Maximize Deductions on Listed Property: Tax Rules & Depreciation

What Is Listed Property?

Listed property is tangible assets used for both business and personal purposes. It's property such as vehicles and entertainment or recreation property. It requires careful record-keeping to qualify for tax deductions. Assets used more than 50% for business purposes can benefit from special tax deductions, such as Section 179, which provide significant financial incentives for businesses. Depreciation also depends on usage; property with over 50% business use is eligible for more favorable methods. Accurate and extensive records are essential to substantiate business use of listed property; failure to do so may impact the eligibility for deductions and require depreciation recapture.

Impact of Listed Property on Taxes and Accelerated Depreciation

A business can own listed property for mixed use. If used over 50% for business, it qualifies for special deductions or depreciation rules. "More than 50%" refers to time, vehicle mileage, or other relevant metrics.

The listed property rules were introduced to prevent people from claiming tax deductions for personal property under the pretense that it was being used in a business or trade. Businesses must maintain "adequate records" of their listed property as per IRS requirements. This includes its purchase price and any repair or maintenance costs, as well as evidence to substantiate its business use.

IRS-Defined Types of Listed Property

In its annually updated Publication 946: How to Depreciate Property, the IRS provides a long list of items that it classifies as listed property. Examples include:

• Passenger automobiles, defined as "any four-wheeled vehicle made primarily for use on public streets, roads, and highways and rated at 6,000 pounds or less of unloaded gross vehicle weight (6,000 pounds or less of gross vehicle weight for trucks and vans)."
• Any other property that is used for transportation, except for what the rules refer to as "qualified nonpersonal use vehicles" or "excepted vehicles." Those are vehicles that are unlikely to be used much, if at all, for personal purposes and include police and fire vehicles, ambulances, hearses, school buses, moving vans, and various types of trucks and tractors.
• Property that the IRS says is "generally used for entertainment, recreation, or amusement (including photographic, phonographic, communication, and video recording equipment)."

Cell phones and similar personal telecommunications devices were once considered listed property. But Congress changed that in 2010. They can still be written off as a business expense to the extent that they are used for business, but they are no longer subject to the stricter record-keeping requirements of listed property.

Strategies to Maximize Listed Property Write-Offs

During annual tax filing, businesses can write off tangible property costs through deductions or depreciation methods. 

Unlocking the Power of Section 179 Deduction

Listed property that meets the requirement of more than 50% business use is eligible for a Section 179 tax deduction.

Section 179 lets businesses write off most costs in the year of service instead of over time. Often that will mean the same year as it was purchased.

The IRS sets limits on how large a Section 179 deduction businesses can take in any given year. In 2023, the deduction was capped at $1.16 million; in 2024, it was capped at $1.22 million. In addition, certain types of property may be subject to their own maximums. For example, the maximum Section 179 deduction for sport utility vehicles is $28,900, again for tax years beginning in 2023.

In addition, a Section 179 deduction cannot exceed your taxable business income for the year. Any remaining amount after the deduction can still be depreciated.

You can't, of course, write off the entire cost of an asset if you use it for business only a portion of the time. Instead, that use must be prorated as a percentage. The IRS offers this simple example:

"May Oak bought and placed in service an item of section 179 property costing $11,000. May used the property 80% for business and 20% for personal purposes. The business part of the cost of the property is $8,800 (80% (0.80) × $11,000)."

Maximizing Depreciation Benefits for Listed Property

Listed property can also be depreciated over time. Property that meets the "more than 50%" test is eligible for the general depreciation system (GDS), an accounting method that allows it to be written off more quickly, with larger deductions in the early years. If business use is 50% or less, use ADS for longer, evenly spread deductions.

Listed property used over 50% for business may qualify for bonus depreciation. It allows taxpayers to write off an even greater amount during the first year. This allowance applies only to "qualified property" that was purchased and placed in service after Sept. 27, 2017 and before Jan. 1, 2023. The allowance started at 100% in 2022 and is declining by 20% each year until it reaches 0% in 2027. Listed property that is used 50% or less for business is considered "excepted property" and not eligible.

Criteria and Exceptions for Business Use of Listed Property

You can claim the Section 179 deduction if the property meets the business-use requirement. To qualify, the listed property must be used mostly (over 50%) for business purposes. If the property does not meet this requirement, it will not qualify for the deduction and straight-line under MACRS must be used.

There is an exception for leased property: the business-use requirement does not apply to listed property leased or held for leasing by someone regularly engaged in the business of leasing listed property. To be considered regularly engaged in leasing, you have to enter into leasing contracts frequently over a continuous period, so it has to reflect the normal nature of your business. Occasional or incidental leasing does not qualify.

For example, leasing just one passenger automobile in a tax year does not constitute being regularly engaged in the business of leasing automobiles. However, rotating leases that span a fleet of vehicles may. Similarly, an employer charging an employee for the personal use of the employer's property is not considered regularly engaged in leasing the property.

How to Calculate Business Use Percentage for Listed Property

To check business-use eligibility, divide a property's use among different purposes during the year. For cars and other transportation, use mileage to figure this out. Find the percentage of business use by dividing the miles driven for business by the total miles driven during the year.

For other items, use the actual time the property is used, not just available. For example, calculate the business use percentage by dividing the hours used for business by the total hours used during the year. Only count activities like entertainment or amusement as business use if you can deduct the expenses as necessary business costs.

Remember that commuting or traveling to work does not count as business use, even if you work during the trip. A business call made during commuting or on a personal trip does not change the trip to business travel. If someone else uses your car, it’s not business use unless it’s directly connected with your business, reported as income, or you are paid fair rent. Employee use of property is considered business use only if it is required for the job and the employer's convenience.

The Bottom Line

Listed property includes tangible assets used for both business and personal purposes, subject to specific IRS rules. To qualify for favorable tax treatment, including Section 179 deductions and bonus depreciation, the property must be used more than 50% for business.

Maintaining accurate records to document business use is essential to meet IRS requirements. By understanding these guidelines and tracking usage carefully, businesses can maximize deductions, manage depreciation effectively, and get the most financial benefit from their assets.