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.
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.
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
(or Liberty Zone
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.
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.
For information on the
limits on depreciation
deductions for listed property
placed in service before 1987,
see Publication 534.
Useful Items - You
may want to see:
Publication
463
Travel, Entertainment,
Gift, and Car Expenses
535
Business Expenses
587
Business Use of Your
Home (Including Use by
Daycare Providers)
Form
(and Instructions)
2106
Employee Business
Expenses
2106-EZ
Unreimbursed Employee
Business Expenses
4562
Depreciation and
Amortization
4797
Sales of Business
Property
See chapter 7 for information
about getting publications and
forms.
What Is Listed
Property?
Terms you may
need to know
(see Glossary):
Capitalized
Commuting
Improvement
Recovery period
Straight line
method
Listed property is any of the
following.
Passenger automobile
weighing 6,000 pounds or
less.
Any other property
used for transportation,
unless it is an excepted
vehicle.
Property generally
used for entertainment,
recreation, or amusement
(including photographic,
phonographic,
communication, and
video-recording
equipment).
Computers and
related peripheral
equipment, unless used
only at a regular
business establishment
and is 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.
Cellular telephones
(or similar
telecommunication
equipment).
Improvements to listed
property.
An improvement made to
listed property that must be
capitalized is treated as a
new item of depreciable
property. The recovery
period and method of
depreciation that apply to
the listed property as a
whole also apply to the
improvement. For example, if
you must depreciate the
listed property using the
straight line method, you
also must depreciate the
improvement using the
straight line method.
Passenger
Automobiles
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.
An ambulance,
hearse, or
combination
ambulance-hearse
used directly in a
trade or business.
A vehicle used
directly in the
trade or business of
transporting persons
or property for pay
or hire.
A truck or van
that is a qualified
nonpersonal use
vehicle placed in
service after July
6, 2003.
Qualified nonpersonal
use vehicles.
Qualified nonpersonal
use vehicles are
vehicles that by their
nature are not likely to
be used more than a
minimal amount for
personal purposes. They
include the trucks and
vans listed as excepted
vehicles under
Other Property Used
for Transportation,
next. They also include
trucks and vans that
have been specially
modified so that they
are not likely to be
used more than a minimal
amount for personal
purposes, such as by
installation of
permanent shelving and
painting the vehicle to
display advertising or
the company's name.
Although vehicles
used to transport persons or
property for pay or hire and
vehicles rated at more than
the 6,000-pound threshold
are not passenger
automobiles, they are still
“other
property used for
transportation”
(discussed next). They are
therefore listed property
items subject to the special
rules for such property
other than the passenger
automobile limits and rules.
For a detailed discussion
of passenger automobiles,
including leased passenger
automobiles, see Publication
463.
Other
Property Used
for
Transportation
Other property used for
transportation includes
trucks, buses, boats,
airplanes, motorcycles, and
any other vehicles used to
transport persons or goods.
Excepted vehicles.
Other property used
for transportation does
not include the
following qualified
nonpersonal use vehicles
(defined earlier under
Passenger
Automobiles).
Clearly
marked police
and fire
vehicles.
Unmarked
vehicles used by
law enforcement
officers if the
use is
officially
authorized.
Ambulances
used as such and
hearses used as
such.
Any vehicle
with a loaded
gross vehicle
weight of over
14,000 pounds
that is designed
to carry cargo.
Delivery
trucks with
seating only for
the driver, or
only for the
driver plus a
folding jump
seat.
Qualified
moving vans.
Qualified
specialized
utility repair
trucks.
School buses
used in
transporting
students and
employees of
schools.
Other buses
with a capacity
of at least 20
passengers that
are used as
passenger buses.
Tractors and
other special
purpose farm
vehicles.
Clearly marked police
and fire vehicle.
A clearly marked
police or fire vehicle
is a vehicle that meets
all the following
requirements.
It is owned
or leased by a
governmental
unit or an
agency or
instrumentality
of a
governmental
unit.
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.
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.
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.
Qualified moving van.
A qualified moving van
is any truck or van used
by a professional moving
company for moving
household or business
goods if the following
requirements are met.
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.
Personal use
for travel to
and from a move
site happens no
more than five
times a month on
average.
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.
Qualified specialized
utility repair truck.
A truck is a qualified
specialized utility
truck if it is not a van
or pickup truck and all
the following apply.
The truck
was specifically
designed for and
is used to carry
heavy tools,
testing
equipment, or
parts.
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.
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.
Computers
and Related
Peripheral
Equipment
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.
Any equipment
that is an integral
part of other
property that is not
a computer.
Typewriters,
calculators, adding
and accounting
machines, copiers,
duplicating
equipment, and
similar equipment.
Equipment of a
kind used primarily
for the user's
amusement or
entertainment, such
as video games.
Can Employees Claim
a Deduction?
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.
The use is for your
employer's convenience.
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.
Employer's
convenience.
Whether the use of listed
property is for your
employer's convenience must
be determined from all the
facts. The use is for your
employer's convenience if it
is for a substantial
business reason of the
employer. The use of listed
property during your regular
working hours to carry on
your employer's business
generally is for the
employer's convenience.
