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Listed Property — Are You Within the IRS Recordkeeping Requirements?

Common examples of listed properties are automobiles, computers and cell phones. See what limitations the IRS has put into place to ensure accurate depreciation.

June 5, 2008
Sponsored by BNA Software

by Nancy Faussett, CPA

Listed property is a special classification for assets that lend themselves to both personal and business use. The designation is for tax purposes only and has no meaning for financial reporting. Common examples of listed property are automobiles, computers and cell phones.

While there are limitations on the allowable depreciation amounts and methods for certain listed property, the primary objective of the IRS is to ensure you only depreciate the business and investment-use portion of these assets and not the personal-use portion. To do this, the IRS has established recordkeeping requirements for the use of such property. Fixed assets management software can ease both the tasks of recordkeeping and depreciation.

Overview

IRS Code Section 280F(d)(4)(A) defines listed property as:

  • Passenger automobiles,
  • Any other transportation property,
  • Property of a type generally used for entertainment, recreation or amusement purposes, but not used exclusively at a regular place of business,
  • Any computer or peripheral equipment not used exclusively at a regular place of business and owned or leased by the person operating the business and
  • Any cellular telephone or other similar telecommunications equipment. (As of the writing of this article, several bills had been introduced in Congress to remove cell phones from being included as listed property.)

Most automobiles are termed “luxury vehicles” and there are annual depreciation limits, adjusted for inflation and based on the year in which the vehicle is placed in service. Section 179 expense is included in the maximum allowable depreciation amount. Leasing the vehicle will not avoid these limits as there is an income inclusion required when a business leases a vehicle for 30 days or more.

Predominant-Use Test

According to the predominant-use test, if listed property does not have more than 50 percent qualified business use, the straight-line depreciation method (MACRS ADS) must be used and no Section 179 expensing is allowed.

“Qualified business use” is any use of the asset in the taxpayer’s trade or business. Although simply being held for the production of income or as an investment does not qualify, if the asset is used predominantly in the business, then all such use is included when calculating the asset’s depreciable portion. Even if the asset does not pass the predominant-use test, the investment-use portion can still be depreciated, albeit by the straight-line method.

Qualified business use does not include:

  • Five percent owner use (this does not apply to aircraft used at least 25 percent of the time for qualified business use, not including five percent owner use) and
  • Employee use, unless for the convenience of the employer and required for employment.

Depreciation Recapture

When an asset initially passes the predominant-use test but then the personal use of the asset increases to 50 percent or more, a portion of the depreciation claimed is subject to recapture and income may need to be recognized.

The amount of depreciation recaptured is the accelerated depreciation allowed for the years preceding the recapture year, including any Section 179 expense, less the MACRS ADS depreciation amount that would have been allowed for the same period of time. You only need to recapture any Section 179 expense amount that was actually deducted. (Otherwise, reduce the Section 179 carryforward amount.)

Even if the asset is fully depreciated, depreciation may still need to be recaptured because the MACRS ADS recovery period is usually longer.

Recordkeeping

Although recordkeeping does not need to be contemporaneous, the following is required:

  • Substantiation must be adequate although no specific form of documentation is required,
  • Simplified recordkeeping is allowed whereby:
    • The amount of deductible vehicle expense may be computed using the standard mileage rate or a fixed mileage allowance (although any amount paid for unsubstantiated expenses must be returned),
    • The employer has a written policy statement that prohibits any personal use of the employer-provided vehicle except for commuting or
    • The taxpayer may record the use of the property for part of the year, as a representative sampling and establish a percentage of business use for the entire year.

Conclusion

Property acquired by a business that lends itself to personal use as well as business use must be properly tracked. Only the business/investment-use portion of an asset may be depreciated. When the business use is not more than 50 percent, straight-line depreciation, generally over a longer recovery period, must be used and no Section 179 expense may be claimed on it. “Luxury vehicles” are limited to a maximum amount of annual depreciation.

Remember that fixed assets management software is a valuable tool for tracking and correctly depreciating listed property.

 

Nancy Faussett, CPA, has over 25 years of tax accounting experience. With BNA Software since October 2001, Nancy serves as in-house expert on fixed assets, depreciation, and various areas of corporate and individual income taxation. Author of the Best Depreciation Guide for Best Software (now Sage), Nancy has also been published in Strategic Finance and the ACT Journal. Previously she was vice president of tax preparation for General Business Services and later worked as a depreciation and tax specialist for Best Software.