Code Sec. 280F depreciation deduction limitations have two major components. First, there are limitations for passenger automobiles which are labeled as “luxury” automobiles in the Code.1 Second, there are limitations for “listed property” (which includes passenger automobiles) when business use of the property is not greater than 50%.2 The principle provisions are discussed below.
The Code Sec. 280F limitations were enacted because Congress believed that incentives from accelerated cost recovery should be directed to capital formation rather than to subsidize the personal use of business assets by taxpayers. It was concerned that many taxpayers were recharacterizing personal use of assets as business use. That practice tends to undermine public confidence in the fairness of the tax laws.3
Passenger automobiles (“luxury” automobiles). Code Sec. 280F limits the annual deductions for MACRS depreciation for “passenger automobiles” (defined at ¶ L-10003 ). 4 Amounts expensed under the Code Sec. 179 election ( ¶ L-9900 et seq.) are treated as depreciation deductions for purposes of these limitations.5 These limitations are applied before the Listed property limitations below,6 as well as before any other reduction in Code Sec. 168 depreciation deduction by reason of any use not qualifying property for the applicable credit or deduction.7 The rules for passenger automobiles are discussed at ¶ L-10008 et seq.
Listed property. Generally, “listed property” includes passenger automobiles and other property used for entertainment or recreation (full definition at ¶ L-10002 ). 8 Code Sec. 280F provides that listed property not predominantly used for a trade or business under the qualified business use test (see below) must be depreciated under the Alternative Depreciation System (ADS, ¶ L-9400 et seq.). 9The ADS requires, among other things, the use of straight-line depreciation.10
RIA observation: Other than the rules for passenger automobiles, Code Sec. 280F does not provide special limits on depreciation deductions (or expense elections) for listed property used more than 50% for a trade or business.
The rules for listed property are discussed at ¶ L-10023 et seq.
Two different measurements of business use. Code Sec. 280F utilizes two different tests that each are based upon the types of use of property. Listed property is tested under the “qualified business use” test, where property is treated as predominantly used in a qualified business use (trade or business) for any tax year if the business use percentage (which excludes use for Code Sec. 212 production of income) for the tax year exceeds 50%.11
RIA observation: In other words, if property is not used for qualified business use more than 50% of the time, it is depreciated under the ADS.
Listed property also is tested under the “business/investment use” test that will reduce allowable depreciation deductions according to the proportion of any personal use of the property.12
RIA illustration: In Year 1, taxpayer uses listed property 75% in a trade or business, 15% for Code Sec. 212 production of income, and 10% for personal purposes. Assume the depreciation deduction for the listed property for Year 1 would be $1,000 before any reduction for personal use. Due to the personal use, taxpayer is only allowed a depreciation deduction for the listed property in Year 1 of $900 (90% of $1,000).
RIA observation: The Code Sec. 179 expensing rules also provide a requirement that property be used more than 50% for trade or business purposes in order to be eligible for an expensing election (discussed at ¶ L-9906 ).
The rules for the two business-use tests are discussed at ¶ L-10004 et seq.
Lessors and lessees. For any person regularly engaged in the business of leasing “listed property” (a lessor), the limitations summarized above do not apply to property they held for leasing.13 Instead, tax benefit limitations are applied to the lessee of listed property (under a lease of 30 days or more) by requiring the lessee to include in income an amount that effectively puts the lessee in the same position as if the lessee had purchased the passenger automobile or other listed property.14 The applicable income inclusions for lessees are determined from IRS tables. The rules for lessors and lessees of listed property are discussed at ¶ L-10200 et seq.
Recapture. For any tax year of its recovery period, except the first, a reduction of the qualified business use of listed property from more-than-50% to 50%-or-less will trigger recapture of MACRS depreciation (in excess of straight-line) previously taken15 and the expense election deduction previously claimed16 with respect to the listed property. For the rules on recapture due to reduced business use, see ¶ L-10023 ; ¶ L-10026 ; ¶ L-9935 .
RIA observation: The depreciation limitations and the expense election limitations of Code Sec. 280F apply only to taxpayers who use passenger automobiles and other listed property in their trade or business. Taxpayers who use this property as employees of a trade or business (see ¶ L-10025 ) may be subject to the “fringe benefit rules” (discussed at ¶ H-1050 et seq.) rather than to the rules summarized above.
For property placed in service before Jan. 1, 1991, 17 Code Sec. 280F contained limitations related to the investment tax credit under former Code sec. 46.18