June, 2009 Tax Newsletter
Business Deductions for Listed (Mixed Use) Property
“Listed” property in general is property that, by its nature, lends itself to both personal and business use. Often it is referred to as “mixed use” property (although in some cases mixed use property may not be synonymous with listed property). The more common types of listed property are passenger cars, computers, and cell phones. If you own a business your combined expenses related to this property is likely to be rather substantial and, accordingly, nearly every audit of a business will involve your substantiation of one or more of these deductions. Therefore, it is incumbent upon you, the taxpayer, to understand and comply with the rules relating to listed property.
Most professionals report business deductions for use of their automobiles, lap-top computers, and cell phones. Often the deductions are based upon estimates rather than actual usage logs. For normal ordinary and necessary business expenses approximations are acceptable if there is other credible evidence of the amount of the expenses on which approximations of the true amounts can be made. However, for most property that can be used for both business and personal purposes the use of estimates to document business use is not acceptable. Automobiles, lap top computers, and cell phones are all listed property and must adhere to rather stringent substantiation requirements. These include substantiating the amount of the expenditure or use, the time and place of the expenditure or use, and its business purpose.
An expenditure or use can be substantiated by a written log or a sampling supported by credible evidence. For example, a taxpayer who is an outside salesperson who typically calls on his accounts at the same time every month could maintain a log to determine the business use of his car for the first month of the year and then use that percentage for the entire year. Similarly, with a cell phone the taxpayer could note from his phone bill the time, amount, and place of all calls for the first week of the month, determine the business percentage of those calls and apply that percentage to the entire year. In either of these examples, if the taxpayer can establish by reasonable evidence that the months used for the samples were “typical” business months, his deductions would, in all likelihood, be allowed.
If listed property is acquired and placed in service during the year, it must be used more than 50% for business in order to claim a section 179 (write-off of the business portion) deduction. If the property is used less than 50%, the asset must be depreciated under a straight line method.
Bottom Line: In the land of the blind, the one-eyed man is king! He who estimates his listed property deductions is blind; he who is diligent about his record keeping and substantiation is the one-eyed man. If you are blind you are the prey for the IRS.
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