Condition
of employment.
Whether the use of listed
property is a condition of
your employment depends on
all the facts and
circumstances. The use of
property must be required
for you to perform your
duties properly. Your
employer does not have to
require explicitly that you
use the property. However, a
mere statement by the
employer that the use of the
property is a condition of
your employment is not
sufficient.
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.
What Is the
Business-Use
Requirement?
Terms you may
need to know
(see Glossary):
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 (or
Liberty Zone 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.
Property not used
predominantly for
qualified business use
during the year it is
placed in service does
not qualify for the
section 179 deduction.
Property not used
predominantly for
qualified business use
during the year it is
placed in service does
not qualify for a
special depreciation
allowance (or Liberty
Zone depreciation
allowance).
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.
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.
A lessee must
include an amount in
income if the leased
property is not used
predominantly for
qualified business use.
Being required to use the
straight line method for an item
of listed property not used
predominantly for qualified
business use 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.
Exception
for leased property.
The business-use
requirement generally does
not apply to any listed
property leased or held for
leasing by anyone regularly
engaged in the business of
leasing listed property.
You are considered
regularly engaged in the
business of leasing listed
property only if you enter
into contracts for the
leasing of listed property
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 your business
in its entirety. Occasional
or incidental leasing
activity is insufficient.
For example, if you lease
only one passenger
automobile during a tax
year, you are 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.
How To
Allocate 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.
Entertainment use.
Treat the use of
listed property for
entertainment,
recreation, or amusement
purposes as a business
use only to the extent
you can deduct expenses
(other than interest and
property tax expenses)
due to its use as an
ordinary and necessary
business expense.
Commuting use.
The use of an
automobile for commuting
is not business use,
regardless of whether
work is performed during
the trip. For example, a
business telephone call
made on a car telephone
while commuting to work
does not change the
character of the trip
from commuting to
business. This is also
true for a business
meeting held in a car
while commuting to work.
Similarly, a business
call made on an
otherwise personal trip
does not change the
character of a trip from
personal to business.
The fact that an
automobile is used to
display material that
advertises the owner's
or user's trade or
business does not
convert an otherwise
personal use into
business use.
Use of
your automobile by
another person. If
someone else uses your
automobile, do not treat
that use as business use
unless one of the
following conditions
applies.
That use is
directly
connected with
your business.
You properly
report the value
of the use as
income to the
other person and
withhold tax on
the income where
required.
You are paid
a fair market
rent.
Treat any payment to you
for the use of the
automobile as a rent
payment for purposes of
item (3).
Employee deductions.
If you are an
employee, do not treat
your use of listed
property as business use
unless it is for your
employer's convenience
and is required as a
condition of your
employment. See
Can Employees Claim
a Deduction,
earlier.
Qualified
Business Use
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.
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).
The use of
property as pay for
the services of a 5%
owner or related
person.
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.
Property does not
stop being used
predominantly for qualified
business use because of a
transfer at death.
Exception for leasing or
compensatory use of
aircraft. Treat
the leasing or
compensatory use of any
aircraft by a 5% owner
or related person as a
qualified business use
if at least 25% of the
total use of the
aircraft during the year
is for a qualified
business use.
5%
owner.
For a business entity
that is not a
corporation, a 5% owner
is any person who owns
more than 5% of the
capital or profits
interest in the
business.
For a corporation, a
5% owner is any person
who owns, or is
considered to own,
either of the following.
More than 5%
of the
outstanding
stock of the
corporation.
Stock
possessing more
than 5% of the
total combined
voting power of
all stock in the
corporation.
Related
persons.
For a description of
related persons, see
Related persons
in the discussion on
property owned or used
in 1986 under
Can You Use MACRS To
Depreciate Your Property
in chapter 1. For this
purpose, however, treat
as related persons only
the relationships listed
in items (1) through
(10) of that discussion
and substitute “50%”
for “10%”
each place it appears.
Examples. The
following examples
illustrate whether the
use of business property
is qualified business
use.
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.
Investment
Use
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%.)
Recapture of
Excess
Depreciation
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:
The depreciation
allowable for the
property (including
any section 179
deduction claimed)
for years before the
first year you do
not use the property
predominantly for
qualified business
use,
minus
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 2000, Ellen
Rye purchased and placed
in service a pickup
truck that cost $18,000.
She used it only for
qualified business use
for 2000 through 2003.
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 2004, she used
the truck 50% for
business and 50% for
personal purposes. She
includes $4,018 excess
depreciation in her
gross income for 2004.
The excess depreciation
is determined as
follows.
Total
section 179
deduction
($10,000)
and
depreciation
claimed
($6,618) for
2000 through
2003.
(Depreciation
is from
Table A-1.)
$16,618
Minus:
Depreciation
allowable
(Table A-8):
2000 – 10%
of $18,000
$1,800
2001 – 20%
of $18,000
3,600
2002 – 20%
of $18,000
3,600
2003 – 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 2006, there will
be no excess
depreciation. The total
depreciation allowable
using Table A-8 through
2006 will be $18,000,
which equals the total
of the section 179
deduction and
depreciation she will
have claimed.
