Larry uses the Inclusion Amount Worksheet for Leased Listed Property to figure the amount he must include in income for 2002. His inclusion amount is $224, which is the sum of - $238 (Amount A) and $462 (Amount B).

Lease beginning in the last 9 months of your tax year.   Add the inclusion amount to income in the next tax year if all the following apply.

• The lease term begins within 9 months before the close of your tax year.
• You do not use the property predominantly for qualified business use during that part of the tax year.
• The lease term continues into your next tax year.

Figure the inclusion amount by taking into account the average of the business/investment use for both tax years (line 2 of the Inclusion Amount Worksheet for Leased Listed Property) and the applicable percentage for the tax year the lease term begins. (Skip lines 6 through 9 of the worksheet and enter zero on line 10.)

Example 1.   On August 1, 2001, 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 ADS. The lease is for 5 years. Her business use of the property was 50% in 2001 and 90% in 2002. She paid rent of $3,600 for 2002, of which $3,240 is deductible. She must include $147 in income in 2002. The $147 is the sum of Amount A and Amount B. Amount A is $147 ($10,000 × 70% × 2.1%), the product of the fair market value, the average business use for 2001 and 2002, and the applicable percentage for year one from Table A-19. Amount B is zero.

Lease for less than one year.   If the lease term is less than one year and you do not use the property predominantly for qualified business use, the amount included in income is the inclusion amount (figured as described in the preceding discussions) multiplied by a fraction. The numerator of the fraction is the number of days in the lease term and the denominator is 365.

The lease term for listed property other than residential rental or nonresidential real property includes options to renew. If you have 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, treat them as one lease.

Example 2.   On October 1, 2001, 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 ADS. The lease term was 6 months (ending on March 31, 2002), during which he used the property 45% in business. He must include $71 in income in 2002. The $71 is the sum of Amount A and Amount B. Amount A is $71 ($15,000 × 45% × 2.1% × 182/365), 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. Amount B is zero.

Where to report inclusion amount.   Report the inclusion amount figured as described in the preceding discussions as other income on the same form or schedule on which you took the deduction for your rental costs. For example, report the inclusion amount as other income on Schedule C (Form 1040) if you took the deduction on Schedule C. (If you took the deduction for rental costs on Form 2106, report the inclusion amount as other income on Form 1040, line 21.)

Do the Passenger Automobile Limits Apply?

• Basis
• Clean-fuel vehicle
• Convention
• Placed in service
• Recovery period

The depreciation deduction, including the section 179 deduction and the special depreciation allowance (or Liberty Zone depreciation allowance), you can claim for a passenger automobile each year is limited. (For the definition of a passenger automobile, see What Is Listed Property, earlier.)

This section describes the maximum depreciation deduction amounts for 2002 and explains how to deduct, after the recovery period, the unrecovered basis of your property that results from applying the passenger automobile limit.

Exception for clean-fuel modifications.   The passenger automobile limits do not apply to any costs you pay to retrofit parts and components to modify an automobile to run on clean fuel. The limits apply only to the cost of the automobile without this modification.

Exception for leased cars.   The passenger automobile limits generally do not apply to passenger automobiles leased or held for leasing by anyone regularly engaged in the business of leasing passenger automobiles. For information on when you are considered regularly engaged in the business of leasing listed property, including passenger automobiles, see Exception for leased property, earlier, under What Is the Business-Use Requirement.

Maximum Depreciation Deduction

Determine the maximum depreciation deduction you can claim for a passenger automobile based on the date you placed the automobile in service. The maximum deduction amounts for most passenger automobiles for 2002 are shown in the following table.

If your business/investment use of the automobile is less than 100%, you must reduce the maximum deduction amount proportionately.

Example.   On April 15, 2002, Virginia Hart bought a new car for $15,000. She used the car only in her business. She files her tax return based on the calendar year. She does not elect a section 179 deduction. She claimed a special depreciation allowance of $4,500 (30% of $15,000). Under MACRS, a car is 5-year property. She placed her car in service on April 15 and used it only for business, so she uses the percentages in Table A-1 to figure her MACRS depreciation on the car. Virginia multiplies the $10,500 unadjusted basis of her car ($15,000 - $4,500) by 0.20 to get her MACRS depreciation of $2,100 for 2002. Her total depreciation for 2002 is $6,600 ($4,500 plus $2,100). This $6,600 is below the maximum depreciation deduction of $7,660 for passenger automobiles placed in service in 2002. She can deduct the full $6,600.

Electric Vehicles

The maximum depreciation deductions for passenger automobiles that are produced to run primarily on electricity are higher than those for other automobiles. The maximum deduction amounts for electric cars for 2002 are shown in the following table.

For more information on electric vehicles, see chapter 12 of Publication 535.

Depreciation Worksheet for
Passenger Automobiles

You can use the following worksheet to figure your depreciation deduction using the percentage tables. Then use the information from this worksheet to prepare Form 4562.

The following example shows how to figure your depreciation deduction using the worksheet.

Example.   On September 26, 2002, Donald Banks bought a new car for $18,000. He used the car 60% for business during 2002. He files his tax return based on the calendar year. Under GDS, his car is 5-year property. Donald is electing a section 179 deduction of $1,000 on the car and claims a special depreciation allowance. He uses Table A-1 to determine the depreciation rate. Donald's MACRS depreciation deduction is limited to $836, as shown in the following worksheet.