chooses to use his own car and receive payment for using it. The use of his own car is neither for the convenience of Uplift nor required as a condition of employment.
Example 4.
Marilyn Lee is a pilot for Y Company, a small charter airline. Y requires pilots to obtain 80 hours of flight time annually in addition to flight time spent with the airline. Pilots usually can obtain these hours by flying with the Air Force Reserve or by flying part-time with another airline. Marilyn owns her own airplane. The use of her airplane to obtain the required flight hours is neither for the convenience of the employer nor required as a condition of employment.
Example 5.
David Rule is employed as an engineer with Zip, an engineering contracting firm. He occasionally takes work home at night rather than work late in the office. He owns and uses a home computer which is virtually identical to the office model. His use of the computer is neither for the convenience of his employer nor required as a condition of employment.
| Adjusted basis |
| Business/investment use |
| Capitalized |
| Commuting |
| Declining balance method |
| Fair market value (FMV) |
| Nonresidential real property |
| Placed in service |
| Recapture |
| Recovery period |
| Straight line method |
You can claim the section 179 deduction and a special depreciation allowance for listed property and depreciate listed property using GDS and a declining balance method if the property meets the business-use requirement. To meet this requirement, listed property must be used predominantly (more than 50% of its total use) for qualified business use. If this requirement is not met, the following rules apply.
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Property not used predominantly for qualified business use during the year it is placed in service does not qualify for the section 179 deduction.
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Property not used predominantly for qualified business use during the year it is placed in service does not qualify for a special depreciation allowance.
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Any depreciation deduction under MACRS for property not used predominantly for qualified business use during any year must be figured using the straight line method over the ADS recovery period. This rule applies each year of the recovery period.
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Excess depreciation on property previously used predominantly for qualified business use must be recaptured (included in income) in the first year in which it is no longer used predominantly for qualified business use.
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A lessee must add an inclusion amount to income in the first year in which the leased property is not used predominantly for qualified business use.
To determine whether the business-use requirement is met, you must allocate the use of any item of listed property used for more than one purpose during the year among its various uses.
For passenger automobiles and other means of transportation, allocate the property's use on the basis of mileage. You determine the percentage of qualified business use by dividing the number of miles you drove the vehicle for business purposes during the year by the total number of miles you drove the vehicle for all purposes (including business miles) during the year.
For other listed property, allocate the property's use on the basis of the most appropriate unit of time the property is actually used (rather than merely being available for use). For example, you can determine the percentage of business use of a computer by dividing the number of hours you used the computer for business purposes during the year by the total number of hours you used the computer for all purposes (including business use) during the year.
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That use is directly connected with your business.
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You properly report the value of the use as income to the other person and withhold tax on the income where required.
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You are paid a fair market rent.
Qualified business use of listed property is any use of the property in your trade or business. However, it does not include the following uses.
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The leasing of property to any 5% owner or related person (to the extent the property is used by a 5% owner or person related to the owner or lessee of the property).
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The use of property as pay for the services of a 5% owner or related person.
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The use of property as pay for services of any person (other than a 5% owner or related person), unless the value of the use is included in that person's gross income and income tax is withheld on that amount where required.
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More than 5% of the outstanding stock of the corporation.
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Stock possessing more than 5% of the total combined voting power of all stock in the corporation.
Example 1.
John Maple is the sole proprietor of a plumbing contracting business. John employs his brother, Richard, in the business. As part of Richard's pay, he is allowed to use one of the company automobiles for personal use. The company includes the value of the personal use of the automobile in Richard's gross income and properly withholds tax on it. The use of the automobile is pay for the performance of services by a related person, so it is not a qualified business use.
Example 2.
John, in Example 1, allows unrelated employees to use company automobiles for personal purposes. He does not include the value of the personal use of the company automobiles as part of their compensation and he does not withhold tax on the value of the use of the automobiles. This use of company automobiles by employees is not a qualified business use.
Example 3.
James Company Inc. owns several automobiles that its employees use for business purposes. The employees also are allowed to take the automobiles home at night. The fair market value of each employee's use of an automobile for any personal purpose, such as commuting to and from work, is reported as income to the employee and James Company withholds tax on it. This use of company automobiles by employees, even for personal purposes, is a qualified business use for the company.
The use of property to produce income in a nonbusiness activity (investment use) is not a qualified business use. However, you can treat the investment use as business use to figure the depreciation deduction for the property in a given year.
Example 1.