Where
to figure and report
recapture. Use
Form 4797, Part IV, to
figure the recapture
amount. Report the
recapture amount as
other income on the same
form or schedule on
which you took the
depreciation deduction.
For example, report the
recapture amount as
other income on Schedule
C (Form 1040) if you
took the depreciation
deduction on Schedule C.
If you took the
depreciation deduction
on Form 2106, report the
recapture amount as
other income on Form
1040, line 21.
Lessee's
Inclusion Amount
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.
Amount
A. Amount A is:
The fair
market value of
the property,
multiplied by
The
business/investment
use for the
first tax year
the qualified
business-use
percentage is
50% or less,
multiplied by
The
applicable
percentage from
Table A-19 in
Appendix A.
The fair market value
of the property is the
value on the first day
of the lease term. If
the capitalized cost of
an item of listed
property is specified in
the lease agreement, you
must treat that amount
as the fair market
value.
Amount
B. Amount B is:
The fair
market value of
the property,
multiplied by
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
The
applicable
percentage from
Table A-20 in
Appendix A.
Maximum
inclusion amount.
The inclusion amount
cannot be more than the
sum of the deductible
amounts of rent for the
tax year in which the
lessee must include the
amount in gross income.
Inclusion amount
worksheet.
The following
worksheet is provided to
help you figure the
inclusion amount for
leased listed property.
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,
2002, 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 five
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 2002, 60% in
2003, and 40% in
2004. He must add an
inclusion amount to
gross income for
2004, 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. 2004 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 2004 is
$800.
Larry uses the
Inclusion Amount
Worksheet for Leased
Listed Property to figure the
amount he must
include in income
for 2004. 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
Lease
beginning in the last 9
months of your tax year.
The inclusion amount
is subject to a special
rule if all the
following apply.
The lease
term begins
within 9 months
before the close
of your tax
year.
You do not
use the property
predominantly
(more than 50%)
for qualified
business use
during that part
of the tax year.
The lease
term continues
into your next
tax year.
Under this special rule,
add the inclusion amount
to income in the next
tax year. Figure the
inclusion amount by
taking into account the
average of the
business/investment use
for both tax years (line
2 of the
Inclusion Amount
Worksheet for Leased
Listed Property)
and the applicable
percentage for the tax
year the lease term
begins. (Skip lines 6
through 9 of the
worksheet and enter zero
on line 10.)
Example 1.
On August 1, 2003,
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 2003
and 90% in 2004. She
paid rent of $3,600 for
2004, of which $3,240 is
deductible. She must
include $147 in income
in 2004. 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 2003 and 2004, and
the applicable
percentage for year one
from Table A-19. Amount
B is zero.
Lease
for less than one year.
A special rule for the
inclusion amount applies
if the lease term is
less than one year and
you do not use the
property predominantly
(more than 50%) for
qualified business use.
The amount included in
income is the inclusion
amount (figured as
described in the
preceding discussions)
multiplied by a
fraction. The numerator
of the fraction is the
number of days in the
lease term and the
denominator is 365 (or
366 for leap years).
The lease term for
listed property other
than residential rental
or nonresidential real
property includes
options to renew. If you
have two or more
successive leases that
are part of the same
transaction (or a series
of related transactions)
for the same or
substantially similar
property, treat them as
one lease.
Example 2.
On October 1, 2003,
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,
2004), during which he
used the property 45% in
business. He must
include $71 in income in
2004. The $71 is the sum
of Amount A and Amount
B. Amount A is $71
($15,000 × 45% × 2.1% ×
183/366), 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.
Where
to report inclusion
amount. Report the
inclusion amount figured
as described in the
preceding discussions as
other income on the same
form or schedule on
which you took the
deduction for your
rental costs. For
example, report the
inclusion amount as
other income on Schedule
C (Form 1040) if you
took the deduction on
Schedule C. (If you took
the deduction for rental
costs on Form 2106,
report the inclusion
amount as other income
on Form 1040, line 21.)
Do
the Passenger
Automobile Limits
Apply?
Terms you may
need to know
(see Glossary):
Basis
Clean-fuel
vehicle
Convention
Placed in
service
Recovery period
The depreciation deduction,
including the section 179
deduction and the special
depreciation allowance or the
special Liberty Zone
depreciation allowance, you can
claim for a passenger automobile
each year is limited. (For the
definition of a passenger
automobile, see
Passenger Automobiles
under What Is Listed Property,
earlier.)
This section describes the
maximum depreciation deduction
amounts for 2004 and explains
how to deduct, after the
recovery period, the unrecovered
basis of your property that
results from applying the
passenger automobile limit.
Exception
for clean-fuel
modifications.
The passenger automobile
limits do not apply to any
costs you pay to retrofit
parts and components to
modify an automobile to
permit it to run on a
clean-burning fuel. The
limits apply only to the
cost of the automobile
without the modification.
