Listed property, sometimes called mixed-use property, is property that has both personal and business uses, such as:
- computers and peripheral equipment, and
- sound, video, and photographic recording equipment
- entertainment, recreational and amusement property,
- passenger automobiles,
- any other property specifically included by the tax code.
Because there is often abuse in trying to qualify personal equipment as business equipment or claiming a larger percentage of business use than the actuality, the IRS has strict rules that apply to listed property. However, tax law makes certain exceptions for some equipment. For instance, the Small-Business Jobs Act of 2010 removed cell phones from the listed property category for tax years 2010 and thereafter. However, property used in a regular business establishment, such as a home office, is not considered listed property, even if it would be considered as such if used outside of a business establishment.
If listed property is used for more than 50% in a business, then any depreciation method available for business property is available for the listed property, including bonus depreciation, first-year expensing, and the modified accelerated cost recovery system. However, if the property is not used more than 50% for business, then the straight-line recovery method under the alternative depreciation system (ADS) must be applied to the business percentage use of the property to claim depreciation deduction.
Under the ADS method, depreciation is claimed on the business portion of the listed property's tax basis, which is usually its cost, including taxes.
Example 1 — ADS Depreciation of Listed Property
If you buy a computer at a cost of $1,000 that is only used for business 40% of the time, then only 40% of the cost of the computer, or $400, can be depreciated. Since the computer is 5-year property under ADS, the tax basis is divided by 5, and assuming that the half-year convention applies, only half of the year of depreciation can be claimed for the 1st and last year of the depreciation period.
So, if the computer cost $1000 and is used 40% for business, then $400 can be depreciated over a total 6 years.
|Year||ADS % Rate||Deduction|
The deductions for listed property are claimed on Form 4562, Depreciation and Amortization (Including Information on Listed Property), under the section for Listed Property.
If property satisfies the business use test when it is 1st placed in service, but the business use drops to 50% or less, then any accelerated depreciation — §179 first-year expensing, bonus depreciation, or MACRS depreciation is subject to recapture. The amount of recapture claimed is equal to the excess of the claimed depreciation over the depreciation that would have been allowable under ADS, which is the excess cost recovery that must be included as ordinary income. The ADS system must then be used to depreciate the property over its remaining life.
Excess Cost Recovery = Claimed Depreciation – ADS Depreciation
Recapture is calculated on Form 4797, Sales of Business Property (Also Involuntary Conversions and Recapture Amounts under Sections 179 and 280F(b)(2)).
Example 2 — Calculating Excess Cost Recovery
You buy a digital SLR camera for $1000 that is used initially for business 60% of the time. Therefore, $600 (= $1000 × 60%) of the cost can be depreciated. You choose to use first-year expensing and deduct the entire $600. In the 3rd year, your business use drops to 40%. Under the ADS, any personal property that does not have a statutory class life (a class life defined in tax law) must use a recovery period of 12 years. To calculate the cost recovery, you must use the ADS recovery table based on the 60% use initially claimed. Using the half-year convention, the 60% business-use table for the camera is:
- ADS Depreciation for 1st 2 years = $25 + $50 = $75
- Excess Cost Recovery = $600 – $75 = $525
So you must add $525 to your gross income for the taxable year, which is reported as Other Income on your business return, which, for most business owners, is Schedule C, Profit or Loss from Business. Then, based on a depreciation schedule for $400 (= $1000 × 40%), you can only deduct $33 for the current year and, assuming that the business-use percentage remains at 40%, you can deduct $33 for the next 9 years, then $17 in the final year:
Special treatment applies to the use of a computer for managing investments. To apply the favorable depreciation rates applicable to property that satisfies the business use test, only the business percentage determines whether the business use test is satisfied. However, whether the computer is used most of the time for business or not, depreciation is claimed on the cost of the computer multiplied by the sum of the business use and the investment use.
Example 3 — Depreciating a Computer Used for Business and for Managing Investments
You buy a computer for $1000.
Case 1: You use it 50% business and 30% for managing your investments and the remaining 20% of the time is used for personal reasons. Since business use is not more than 50%, none of the accelerated depreciation methods can be used to depreciate the property — only ADS depreciation can be used. However, the basis for depreciation is $800, since that is 80% of the combined business and investment use for the property.
Case 2: Your business use of the computer is 60% while your investment use is 20%. Therefore, you can use any of the depreciation methods to depreciate 80% of the cost of the computer.
There are additional restrictions on depreciating a passenger automobile placed in service after calendar year 2002, under IRC §280F, even if the automobile is used more than 50% of the time for business. See Actual Expense Method for Deducting Car and Truck Expenses for more details.