Table of Contents
- Topics - This chapter discusses:
- Useful Items - You may want to see:
- Listed Property Defined
- Predominant Use Test
- Deductions After Recovery Period
- Leased Property
- What Records Must Be Kept
- Deductions in Later Years
Listed property defined
The predominant use test
What records must be kept
463 Travel, Entertainment, Gift, and Car Expenses
587 Business Use of Your Home
946 How To Depreciate Property
Form (and Instructions)
2106-EZ Unreimbursed Employee Business Expenses
2106 Employee Business Expenses
4255 Recapture of Investment Credit
4562 Depreciation and Amortization
This chapter discusses some special rules and recordkeeping requirements for listed property. For complete coverage of the rules, including the rules concerning passenger automobiles, see Pub. 946.
If listed property is not used predominantly (more than 50%) in a qualified business use as discussed in Predominant Use Test, later, the section 179 deduction is not allowable and the property must be depreciated using the straight line method.
Listed property is any of the following.
Any passenger automobile (defined later).
Any other property used for transportation.
Any property of a type generally used for entertainment, recreation, or amusement (including photographic, phonographic, communication, and video recording equipment).
Any computer and related peripheral equipment, defined later, unless it is 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 (defined later), if, and only if, that portion is used both regularly and exclusively for business as discussed in Pub. 587.
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 (at 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.
A passenger automobile does not include:
An ambulance, hearse, or combination ambulance-hearse used directly in a trade or business; and
A vehicle used directly in the trade or business of transporting persons or property for compensation or hire.
A dwelling unit is a house or apartment used to provide living accommodations in a building or structure. It does not include a unit in a hotel, motel, inn, or other establishment where more than half the units are used on a transient basis.
Other property used for transportation includes trucks, buses, boats, airplanes, motorcycles, and any other vehicles for transporting persons or goods.
Listed property does not include:
Any vehicle which, by reason of its design, is not likely to be used more than a minimal amount for personal purposes, such as clearly marked police and fire vehicles, ambulances, or hearses used for those purposes;
Any vehicle that is designed to carry cargo and that has a loaded gross vehicle weight over 14,000 pounds, bucket trucks (cherry pickers), cement mixers, combines, cranes and derricks, delivery trucks with seating only for the driver (or only for the driver plus a folding jump seat), dump trucks (including garbage trucks), flatbed trucks, forklifts, qualified moving vans, qualified specialized utility repair trucks, and refrigerated trucks;
Any passenger bus used for that purpose with a capacity of at least 20 passengers and school buses;
Any tractor or other special purpose farm vehicle, and unmarked vehicles used by law enforcement officers if the use is officially authorized; and
Any vehicle, such as a taxicab, if substantially all its use is in the trade or business of providing services to transport persons or property for compensation or hire by unrelated persons.
A computer is a programmable electronically activated device that:
Is capable of accepting information, applying prescribed processes to the information, and supplying the results of those processes with or without human intervention; and
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.
Computer or peripheral equipment does not include:
Any equipment which is an integral part of property which is not a computer;
Typewriters, calculators, adding and accounting machines, copiers, duplicating equipment, and similar equipment; and
Equipment of a kind, used primarily for the user's amusement or entertainment, such as video games.
If “listed property,” defined earlier, placed in service after June 18, 1984, is not used predominantly (more than 50%) in a qualified business use during any tax year:
The section 179 deduction on the property is not allowable, and
You must depreciate the property using the straight line method.
|Class of Property||Listed Property
|3-year property||5 years|
|5-year property||12 years|
|10-year property||25 years|
|18-year real property||40 years|
|19-year real property||40 years|
Listed property meets the predominant use test for any tax year if its business use is more than 50% of its total use. You must allocate the use of any item of listed property used for more than one purpose during the tax year among its various uses. The percentage of investment use of listed property cannot be used as part of the percentage of qualified business use to meet the predominant use test. However, the combined total of business and investment use is taken into account to figure your depreciation deduction for the property.
Property does not stop being predominantly used in a qualified business use because of a transfer at death.
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. Because her business use of the computer does not exceed 50%, the computer is not predominantly used in a qualified business use for the tax year. Because she does not meet the predominant use test, she cannot elect a section 179 deduction for this property. Her combined rate of business/investment use for determining her depreciation deduction is 90%.
A qualified business use is any use in your trade or business. However, it does not include:
The use of property held merely to produce income (investment use),
The leasing of property to any 5% owner or related person (to the point that the property is used by a 5% owner or person related to the owner or lessee of the property),
The use of property as compensation for the performance of services by a 5% owner or related person, or
The use of property as compensation for the performance of services by any person (other than a 5% owner or related person) unless the value of the use is included in that person's gross income for the use of the property and income tax is withheld on that amount where required. See Employees, later.
More than 5% of the outstanding stock of the corporation, or
Stock possessing more than 5% of the total combined voting power of all stock in the corporation.