Exception
for leased cars. The
passenger automobile limits
generally do not apply to
passenger automobiles leased
or held for leasing by
anyone regularly engaged in
the business of leasing
passenger automobiles. For
information on when you are
considered regularly engaged
in the business of leasing
listed property, including
passenger automobiles, see
Exception for leased
property,
earlier, under
What Is the Business-Use
Requirement.
Maximum
Depreciation
Deduction
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.
Passenger
Automobiles
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
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
4,900
2,950
1,775
2002
7,660 3
4,900
2,950
1,775
2001
7,660 4
4,900
2,950
1,775
2000
3,060
4,900
2,950
1,775
1999
3,060
5,000
2,950
1,775
1998
3,160
5,000
2,950
1,775
1997
3,160
5,000
3,050
1,775
1If
you elected
not
to claim any
special
depreciation
allowance
for the
vehicle, the
vehicle is
not
qualified
property, or
the vehicle
is qualified
Liberty Zone
property,
the maximum
deduction is
$2,960.
2If
you acquired
the vehicle
before
5/06/03, the
maximum
deduction is
$7,660. If
you elected
not
to claim any
special
depreciation
allowance
for the
vehicle, the
vehicle is
not
qualified
property, or
the vehicle
is qualified
Liberty Zone
property,
the maximum
deduction is
$3,060.
3If
you elected
not
to claim any
special
depreciation
allowance
for the
vehicle, the
vehicle is
not
qualified
property, or
the vehicle
is qualified
Liberty Zone
property,
the maximum
deduction is
$3,060.
4
If you
acquired the
vehicle
before
9/11/01, you
elected
not
to claim any
special
depreciation
allowance
for the
vehicle, the
vehicle is
not
qualified
property, or
the vehicle
is qualified
Liberty Zone
property,
the maximum
deduction is
$3,060.
If your
business/investment use
of the automobile is
less than 100%, you must
reduce the maximum
deduction amount by
multiplying the maximum
amount by the percentage
of business/investment
use determined on an
annual basis during the
tax year.
If you have a
short tax year, you must
reduce the maximum
deduction amount by
multiplying the maximum
amount by a fraction.
The numerator of the
fraction is the number
of months and partial
months in the short tax
year and the denominator
is 12.
Example.
On April 15,
2004, Virginia Hart
bought and placed in
service a new car
for $15,000. She
used the car only in
her business. She
files her tax return
based on the
calendar year. She
does not elect a
section 179
deduction. She
claimed a special
depreciation
allowance of $7,500
(50% of $15,000).
Under MACRS, a car
is 5-year property.
Since she placed her
car in service on
April 15 and used it
only for business,
she uses the
percentages in Table
A-1 to figure her
MACRS depreciation
on the car. Virginia
multiplies the
$7,500 unadjusted
basis of her car
($15,000 - $7,500)
by 0.20 to get her
MACRS depreciation
of $1,500 for 2004.
Her total
depreciation for
2004 is $9,000
($7,500 plus
$1,500). This $9,000
is below the maximum
depreciation
deduction of $10,610
for passenger
automobiles placed
in service in 2004.
She can deduct the
full $9,000.
Electric
Vehicles
The maximum
depreciation deductions
for passenger
automobiles that are
produced to run
primarily on electricity
are higher than those
for other automobiles.
The maximum deduction
amounts for electric
cars are shown in the
following table.
Maximum Depreciation
Deduction For
Electric Vehicles
Date
4th &
Placed
1st
2nd
3rd
Later
In Service
Year
Year
Year
Years
2004
$31,830
1
$14,300
$8,550
$5,125
5/06/2003–
12/31/2003
32,030
2
14,600
8,750
5,225
1/01/2003–
5/05/2003
22,880
3
14,600
8,750
5,225
2002
22,980
4
14,700
8,750
5,325
2001
23,080
5
14,800
8,850
5,325
2000
9,280
14,800
8,850
5,325
1999
9,280
14,900
8,950
5,325
1998
9,380
15,000
8,950
5,425
1997
9,480
15,100
9,050
5,425
1If
you elected
not
to claim any
special
depreciation
allowance
for the
vehicle, the
vehicle is
not
qualified
property, or
the vehicle
is qualified
Liberty Zone
property,
the maximum
deduction is
$8,880.
2If
you acquired
the vehicle
before
5/06/03, the
maximum
deduction is
$22,880. If
you elected
not
to claim any
special
depreciation
allowance
for the
vehicle, the
vehicle is
not
qualified
property, or
the vehicle
is qualified
Liberty Zone
property,
the maximum
deduction is
$9,080.
3
If you
elected
not
to claim any
special
depreciation
allowance
for the
vehicle, the
vehicle is
not
qualified
property, or
the vehicle
is qualified
Liberty Zone
property,
the maximum
deduction is
$9,080.
4
If you
elected
not
to claim any
special
depreciation
allowance
for the
vehicle, the
vehicle is
not
qualified
property, or
the vehicle
is qualified
Liberty Zone
property,
the maximum
deduction is
$9,180.
