Publication 946 |
2000 Tax Year |
Leased Property
The following discussion covers the rules that apply to the lessor
(the owner of the property) and the lessee (the person who rents the
property from the owner).
This section does not cover the rules for leasing a passenger
automobile. For those rules, see Leasing a Car in
Publication 463.
Lessor
The predominant use test (discussed earlier under Applying the
Predominant Use Test) and the limits on depreciation for
passenger automobiles (discussed later under Special Rule for
Passenger Automobiles) generally do 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.
Lessee
A lessee of listed property (other than passenger automobiles)
leased after 1986 must include an inclusion amount in gross income for
the first tax year the property is not used predominantly in a
qualified business use. For information on listed property leased
before 1987, see Publication 534.
The inclusion amount for leased listed property is the sum of
amount A and amount B.
Amount A.
Amount A is the product of the following:
- The fair market value of the property,
multiplied by
- The business/investment use for the first tax year the
business use percentage is 50% or less,
multiplied by
- The applicable percentage from Table A-19 in Appendix
A.
Amount B.
Amount B is the product of the following:
- The fair market value of the property,
multiplied by
- The average of the business/investment use for all tax years
the property is leased that precede the first tax year the business
use percentage is 50% or less, multiplied by
- The applicable percentage from Table A-20 in Appendix A.
The fair market value 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, the lessee must treat that amount
as the fair market value.
The average business/investment use of any listed property is the
average business/investment use for the first tax year the business
use percentage is 50% or less and all prior tax years the property is
leased.
Inclusion Amount Worksheet
The following worksheet is provided to help you figure the
inclusion amount for leased listed property.
Inclusion Amount
Worksheet for
Listed Property (Leased)
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, 1998, 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. Because Larry does not use
the computer at a regular business establishment, it is listed
property. His qualified business use of the property is 80% in 1998,
60% in 1999, and 40% in 2000. He must add an inclusion amount to gross
income for 2000, the first tax year he does not use the computer more
than 50% for business. The computer has a 5-year recovery period under
both GDS and ADS. Because 2000 is the third tax year of the lease, the
applicable percentage from Table A-19 is -19.8%. The applicable
percentage from Table A-20 is 22.0%. Larry uses the Inclusion
Amount Worksheet for Listed Property (Leased) to figure the
amount he must include in income for 2000. His inclusion amount is
$224, which is the sum of -$238 (Amount A) and $462 (Amount B).
Inclusion Amount
Worksheet for
Listed Property (Leased)
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 |
Special rules.
The lessee adds the inclusion amount to gross income in the next
tax year if all the following apply.
- The lease term begins within 9 months before the close of
the lessee's tax year.
- The lessee does not use the property predominantly in a
qualified business use during that portion of the tax year.
- The lease term continues into the lessee's next tax year.
The lessee determines the inclusion amount by taking into
account the average of the business/investment use for both tax years
and the applicable percentage for the tax year the lease term begins.
If the lease term is less than one year, the amount included in
gross income is the amount that bears the same ratio to the additional
inclusion amount as the number of days in the lease term bears to 365.
The lease term for listed property other than
residential rental or nonresidential real property includes options to
renew. You treat 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 as one lease.
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.
Example 1.
On August 1, 1999, 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 the ADS method. The lease is for 5
years. Her qualified business use of the property is 50% in 1999 and
90% in 2000. She pays rent of $3,600 for 2000 of which $3,240 is
deductible. She must include $147 in gross income in 2000. The $147 is
the sum of Amount A and Amount B. Amount A is $147 ($10,000 x
70% x 2.1%), the product of the fair market value, the average
business use for 1999 and 2000, and the applicable percentage for year
one from Table A-19. Because the applicable percentage for year one
from Table A-20 is 0%, Amount B is zero.
Example 2.
On October 1, 1999, 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 the ADS method. The lease term is 6
months (ending on March 31, 2000) during which he uses the property
45% in business. He must include $71 in gross income in 2000. The $71
is the sum of Amount A and Amount B. Amount A is $71 ($15,000 x
45% x 2.1% x 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. Because the applicable percentage for year one from
Table A-20 is 0%, Amount B is zero.
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