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IRS.gov Website
Publication 946
taxmap/pubs/p946-031.htm#en_us_publink1000107669

What Is the Business-Use
Requirement?(p57)

rule

Words you may need to know (see Glossary)

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.
EIC
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.
taxmap/pubs/p946-031.htm#en_us_publink1000107671

Exception for leased property.(p58)

rule
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.
taxmap/pubs/p946-031.htm#en_us_publink1000107672

How To Allocate Use(p58)

rule
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.
taxmap/pubs/p946-031.htm#en_us_publink1000107673

Entertainment use.(p58)

rule
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.
taxmap/pubs/p946-031.htm#en_us_publink1000107674

Commuting use.(p58)

rule
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.
taxmap/pubs/p946-031.htm#en_us_publink1000107675

Use of your automobile by another person.(p58)

rule
If someone else uses your automobile, do not treat that use as business use unless one of the following conditions applies.
  1. That use is directly connected with your business.
  2. You properly report the value of the use as income to the other person and withhold tax on the income where required.
  3. 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).
taxmap/pubs/p946-031.htm#en_us_publink1000107676

Employee deductions.(p58)

rule
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.
taxmap/pubs/p946-031.htm#en_us_publink1000107677

Qualified Business Use(p58)

rule
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.
EIC
Property does not stop being used predominantly for qualified business use because of a transfer at death.
taxmap/pubs/p946-031.htm#en_us_publink1000107679

Exception for leasing or compensatory use of aircraft.(p58)

rule
Treat the leasing of any aircraft by a 5% owner or related person, or the compensatory use of any aircraft, 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.
taxmap/pubs/p946-031.htm#en_us_publink1000107680

5% owner.(p58)

rule
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.
taxmap/pubs/p946-031.htm#en_us_publink1000107681

Related persons.(p58)

rule
For a description of related persons, see Related persons in the discussion on property owned or used in 1986 under What Method Can You Use 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.
taxmap/pubs/p946-031.htm#en_us_publink1000107682

Examples.(p59)

rule
The following examples illustrate whether the use of business property is qualified business use.
taxmap/pubs/p946-031.htm#en_us_publink1000107683

Example 1.(p59)

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.
taxmap/pubs/p946-031.htm#en_us_publink1000107684

Example 2.(p59)

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.
taxmap/pubs/p946-031.htm#en_us_publink1000107685

Example 3.(p59)

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.
taxmap/pubs/p946-031.htm#en_us_publink1000107686

Investment Use(p59)

rule
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.
taxmap/pubs/p946-031.htm#en_us_publink1000107687

Example 1.(p59)

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%.
taxmap/pubs/p946-031.htm#en_us_publink1000107688

Example 2.(p59)

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%.
taxmap/pubs/p946-031.htm#en_us_publink1000107689

Recapture of Excess Depreciation(p59)

rule
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:
  1. 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
  2. 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.
taxmap/pubs/p946-031.htm#en_us_publink1000107690

Example.(p59)

In June 2008, Ellen Rye purchased and placed in service a pickup truck that cost $18,000. She used it only for qualified business use for 2008 through 2011. 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 2012, she used the truck 50% for business and 50% for personal purposes. She includes $4,018 excess depreciation in her gross income for 2012. The excess depreciation is determined as follows.
Total section 179 deduction ($10,000) and depreciation claimed ($6,618) for 2008 through 2011. (Depreciation is from Table A-1.) $16,618
Minus: Depreciation allowable (Table A-8):   
2008 – 10% of $18,000$1,800 
2009 – 20% of $18,0003,600 
2010 – 20% of $18,0003,600 
2011 – 20% of $18,0003,60012,600
Excess depreciation$4,018
If Ellen's use of the truck does not change to 50% for business and 50% for personal purposes until 2014, there will be no excess depreciation. The total depreciation allowable using Table A-8 through 2014 will be $18,000, which equals the total of the section 179 deduction and depreciation she will have claimed.
taxmap/pubs/p946-031.htm#en_us_publink1000107691

Where to figure and report recapture.(p60)

rule
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.
taxmap/pubs/p946-031.htm#en_us_publink1000107692

Lessee's Inclusion Amount(p60)

rule
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.
taxmap/pubs/p946-031.htm#en_us_publink1000107693

Amount A.(p60)

rule
Amount A is:
  1. The fair market value of the property, multiplied by
  2. The business/investment use for the first tax year the qualified business-use percentage is 50% or less, multiplied by
  3. 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.
taxmap/pubs/p946-031.htm#en_us_publink1000107694

Amount B.(p60)

rule
Amount B is:
  1. The fair market value of the property, multiplied by
  2. 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
  3. The applicable percentage from Table A–20 in Appendix A.
taxmap/pubs/p946-031.htm#en_us_publink1000107695

Maximum inclusion amount.(p60)

rule
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.
taxmap/pubs/p946-031.htm#en_us_publink1000107696

Inclusion amount worksheet.(p60)

rule
The following worksheet is provided to help you figure the inclusion amount for leased listed property.taxmap/pubs/p946-031.htm#id2012_id2013_w13081f03
Pencil

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.)
   
taxmap/pubs/p946-031.htm#en_us_publink1000107697

Example.(p60)

On February 1, 2010, 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 2010, 60% in 2011, and 40% in 2012. He must add an inclusion amount to gross income for 2012, 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. 2012 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 2012 is $800.
Larry uses the Inclusion amount worksheet.to figure the amount he must include in income for 2012. His inclusion amount is $224, which is the sum of −$238 (Amount A) and $462 (Amount B). taxmap/pubs/p946-031.htm#id2012_id2013_w13081f04
Pencil

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 less40%
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 value3,000 
7.Average business/investment use for years property leased before the first year business use is 50% or less70%
8.Multiply line 6 by line 72,100 
9.Rate (%) from Table A-2022.0%
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 
    
taxmap/pubs/p946-031.htm#en_us_publink1000107698

Lease beginning in the last 9 months of your tax year.(p61)

rule
The inclusion amount is subject to a special rule if all the following apply. 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.
taxmap/pubs/p946-031.htm#en_us_publink1000107699

Example 1.(p61)

On August 1, 2011, 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 2011 and 90% in 2012. She paid rent of $3,600 for 2011, of which $3,240 is deductible. She must include $147 in income in 2012. 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 2011 and 2012, and the applicable percentage for year one from Table A-19 . Amount B is zero.
taxmap/pubs/p946-031.htm#en_us_publink1000107700

Lease for less than one year.(p61)

rule
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.
taxmap/pubs/p946-031.htm#en_us_publink1000107701

Example 2.(p61)

On October 1, 2011, 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, 2012), during which he used the property 45% in business. He must include $71 in income in 2012. The $71 is the sum of Amount A and Amount B. Amount A is $71 ($15,000 × 45% × 2.1% × 183/365), 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.
taxmap/pubs/p946-031.htm#en_us_publink1000107702

Where to report inclusion amount.(p61)

rule
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.