5
If you
acquired the
vehicle
before
9/11/01, you
elected
not
to claim any
special
depreciation
allowance
for the
vehicle, the
vehicle is
not
qualified
property, or
the vehicle
is qualified
Liberty Zone
property,
the maximum
deduction is
$9,280.
For more information
on electric vehicles,
see chapter 12 of
Publication 535.
Trucks and
Vans
The maximum
depreciation deductions
for trucks and vans
first placed in service
in 2004 are higher than
those for other
passenger automobiles.
This includes vehicles
such as minivans and
sport utility vehicles
that are built on a
truck chassis. The
maximum deduction
amounts for trucks and
vans are shown in the
following table.
Maximum Depreciation
Deduction For Trucks
and Vans
Date
4th &
Placed
1st
2nd
3rd
Later
In Service
Year
Year
Year
Years
2004
$10,910
1
$5,300
$3,150
$1,875
5/06/2003–
12/31/2003
11,010
2
5,400
3,250
1,975
1/01/2003–
5/05/2003
7,960 3
5,400
3,250
1,975
1If
you elected
not
to claim any
special
depreciation
allowance
for the
vehicle, the
vehicle is
not
qualified
property, or
the vehicle
is qualified
Liberty Zone
property,
the maximum
deduction is
$3,260.
2
If you
acquired the
vehicle
before
5/06/03, the
maximum
deduction is
$7,960. If
you elected
not
to claim any
special
depreciation
allowance
for the
vehicle, the
vehicle is
not
qualified
property, or
the vehicle
is qualified
Liberty Zone
property,
the maximum
deduction is
$3,360.
3
If you
elected
not
to claim any
special
depreciation
allowance
for the
vehicle, the
vehicle is
not
qualified
property, or
the vehicle
is qualified
Liberty Zone
property,
the maximum
deduction is
$3,360.
Depreciation
Worksheet
for
Passenger
Automobiles
You can use the
following worksheet to
figure your depreciation
deduction using the
percentage tables. Then
use the information from
this worksheet to
prepare Form 4562.
Depreciation
Worksheet for
Passenger
Automobiles
Part
I
1.
MACRS
system
(GDS or
ADS)
2.
Property
class
3.
Date
placed
in
service
4.
Recovery
period
5.
Method
and
convention
6.
Depreciation
rate
(from
tables)
7.
Maximum
depreciation
deduction
for this
year
from the
appropriate
table
8.
Business/investment-use
percentage
9.
Multiply
line 7
by line
8. This
is your
adjusted
maximum
depreciation
deduction
10.
Section
179
deduction
claimed
this
year
(not
more
than
line 9).
Enter
-0- if
this is
not the
year you
placed
the car
in
service.
Note.
1) If
line 10
is equal
to line
9, stop
here.
Your
combined
section
179 and
depreciation
deduction
(including
your
special
depreciation
allowance
or
Liberty
Zone
depreciation
allowance)
is
limited
to the
amount
on line
9.
2) If
line 10
is less
than
line 9,
complete
Part II.
Part
II
11.
Subtract
line 10
from
line 9.
This is
the
limit on
the
amount
you can
deduct
for
depreciation
(including
any
special
depreciation
allowance
or
Liberty
Zone
depreciation
allowance)
12.
Cost or
other
basis
(reduced
by any
section
179A
deduction
1
or
credit
for
electric
vehicles
2)
13.
Multiply
line 12
by line
8. This
is your
business/investment
cost
14.
Section
179
deduction
claimed
in the
year you
placed
the car
in
service
15.
Subtract
line 14
from
line 13.
This is
your
tentative
basis
for
depreciation
16.
Multiply
line 15
by .30
if the
30%
special
depreciation
allowance
(or
Liberty
Zone
depreciation
allowance)
applies.
Multiply
line 15
by .50
if the
50%
special
depreciation
allowance
applies.
This is
your
special
depreciation
allowance
(or
Liberty
Zone
depreciation
allowance).
Enter
-0- if
this is
not the
year you
placed
the car
in
service,
the car
is not
qualified
property
(or
Liberty
Zone
property),
or you
elected
not to
claim a
special
depreciation
allowance
(or
Liberty
Zone
depreciation
allowance).
Note.
1) If
line 16
is equal
to line
11, stop
here.
Your
depreciation
deduction
(including
your
special
depreciation
allowance
or
Liberty
Zone
depreciation
allowance)
is
limited
to the
amount
on line
11.
2) If
line 16
is less
than
line 11,
complete
Part
III.
Part
III
17.
Subtract
line 16
from
line 11.
This is
the
limit on
the
amount
you can
deduct
for
MACRS
depreciation
18.
Subtract
line 16
from
line 15.
This is
your
basis
for
depreciation
19.
Multiply
line 18
by line
6. This
is your
tentative
MACRS
depreciation
deduction
20.
Enter
the
lesser
of line
17 or
line 19.
This is
your
MACRS
depreciation
deduction
1The
section
179A
deduction
is for
clean-fuel
vehicles
or
clean-fuel
vehicle
refueling
property.
When
figuring
the
amount
to enter
on line
12, do
not
reduce
your
cost or
other
basis by
any
section
179
deduction
you
claimed
for your
car.
