Publication 946 |
2000 Tax Year |
Predominant Use Test
Words you may need to know (see Glossary):
- Business/investment use
- Commuting
- Fair market value (FMV)
- Placed in service
- Recovery period
- Straight line method
If you do not use listed property predominantly (more than 50%) in
a qualified business use, you cannot take a section 179 deduction for
the property and you must depreciate the property using ADS (straight
line method) over the ADS recovery period.
Listed property meets the predominant use test for any year if its
qualified business use is more than 50% of its total use. You must
allocate the use of any item of listed property used for more than one
purpose during the year among its various uses. You cannot use the
percentage of investment use of listed property as part of the
percentage of qualified business use to meet the predominant use test.
However, you do use the combined total of business and investment use
to figure your depreciation deduction for the property.
Property does not stop being predominantly used in a qualified
business use because of a transfer at death.
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.
Because she does not use the computer more than 50% for business, it
does not meet the predominant use test. Because it does not meet the
predominant use test, she cannot elect a section 179 deduction for
this property. Her combined rate of business/investment use for
determining her depreciation deduction using ADS is 90%.
Example 2.
If Sarah in Example 1 uses her computer 30% of the time to manage
her investments and 60% of the time in her consumer research business,
her property meets the predominant use test. She can elect a section
179 deduction. Her combined business/investment use for determining
her depreciation deduction using GDS is 90%.
Qualified Business Use
A qualified business use is any use in your trade or business.
However, it does not include the following.
- The use of property held merely to produce income
(investment use).
- The leasing of property to any 5% owner or related
person (to the extent that the property is used by a 5% owner or
person related to the owner or lessee of the property).
- The use of property as pay for 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. See Employees,
later.
5% owner.
Generally, a 5% owner is any person who owns more than 5% of the
capital or profits interest in the business.
A 5% owner of a corporation 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 person.
A related person is anyone related to a taxpayer as discussed in
chapter 2 in Related persons under Nonqualifying
Property.
Entertainment Use
Treat the use of listed property for entertainment, recreation, or
amusement purposes as a qualified 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.
Leasing or Compensatory
Use of Aircraft
If at least 25% of the total use of any aircraft during the year is
for a qualified business use, treat the leasing or compensatory use of
the aircraft by a 5% owner or related person as a qualified business
use.
Commuting
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 or user's trade or business does not convert an
otherwise personal use into business use.
Use of Your Passenger
Automobile by Another Person
If someone else uses your automobile, do not treat that use as
business use unless one of the following 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).
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. Because the use of the automobile is pay for the performance of
services by a "related person," the use of the company automobile
is not a qualified business use. See Qualified Business Use,
earlier.
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 which its employees
use for business purposes. The employees are also allowed to take the
automobiles home at night. The fair market value of the use of an
automobile for any personal purpose, such as commuting to and from
work, is reported as income to the employees 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.
Employees
Any use by an employee of his or her own listed property (or listed
property rented by an employee) in performing services as an employee
is not business use unless both the following apply.
- The use is for the employer's convenience.
- The use is required as a condition of employment.
Employer's convenience.
Whether the use of listed property is for the employer's
convenience must be determined from all the facts. The use is for the
employer's convenience if it is for a substantial business reason of
the employer. The use of listed property during the employee's regular
working hours to carry on the employer's business is generally for the
employer's convenience.
Condition of employment.
Whether the use of listed property is a condition of employment
depends on all the facts and circumstances. The use of property must
be required for the employee to perform duties properly. The employer
does not have to explicitly require the employee to use the property.
However, a mere statement by the employer that the use of the property
is a condition of 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 can usually 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 a required condition
of employment.
Employee deductions.
Employees who meet the requirements for the use of listed property
for both the employer's convenience and as a condition of employment
can deduct depreciation, or rental expenses, for the business use of
that property. Employees should report their expenses on Form 2106 or
Form 2106-EZ and attach it to their individual income tax returns.
Method of Allocating Use
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 items of listed property, allocate the property's use on
the basis of the most appropriate unit of time. For example, you can
determine the percentage of business use of a computer by dividing the
number of hours 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.