Sarah Bradley uses a home computer 50% of the time to manage her investments. She also uses the computer 40% of the time in her part-time consumer research business. Sarah's home computer is listed property because it is not used at a regular business establishment. She does not use the computer predominantly for qualified business use. Therefore, she cannot elect a section 179 deduction or claim a special depreciation allowance for the computer. She must depreciate it using the straight line method over the ADS recovery period. Her combined business/investment use for determining her depreciation deduction is 90%.
Example 2.
If Sarah uses her computer 30% of the time to manage her investments and 60% of the time in her consumer research business, it is used predominantly for qualified business use. She can elect a section 179 deduction and, if she does not deduct all the computer's cost, she can claim a special depreciation allowance and depreciate the computer using the 200% declining balance method over the GDS recovery period. Her combined business/investment use for determining her depreciation deduction is 90%.
If you used listed property more than 50% in a qualified business use in the year you placed it in service, you must recapture (include in income) excess depreciation in the first year you use it 50% or less. You also increase the adjusted basis of your property by the same amount.
Excess depreciation is:
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The depreciation allowable for the property (including any section 179 deduction and special depreciation allowance claimed) for years before the first year you do not use the property predominantly for qualified business use, minus
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The depreciation that would have been allowable for those years if you had not used the property predominantly for qualified business use in the year you placed it in service.
To determine the amount in (2) above, you must refigure the depreciation using the straight line method and the ADS recovery period.
Example.
In June 2003, Ellen Rye purchased and placed in service a pickup truck that cost $18,000. She used it only for qualified business use for 2003 through 2006. Ellen claimed a section 179 deduction of $10,000 based on the purchase of the truck. She began depreciating it using the 200% DB method over a 5-year GDS recovery period. The pickup truck's gross vehicle weight was over 6,000 pounds, so it was not subject to the passenger automobile limits discussed later under Do the Passenger Automobile Limits Apply. During 2007, she used the truck 50% for business and 50% for personal purposes. She includes $4,018 excess depreciation in her gross income for 2007. The excess depreciation is determined as follows.
| Total section 179 deduction ($10,000) and depreciation claimed ($6,618) for 2003 through 2006. (Depreciation is from Table A-1.) | $16,618 | ||
| Minus: Depreciation allowable (Table A-8): | |||
| 2003 - 10% of $18,000 | $1,800 | ||
| 2004 - 20% of $18,000 | 3,600 | ||
| 2005 - 20% of $18,000 | 3,600 | ||
| 2006 - 20% of $18,000 | 3,600 | 12,600 | |
| Excess depreciation | $4,018 | ||
If Ellen's use of the truck does not change to 50% for business and 50% for personal purposes until 2009, there will be no excess depreciation. The total depreciation allowable using Table A-8 through 2009 will be $18,000, which equals the total of the section 179 deduction and depreciation she will have claimed.
If you use leased listed property other than a passenger automobile for business/investment use, you must include an amount in your income in the first year your qualified business-use percentage is 50% or less. Your qualified business-use percentage is the part of the property's total use that is qualified business use (defined earlier). For the inclusion amount rules for a leased passenger automobile, see Leasing a Car in chapter 4 of Publication 463.
The inclusion amount is the sum of Amount A and Amount B, described next. However, see the special rules for the inclusion amount, later, if your lease begins in the last 9 months of your tax year or is for less than one year.
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The fair market value of the property, multiplied by
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The business/investment use for the first tax year the qualified business-use percentage is 50% or less, multiplied by
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The applicable percentage from Table A-19 in Appendix A.
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The fair market value of the property, multiplied by
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The average of the business/investment use for all tax years the property was leased that precede the first tax year the qualified business-use percentage is 50% or less, multiplied by
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The applicable percentage from Table A-20 in Appendix A.
Inclusion Amount Worksheet for Leased Listed Property
| 1. | Fair market value | |
| 2. | Business/investment use for first year business use is 50% or less | |
| 3. | Multiply line 1 by line 2. | |
| 4. | Rate (%) from Table A-19 | |
| 5. | Multiply line 3 by line 4. This is Amount A. | |
| 6. | Fair market value | |
| 7. | Average business/investment use for years property leased before the first year business use is 50% or less . . . . . . . . . . . . . | |
| 8. | Multiply line 6 by line 7 | |
| 9. | Rate (%) from Table A-20 | |
| 10. | Multiply line 8 by line 9. This is Amount B. | |
| 11. | Add line 5 and line 10. This is your inclusion amount. Enter here and as other income on the form or schedule on which you originally took the deduction (for example, Schedule C or F (Form 1040), Form 1040, Form 1120, etc.) |
Example.