2Reduce
the
basis by
the
lesser
of
$4,000
or 10%
of the
cost of
the
vehicle
even if
the
credit
is less
than
that
amount.
The following example
shows how to figure your
depreciation deduction
using the worksheet.
Example.
On September 26,
2004, Donald Banks
bought and placed in
service a new car
for $18,000. He used
the car 60% for
business during
2004. He files his
tax return based on
the calendar year.
Under GDS, his car
is 5-year property.
Donald is electing a
section 179
deduction of $1,000
on the car and
claims the 50%
special depreciation
allowance. He uses
Table A-1 to
determine the
depreciation rate.
Donald's MACRS
depreciation
deduction is limited
to $466, as shown in
the following
worksheet.
Depreciation
Worksheet
for
Passenger
Automobiles
Part
I
1.
MACRS
system
(GDS
or
ADS)
GDS
2.
Property
class
5-year
3.
Date
placed
in
service
9/26/04
4.
Recovery
period
5-Year
5.
Method
and
convention
200%
DB/Half-Year
6.
Depreciation
rate
(from
tables)
.20
7.
Maximum
depreciation
deduction
for
this
year
from
the
appropriate
table
$10,610
8.
Business/investment-use
percentage
60%
9.
Multiply
line
7 by
line
8.
This
is
your
adjusted
maximum
depreciation
deduction
$6,366
10.
Section
179
deduction
claimed
this
year
(not
more
than
line
9).
Enter
-0-
if
this
is
not
the
year
you
placed
the
car
in
service.
$1,000
Note.
1)
If
line
10
is
equal
to
line
9,
stop
here.
Your
combined
section
179
and
depreciation
deduction
(including
your
special
depreciation
allowance
or
Liberty
Zone
depreciation
allowance)
is
limited
to
the
amount
on
line
9.
2)
If
line
10
is
less
than
line
9,
complete
Part
II.
Part
II
11.
Subtract
line
10
from
line
9.
This
is
the
limit
on
the
amount
you
can
deduct
for
depreciation
(including
any
special
depreciation
allowance
or
Liberty
Zone
depreciation
allowance)
$5,366
12.
Cost
or
other
basis
(reduced
by
any
section
179A
deduction
1
or
credit
for
electric
vehicles
2)
$18,000
13.
Multiply
line
12
by
line
8.
This
is
your
business/investment
cost
$10,800
14.
Section
179
deduction
claimed
in
year
you
placed
the
car
in
service
$1,000
15.
Subtract
line
14
from
line
13.
This
is
your
tentative
basis
for
depreciation
$9,800
16.
Multiply
line
15
by
.30
if
the
30%
special
depreciation
allowance
(or
Liberty
Zone
depreciation
allowance)
applies.
Multiply
line
15
by
.50
if
the
50%
special
depreciation
allowance
applies.
This
is
your
special
depreciation
allowance
(or
Liberty
Zone
depreciation
allowance).
Enter
-0-
if
this
is
not
the
year
you
placed
the
car
in
service,
the
car
is
not
qualified
property
(or
Liberty
Zone
property),
or
you
elected
not
to
claim
the
special
depreciation
allowance
(or
Liberty
Zone
depreciation
allowance)
$4,900
Note.
1)
If
line
16
is
equal
to
line
11,
stop
here.
Your
depreciation
deduction
(including
your
special
depreciation
allowance
or
Liberty
Zone
depreciation
allowance)
is
limited
to
the
amount
on
line
11.
2)
If
line
16
is
less
than
line
11,
complete
Part
III.
Part
III
17.
Subtract
line
16
from
line
11.
This
is
the
limit
on
the
amount
you
can
deduct
for
MACRS
depreciation
$466
18.
Subtract
line
16
from
line
15.
This
is
your
basis
for
depreciation
$4,900
19.
Multiply
line
18
by
line
6.
This
is
your
tentative
MACRS
depreciation
deduction
$980
20.
Enter
the
lesser
of
line
17
or
line
19.
This
is
your
MACRS
depreciation
deduction
$466
1The
section
179A
deduction
is
for
clean-fuel
vehicles
or
clean-fuel
vehicle
refueling
property.
When
figuring
the
amount
to
enter
on
line
12,
do
not
reduce
your
cost
or
other
basis
by
any
section
179
deduction
you
claimed
for
your
car.
2Reduce
the
basis
by
the
lesser
of
$4,000
or
10%
of
the
cost
of
the
vehicle
even
if
the
credit
is
less
than
that
amount.
Deductions
After the
Recovery Period
If the depreciation
deductions for your
automobile are reduced under
the passenger automobile
limits, you will have
unrecovered basis in your
automobile at the end of the
recovery period. If you
continue to use the
automobile for business, you
can deduct that unrecovered
basis after the recovery
period ends. You can claim a
depreciation deduction in
each succeeding tax year
until you recover your full
basis in the car. The
maximum amount you can
deduct each year is
determined by the date you
placed the car in service
and your
business/investment-use
percentage. See
Maximum Depreciation
Deduction,
earlier.