Applying the
Predominant Use Test
You must apply the predominant use test for an item of listed
property each year of the recovery period. For example, if you place
an item of listed property in service this year, you must apply the
predominant use test for that property each year of the recovery
period.
First Recovery Year
If you do not use an item of listed property predominantly in a
qualified business use in the year you place it in service, the
following rules apply.
- You cannot claim a section 179 deduction for the
property.
- You must use ADS to figure depreciation on the property.
As discussed earlier in chapter 3
under When To Use ADS,
using ADS means that you must figure your depreciation deduction
using the straight line method over the ADS recovery period.
The required use of the straight line method for an item of listed
property that does not meet the predominant use test is not the same
as electing the straight line method. It does not mean that you have
to use the straight line method for other property in the same class
as the item of listed property.
Example.
On July 1, James Wand bought and placed in service a computer,
which is 5-year property, costing $4,000. During the year, he uses the
computer 40% for qualified business use, 30% for investment purposes
(to produce income), and 30% for personal use. James's computer is
listed property because it is not used at a regular business
establishment. Because the qualified business use is only 40%, he
cannot elect any section 179 deduction and must use ADS to figure
depreciation. Under ADS, he figures his depreciation deduction for the
year using the straight line method over the ADS 5-year recovery
period. To determine his deduction, he must first determine the
business/investment portion of his property cost. He does this by
multiplying the total cost by the combined business/investment use
percentage ($4,000 x 70%). He then figures his depreciation
deduction for the year. He refers to Table A-8 and obtains the
first-year rate of 10% using the half-year convention. He then
multiplies the combined business/investment portion of the cost by the
first-year straight line rate ($2,800 x 10%). The result is his
depreciation deduction for the year, $280.
Years After the
First Recovery Year
If, in a year after you place an item of listed property in
service, you fail to meet the predominant use test for that item of
property, you may be required to recapture part of the section 179 and
depreciation deductions claimed. You will also be required to figure
your depreciation using the straight line method over the ADS recovery
period.
Recapture of excess depreciation.
For the first tax year you no longer use the property predominantly
in a qualified business use, you must include any excess depreciation
in both of the following.
- Your gross income.
- The adjusted basis of your property.
Excess depreciation is the result of the following.
- The depreciation allowable for the property (including any
section 179 deduction claimed) for years before the first year you did
not use the property predominantly in a qualified business use,
minus
- The depreciation that would have been allowable for those
years if you had not used the property predominantly in a qualified
business use for the year you placed it in service. This means you
figure your depreciation using the straight line method over the ADS
recovery period.
For information on investment credit recapture, see the
instructions for Form 4255.
Example.
On June 25, 1996, Ellen Rye purchased and placed in service a
pickup truck that cost $18,000. The pickup truck had a gross vehicle
weight of 7,000 pounds. She used it only in a qualified business use
for 1996 through 1999. Because the pickup truck weighed over 6,000
pounds, it was not subject to the limits that apply to passenger
automobiles as discussed later under Special Rule for Passenger
Automobiles. Ellen claimed a section 179 deduction of $10,000
based on the purchase of the truck. She began depreciating it using
200% DB over a 5-year GDS recovery period. If, during 2000, she had
used the truck 50% for business and 50% for personal purposes, she
would include $4,018 excess depreciation in her gross income. The
excess depreciation would be determined as follows.
Total section 179 deduction ($10,000) and
depreciation claimed ($6,618). Depreciation is from Table A-1. |
$16,618 |
Depreciation allowable (Table A-8): |
1996 - 10% of $18,000 |
$1,800 |
1997 - 20% of $18,000 |
3,600 |
1998 - 20% of $18,000 |
3,600 |
1999 - 20% of $18,000 |
3,600 |
12,600 |
Excess depreciation |
$4,018 |
If her use of the truck did not change to 50% for business and 50%
for personal purposes until 2002, she would not have to include any
excess depreciation in income. This is because there would be no
excess depreciation. The total depreciation allowable using Table A-8
through 2002 would be $18,000 which equals the total depreciation plus
the section 179 deduction she claimed.
Previous| First | Next
Publication Index | IRS-Forms Main | Home
|