On February 1, 2005, Larry House, a calendar year taxpayer, leased and placed in service a computer with a fair market value of $3,000. The lease is for a period of 5 years. Larry does not use the computer at a regular business establishment, so it is listed property. His business use of the property (all of which is qualified business use) is 80% in 2005, 60% in 2006, and 40% in 2007. He must add an inclusion amount to gross income for 2007, the first tax year his qualified business-use percentage is 50% or less. The computer has a 5-year recovery period under both GDS and ADS. 2007 is the third tax year of the lease, so the applicable percentage from Table A-19 is -19.8%. The applicable percentage from Table A-20 is 22.0%. Larry's deductible rent for the computer for 2007 is $800.
Larry uses the Inclusion Amount Worksheet for Leased Listed Property to figure the amount he must include in income for 2007. His inclusion amount is $224, which is the sum of -$238 (Amount A) and $462 (Amount B).
Inclusion Amount Worksheet for Leased Listed Property
| 1. | Fair market value | $3,000 | |
| 2. | Business/investment use for first year business use is 50% or less | 40 | % |
| 3. | Multiply line 1 by line 2. | 1,200 | |
| 4. | Rate (%) from Table A-19 | -19.8 | % |
| 5. | Multiply line 3 by line 4. This is Amount A. | -238 | |
| 6. | Fair market value | 3,000 | |
| 7. | Average business/investment use for years property leased before the first year business use is 50% or less | 70 | % |
| 8. | Multiply line 6 by line 7 | 2,100 | |
| 9. | Rate (%) from Table A-20 | 22.0 | % |
| 10. | Multiply line 8 by line 9. This is Amount B. | 462 | |
| 11. | Add line 5 and line 10. This is your inclusion amount. Enter here and as other income on the form or schedule on which you originally took the deduction (for example, Schedule C or F (Form 1040), Form 1040, Form 1120, etc.) | $224 | |
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The lease term begins within 9 months before the close of your tax year.
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You do not use the property predominantly (more than 50%) for qualified business use during that part of the tax year.
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The lease term continues into your next tax year.
Example 1.
On August 1, 2006, Julie Rule, a calendar year taxpayer, leased and placed in service an item of listed property. The property is 5-year property with a fair market value of $10,000. Her property has a recovery period of 5 years under ADS. The lease is for 5 years. Her business use of the property was 50% in 2006 and 90% in 2007. She paid rent of $3,600 for 2007, of which $3,240 is deductible. She must include $147 in income in 2007. The $147 is the sum of Amount A and Amount B. Amount A is $147 ($10,000 × 70% × 2.1%), the product of the fair market value, the average business use for 2006 and 2007, and the applicable percentage for year one from Table A-19. Amount B is zero.
Example 2.
On October 1, 2006, John Joyce, a calendar year taxpayer, leased and placed in service an item of listed property that is 3-year property. This property had a fair market value of $15,000 and a recovery period of 5 years under ADS. The lease term was 6 months (ending on March 31, 2007), during which he used the property 45% in business. He must include $71 in income in 2007. The $71 is the sum of Amount A and Amount B. Amount A is $71 ($15,000 × 45% × 2.1% × 182/365), the product of the fair market value, the average business use for both years, and the applicable percentage for year one from Table A-19, prorated for the length of the lease. Amount B is zero.
The depreciation deduction, including the section 179 deduction, you can claim for a passenger automobile (defined earlier) each year is limited.
This section describes the maximum depreciation deduction amounts for 2007 and explains how to deduct, after the recovery period, the unrecovered basis of your property that results from applying the passenger automobile limit.
The passenger automobile limits are the maximum depreciation amounts you can deduct for a passenger automobile. They are based on the date you placed the automobile in service.
The maximum deduction amounts for most passenger automobiles are shown in the following table.
Maximum Depreciation Deduction for Passenger Automobiles
| Date | 4th & | |||
| Placed | 1st | 2nd | 3rd | Later |
| In Service | Year | Year | Year | Years |
| 2007 | $3,060 | $4,900 | $2,850 | $1,775 |
| 2006 | 2,960 | 4,800 | 2,850 | 1,775 |
| 2005 | 2,960 | 4,700 | 2,850 | 1,675 |
| 2004 | 10,610 1 | 4,800 | 2,850 | 1,675 |
|
5/06/2003-
12/31/2003 |
10,710 2 | 4,900 | 2,950 | 1,775 |
|
1/01/2003-
5/05/2003 |
7,660 3 |