The use of listed property for entertainment, recreation, or amusement purposes is treated as a qualified business use only to the extent that expenses (other than interest and property tax expenses) for its use are deductible as ordinary and necessary business expenses. See Pub. 463.
If at least 25% of the total use of any aircraft during the tax year is for a qualified business use, the leasing or compensatory use of the aircraft by a 5% owner or related person is treated as a qualified business use.
The use of a vehicle for commuting is not business use, regardless of whether work is performed during the trip.
If someone else uses your automobile, that use is not business use unless:
That use is directly connected with your business,
The value of the use is properly reported by you as income to the other person and tax is withheld on the income where required, or
The value of the use results in a payment of fair market rent.
Any payment to you for the use of the automobile is treated as a rent payment for purposes of item (3).
Any use by an employee of his or her own listed property (or listed property rented by an employee) in performing services as an employee is not business use unless:
The use is for the employer's convenience, and
The use is required as a condition of employment.
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 small car or motorcycle for use in their employment. The company reimburses delivery persons for their costs. Virginia's use of the motorcycle is for the convenience of We Deliver and is required as a condition of employment.
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 reimburses 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.
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 the vehicle is driven for business purposes during the year by the total number of miles the vehicle is driven for all purposes (including business miles) during the year.
For other items of listed property, allocate the property's use on the basis of the most appropriate unit of time. For example, you can determine the percentage of business use of a computer by dividing the number of hours the computer is used for business purposes during the year by the total number of hours the computer is used for all purposes (including business hours) during the year.
You must apply the predominant use test for an item of listed property each year of the recovery period.
If any item of listed property is not used predominantly in a qualified business use in the year it is placed in service:
The property is not eligible for a section 179 deduction, and
The depreciation deduction must be figured using the straight line method.
The required use of the straight line method for an item of listed property that does not meet the predominant use test is not the same as electing the straight line method. It does not mean that you have to use the straight line method for other property in the same class as the item of listed property.
If you use listed property predominantly (more than 50%) in a qualified business use in the tax year you place it in service, but not in a subsequent tax year during the recovery period, the following rules apply.
Figure depreciation using the straight line method. Do this for each year, beginning with the year you no longer use the property predominantly in a qualified business use.
Figure any excess depreciation on the property and add it to:
Your gross income, and
The adjusted basis of your property.
See Recapture of excess depreciation next.
The amount of depreciation allowable for the property (including any section 179 deduction claimed) for tax years before the first tax year the property was not predominantly used in a qualified business use, over
The amount of depreciation that would have been allowable for those years if the property were not used predominantly in a qualified business use for the year it was placed in service. This means you figure your depreciation using the percentages from Table 16 or 17.
When listed property (other than passenger automobiles) is used for business, investment, and personal purposes, no deduction is ever allowable for the personal use. In tax years after the recovery period, you must determine if there is any unrecovered basis remaining before you compute the depreciation deduction for that tax year. To make this determination, figure the depreciation for earlier tax years as if your property were used 100% for business or investment purposes, beginning with the first tax year in which some or all use is for business or investment. See Car Used 50% or Less for Business in chapter 4 of Pub. 463.
The limitations on cost recovery deductions apply to the rental of listed property. The following discussion covers the rules that apply to the lessor (the owner of the property) and the lessee (the person who rents the property from the owner). See Leasing a Car in chapter 4 of Pub. 463 for a discussion of leased passenger automobiles.
The limitations on cost recovery generally do not apply to any listed property leased or held for leasing by anyone regularly engaged in the business of leasing listed property.
A person is considered regularly engaged in the business of leasing listed property only if contracts for leasing of listed property are entered into with some frequency over a continuous period of time. This determination is made on the basis of the facts and circumstances in each case and takes into account the nature of the person's business in its entirety. Occasional or incidental leasing activity is insufficient. For example, a person leasing only one passenger automobile during a tax year is not regularly engaged in the business of leasing automobiles. An employer who allows an employee to use the employer's property for personal purposes and charges the employee for the use is not regularly engaged in the business of leasing the property used by the employee.
A lessee of listed property (other than passenger automobiles) must include an amount in gross income called the inclusion amount for the first tax year the property is not used predominantly in a qualified business use.
The lease term begins within 9 months before the close of the lessee's tax year,
The lessee does not use the property predominantly in a qualified business use during that portion of the tax year, and
The lease term continues into the lessee's next tax year.
You cannot take any depreciation or section 179 deduction for the use of listed property (including passenger automobiles) unless you can prove business/investment use with adequate records or sufficient evidence to support your own statements.
To meet the adequate records requirement, you must maintain an account book, diary, log, statement of expense, trip sheet, or similar record or other documentary evidence that, together with the receipt, is sufficient to establish each element of an expenditure or use. It is not necessary to record information in an account book, diary, or similar record if the information is already shown on the receipt. However, your records should back up your receipts in an orderly manner.