Unrecovered basis is the
cost or other basis of the
passenger automobile reduced
by any clean-fuel vehicle
deduction, electric vehicle
credit, depreciation, and
section 179 deductions that
would have been allowable if
you had used the car 100%
for business and investment
use and the passenger
automobile limits had not
applied.
You cannot claim a
depreciation deduction for
listed property other than
passenger automobiles after
the recovery period ends.
There is no unrecovered
basis at the end of the
recovery period because you
are considered to have used
this property 100% for
business and investment
purposes during all of the
recovery period.
Example.
In May 1999, you
bought and placed in
service a car costing
$30,000. The car was
5-year property under
GDS (MACRS). You did not
elect a section 179
deduction for the car.
You used the car
exclusively for business
during the recovery
period (1999 through
2004). You figured your
depreciation as shown
below.
Year
Percentage
Amount
Limit
Allowed
1999
20.0%
$6,000
$3,060
$3,060
2000
32.0
9,600
5,000
5,000
2001
19.2
5,760
2,950
2,950
2002
11.52
3,456
1,775
1,775
2003
11.52
3,456
1,775
1,775
2004
5.76
1,728
1,775
1,728
Total
$16,288
At the end of 2004,
you had an unrecovered
basis of $13,712
($30,000 - $16,288). If
in 2004 and later years
you continue to use the
car 100% for business,
you can deduct each year
the lesser of $1,775 or
your remaining
unrecovered basis.
If your business use
of the car had been less
than 100% during any
year, your depreciation
deduction would have
been less than the
maximum amount allowable
for that year. However,
in figuring your
unrecovered basis in the
car, you would still
reduce your basis by the
maximum amount allowable
as if the business use
had been 100%. For
example, if you had used
your car 60% for
business instead of
100%, your allowable
depreciation deductions
would have been $9,773
($16,288 × 60%), but you
still would have to
reduce your basis by
$16,288 to determine
your unrecovered basis.
Deductions
For Passenger
Automobiles
Acquired in a
Trade-in
If you acquire a
passenger automobile in a
trade-in, depreciate the
carryover basis separately
as if the trade-in did not
occur. If the automobile
acquired in the trade-in is
qualified property (or
qualified Liberty Zone
property), the carryover
basis is eligible for a
special depreciation
allowance (or Liberty Zone
depreciation allowance). See
What Is Qualified Property
and What Is Qualified
Liberty Zone Property
in chapter 3. Depreciate the
part of the new automobile's
basis that exceeds its
carryover basis (excess
basis) as if it were newly
placed in service property.
This excess basis is the
additional cash paid for the
new automobile in the
trade-in. See
Property Acquired in a
Like-kind Exchange or
Involuntary Conversion
in chapter 4 for more
information including how to
elect not to apply the rules
above.
The depreciation figured
for the 2 components of the
basis (carryover basis and
excess basis) is subject to
a single passenger
automobile limit. Special
rules apply in determining
the passenger automobile
limits. These rules and
examples are discussed in
section 1.168(i)-6T(d)(3) of
the regulations.
What Records Must Be
Kept?
Terms you may
need to know
(see Glossary):
Business/investment
use
Circumstantial
evidence
Documentary
evidence
You cannot take any
depreciation or section 179
deduction for the use of listed
property unless you can prove
your business/investment use
with adequate records or with
sufficient evidence to support
your own statements. The period
of time you must keep these
records is discussed later under
How
Long To Keep Records.
Adequate
Records
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. You do
not have 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.
Elements of expenditure
or use. Your
records or other
documentary evidence
must support all the
following.
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.
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 you
prepare at or near the
time of the expenditure
or use has greater value
as proof of the
expenditure or use. You
do not have to keep a
daily log. 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 you
prepare later.
Timeliness. You
must record the elements
of an expenditure or use
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
generally is considered
a timely record if, in
the regular course of
business:
The
statement is
given by an
employee to the
employer, or
The
statement is
given by an
independent
contractor to
the client or
customer.
For example, a log
maintained on a weekly
basis, that accounts for
use during the week,
will be considered a
record made at or near
the time of use.
Business purpose
supported.
Generally, an adequate
record of business
purpose must be in the
form of a written
statement. However, the
amount of detail
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.
Business use supported.
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 who
uses a truck for both
business and personal
purposes and whose only
business use of the
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 you generally
must prepare an adequate
written record, you can
prepare a record of the
business use of listed
property using a
computer memory device
that uses a logging
program.
Separate or combined
expenditures or uses.
Each use by you
normally is considered a
separate use. However,
you can combine repeated
uses as a single item.
Record each
expenditure as a
separate item. Do not
combine it with other
expenditures. If you
choose, however, you can
combine amounts you
spent for the use of
listed property during a
tax year, such as for
gasoline or automobile
repairs. If you combine
these expenses, 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.
You can account for
uses that can be
considered part of a
single use, such as a
round trip or
uninterrupted business
use, by a single record.
