42.10 Computers and Other Listed Property

“Listed property” is a term applied to certain equipment that may be used for personal and business purposes. For such property, the law allows bonus depreciation (42.21), first-year expensing (42.3) or accelerated MACRS (42.5) deductions only if business use exceeds 50%. For business use of 50% or less, you must use ADS straight-line depreciation (42.9). Deductions for listed property are claimed on Part V of Form 4562. If the more-than-50%-business-use test is met in the first year and first-year expensing or accelerated MACRS is claimed, but business use of listed property falls to 50% or less during the ADS straight-line recovery period (42.9), you must “recapture” first-year expensing, bonus depreciation and accelerated MACRS deductions; see Example 2 below.

What is “listed property”?

Listed property includes passenger autos and other transportation vehicles (43.4), computers and peripheral equipment, boats, airplanes, and any photographic, sound, or video recording equipment that could be used for entertainment or recreational purposes. However, exceptions remove some items from the listed property category for many businesses. Listed property does not include (1) any computer or peripheral equipment that you own or lease that is used exclusively at a regular business establishment, and (2) photographic, phonographic, communications, or video equipment used exclusively and regularly in your business or regular business establishment. A home office that meets certain requirements (40.12) is considered a regular business establishment.

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image Caution
Depreciation Restrictions for a Computer
If you use a home computer for business but not in a qualified home office (40.12), it must be used more than 50% of the time for business to claim bonus depreciation or a first-year expensing deduction. If used 50% or less for business, straight-line depreciation over the ADS recovery period is required.
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EXAMPLES
1. You buy a computer in 2012 and use it exclusively in your regular business office. The computer is not listed property. You may claim bonus depreciation (42.21), first-year expensing (42.3) or accelerated MACRS depreciation (42.5) for your investment on Form 4562. If business use falls to 50% or less after 2012, the only deduction subject to recapture is the first-year expensing deduction (42.3).
2. You have no regular business establishment and use a computer bought in 2012 as a freelance consultant. The computer is listed property and you may claim bonus depreciation, first-year expensing, or MACRS depreciation only if you use the computer more than 50% for business. If business use does not exceed 50%, you may only claim ADS straight-line depreciation (42.9). Your deductions are claimed in the section for “Listed Property” on Form 4562.

Deductions subject to recapture.

If business use of listed property exceeds 50% in the first year but in a later year drops to 50% or less, bonus depreciation, MACRS and any first-year expensing deduction are subject to “recapture.” In the year in which business use drops to 50% or less, you recapture the excess of (1) the MACRS, bonus depreciation, and first-year expensing deductions claimed in prior years over (2) the deductions that would have been allowed using ADS straight-line depreciation (42.9). For the rest of the recovery period, you continue to use the alternative straight-line rate.

Recapture is figured on Form 4797. The recapture computation follows the steps shown in 43.10 for recapture of excess depreciation on an automobile.

Investor’s use of a computer.

For an investor who uses a home computer for managing an investment portfolio, the computer is treated as listed property. Unless the computer is also used for business, and the computer time spent on business work exceeds 50% of the total, only straight-line depreciation may be claimed; neither first-year expensing nor accelerated MACRS is allowed. Although the investment use is disregarded for purposes of the more-than-50%-business-use test, the investment use is combined with the business use for purposes of determining the percentage of depreciable cost. Depreciable investment use must relate to managing investments that produce taxable income. See the Examples below.

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image Planning Reminder
Computer Software
Software purchased “off the shelf” and used for business or investment purposes qualifies for first-year expensing in 2003–2012. If not expensed, it is depreciable over a three-year period provided it has a useful life exceeding one year. If the useful life does not exceed one year, the cost is immediately deductible. Also see 42.18.
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EXAMPLES
1. In 2012, Jane Adams buys a computer; she uses it 10% of the time for personal purposes, 50% of the time to manage her stock investments and 40% in a part-time research business. The more-than-50%-business-use test is not met for claiming first-year expensing, bonus depreciation or accelerated MACRS deductions. She must use ADS straight-line depreciation over five years (42.9); her depreciable basis is 90% of cost.
2. Assume that Jane used the computer 60% of the time for business and 30% for investment. As business use exceeds 50%, she may claim bonus depreciation (42.21) or first-year expensing (42.3). If she instead claims accelerated MACRS, the MACRS rate is applied to 90% of her cost.

Leasing a computer.

You may deduct the portion of your lease payments attributable to business use. However, if business use is 50% or less for any year, you must report as income an amount based on the fair market value of the unit, the percentage of business plus investment use, and percentages from two IRS tables shown in Publication 946.

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