The records or other documentary evidence must support:
The amount of each separate expenditure, such as the cost of acquiring the item, maintenance and repair costs, capital improvement costs, lease payments, and any other expenses;
The amount of each business and investment use (based on an appropriate measure, such as mileage for vehicles and time for other listed property), and the total use of the property for the tax year;
The date of the expenditure or use; and
The business or investment purpose for the expenditure or use.
Written documents of your expenditure or use are generally better evidence than oral statements alone. A written record prepared at or near the time of the expenditure or use has greater value as proof of the expenditure or use. A daily log is not required. However, some type of record containing the elements of an expenditure or the business or investment use of listed property made at or near the time and backed up by other documents is preferable to a statement prepared later.
The elements of an expenditure or use must be recorded at the time you have full knowledge of the elements. An expense account statement made from an account book, diary, or similar record prepared or maintained at or near the time of the expenditure or use is generally considered a timely record if in the regular course of business:
The statement is submitted by an employee to the employer, or
The statement is submitted by an independent contractor to the client or customer.
For example, a log maintained on a weekly basis, which accounts for use during the week, will be considered a record made at or near the time of use.
An adequate record of business purpose must generally be in the form of a written statement. However, the amount of backup necessary to establish a business purpose depends on the facts and circumstances of each case. A written explanation of the business purpose will not be required if the purpose can be determined from the surrounding facts and circumstances. For example, a salesperson visiting customers on an established sales route will not normally need a written explanation of the business purpose of his or her travel.
An adequate record contains enough information on each element of every business or investment use. The amount of detail required to support the use depends on the facts and circumstances. For example, a taxpayer whose only business use of a truck is to make customer deliveries on an established route can satisfy the requirement by recording the length of the route, including the total number of miles driven during the tax year and the date of each trip at or near the time of the trips.
Although an adequate record generally must be written, a record of the business use of listed property, such as a computer or automobile, can be prepared in a computer memory device using a logging program.
Each use by you is normally considered a separate use. However, repeated uses can be combined as a single item.
Each expenditure is recorded as a separate item and not combined with other expenditures. If you choose, however, amounts spent for the use of listed property during a tax year, such as for gasoline or automobile repairs, can be combined. If these expenses are combined, you do not need to support the business purpose of each expense. Instead, you can divide the expenses based on the total business use of the listed property.
Uses which can be considered part of a single use, such as a round trip or uninterrupted business use, can be accounted for by a single record. For example, use of a truck to make deliveries at several locations which begin and end at the business premises and can include a stop at the business in between deliveries can be accounted for by a single record of miles driven. Use of a passenger automobile by a salesperson for a business trip away from home over a period of time can be accounted for by a single record of miles traveled. Minimal personal use (such as a stop for lunch between two business stops) is not an interruption of business use.
If any of the information on the elements of an expenditure or use is confidential, it does not need to be in the account book or similar record if it is recorded at or near the time of the expenditure or use. It must be kept elsewhere and made available as support to the district director on request.
If you have not fully supported a particular element of an expenditure or use, but have complied with the adequate records requirement for the expenditure or use to the district director's satisfaction, you can establish this element by any evidence the district director deems adequate.
If you fail to establish that you have substantially complied with the adequate records requirement for an element of an expenditure or use to the district director's satisfaction, you must establish the element:
By your own oral or written statement containing detailed information as to the element, and
By other evidence sufficient to establish the element.
If the element is the cost or amount, time, place, or date of an expenditure or use, its supporting evidence must be direct, such as oral testimony by witnesses or a written statement setting forth detailed information about the element or the documentary evidence. If the element is the business purpose of an expenditure, its supporting evidence can be circumstantial evidence.
You can maintain an adequate record for portions of a tax year and use that record to support your business and investment use for the entire tax year if it can be shown by other evidence that the periods for which an adequate record is maintained are representative of use throughout the year.
When you establish that failure to produce adequate records is due to loss of the records through circumstances beyond your control, such as through fire, flood, earthquake, or other casualty, you have the right to support a deduction by reasonable reconstruction of your expenditures and use.
If you claim a deduction for any listed property, you must provide the requested information on page 2 of Form 4562. If you claim a deduction for any vehicle, you must answer certain questions on page 2 of Form 4562 to provide information about the vehicle use.
You can satisfy the requirements of a written policy statement for vehicles either not used for personal purposes, or not used for personal purposes other than commuting; or
You treat all vehicle use by employees as personal use.
When listed property is used for business, investment, and personal purposes, no deduction is allowable for its personal use either in the current year or any later tax year. In later years, you must determine if there is any remaining unadjusted or unrecovered basis before you compute the depreciation deduction for that tax year. In making this determination, figure the depreciation deductions for earlier tax years as if the listed property were used 100% for business or investment purposes in those years, beginning with the first tax year in which some or all of the property use is for business or investment.
For more information about deductions after the recovery period for automobiles, see Pub. 463.
|More Online Publications|