For example, you can
account for the use of a
truck to make deliveries
at several locations
that begin and end at
the business premises
and can include a stop
at the business in
between deliveries by a
single record of miles
driven. You can account
for the use of a
passenger automobile by
a salesperson for a
business trip away from
home over a period of
time 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.
Confidential
information. If
any of the information
on the elements of an
expenditure or use is
confidential, you do not
need to include it in
the account book or
similar record if you
record it at or near the
time of the expenditure
or use. You must keep it
elsewhere and make it
available as support to
the IRS director for
your area on request.
Substantial compliance.
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 satisfaction of the
IRS director for your
area, you can establish
this element by any
evidence the IRS
director for your area
deems adequate.
If you fail to
establish to the
satisfaction of the IRS
director for your area
that you have
substantially complied
with the adequate
records requirement for
an element of an
expenditure or use, you
must establish the
element as follows.
By your own
oral or written
statement
containing
detailed
information as
to the element.
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 evidence, 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.
Sampling. You can
maintain an adequate
record for part 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 you
maintain an adequate
record are
representative of use
throughout the year.
Example 1.
Denise Williams,
a sole proprietor
and calendar year
taxpayer, operates
an interior
decorating business
out of her home. She
uses her automobile
for local business
visits to the homes
or offices of
clients, for
meetings with
suppliers and
subcontractors, and
to pick up and
deliver items to
clients. There is no
other business use
of the automobile,
but she and family
members also use it
for personal
purposes. She
maintains adequate
records for the
first three months
of the year showing
that 75% of the
automobile use was
for business.
Subcontractor
invoices and paid
bills show that her
business continued
at approximately the
same rate for the
rest of the year. If
there is no change
in circumstances,
such as the purchase
of a second car for
exclusive use in her
business, the
determination that
her combined
business/investment
use of the
automobile for the
tax year is 75%
rests on sufficient
supporting evidence.
Example 2.
Assume the same
facts as in
Example 1,
except that Denise
maintains adequate
records during the
first week of every
month showing that
75% of her use of
the automobile is
for business. Her
business invoices
show that her
business continued
at the same rate
during the later
weeks of each month
so that her weekly
records are
representative of
the automobile's
business use
throughout the
month. The
determination that
her
business/investment
use of the
automobile for the
tax year is 75%
rests on sufficient
supporting evidence.
Example 3.
Bill Baker, a
sole proprietor and
calendar year
taxpayer, is a
salesman in a large
metropolitan area
for a company that
manufactures
household products.
For the first three
weeks of each month,
he occasionally uses
his own automobile
for business travel
within the
metropolitan area.
During these weeks,
his business use of
the automobile does
not follow a
consistent pattern.
During the fourth
week of each month,
he delivers all
business orders
taken during the
previous month. The
business use of his
automobile, as
supported by
adequate records, is
70% of its total use
during that fourth
week. The
determination based
on the record
maintained during
the fourth week of
the month that his
business/investment
use of the
automobile for the
tax year is 70% does
not rest on
sufficient
supporting evidence
because his use
during that week is
not representative
of use during other
periods.
Loss of
records. 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.
How Long To
Keep Records
For listed property,
you must keep records for as
long as any excess
depreciation can be
recaptured (included in
income).
Recapture can occur in
any tax year of the recovery
period.
How Is Listed
Property Information
Reported?
Terms you may
need to know
(see Glossary):
Commuting
Standard mileage
rate
You must provide the
information about your listed
property requested in Part V of
Form 4562, Section A, if you
claim either of the following
deductions.
Any deduction for a
vehicle.
A depreciation
deduction for any other
listed property.
If you claim any deduction
for a vehicle, you also must
provide the information
requested in Section B. (If you
provide the vehicle for your
employee's use, the employee
must give you this information.)
If you provide any vehicle for
use by an employee, you must
first answer the questions in
Section C to see if you meet an
exception to completing Section
B for that vehicle.
Vehicles
used by your employees.
You do not have to
complete Section B, Part V,
for vehicles used by your
employees who are not
more-than-5% owners or
related persons if you meet
at least one of the
following requirements.
You maintain a
written policy
statement that
prohibits one of the
following uses of
the vehicles.
All
personal use
including
commuting.
Personal
use, other
than
commuting,
by employees
who are not
officers,
directors,
or
1%-or-more
owners.
You treat all
use of the vehicles
by your employees as
personal use.
You provide more
than 5 vehicles for
use by your
employees, and you
keep the information
on their use given
to you by the
employees in your
records.
For demonstrator
automobiles provided
to full-time
salespersons, you
maintain a written
policy statement
that limits the
total mileage
outside the
salesperson's normal
working hours and
prohibits use of the
automobile by anyone
else, for vacation
trips, or to store
personal
possessions.
Exceptions.
If you file Form 2106,
2106-EZ, or Schedule C-EZ
(Form 1040), report
information about listed
property on that form and
not on Form 4562. Also, if
you file Schedule C (Form
1040) and are claiming the
standard mileage rate or
actual vehicle expenses
(except depreciation) and
you are not required to file
Form 4562 for any other
reason, report vehicle
information in Part IV of
Schedule C and not on Form
4562.
