 Hello and welcome to this session in which we'll discuss the cost recovery of certain properties that we called listed properties. What is the term listed property or simply put listed property? It refers to tangible personal property that's used for both both personal and business purpose. And it has a high likelihood of being used for personal purpose. So what are we looking at here? Well, let's assume a camera. You might have a camera for your business where you take pictures for your product to advertise online. So you'll take pictures, you advertise online. It's being used for business purpose. Now also when you are in a social event with your friends, you also use this camera to take pictures for your own purpose enjoyment and list put on Facebook for your friends for your social connection to see. Well, guess what? This camera is being used for both personal use as well as business use. Same thing with a cell phone. It has you could use it for business. You could also use it for personal. So as far as cost recovery or depreciation is concerned, listed properties for tax purposes are a specific category of asset that are subject to special rules for depreciation. So this assets we have to follow specific rules when we depreciate them. Some examples of listed properties are passenger automobile, which is a vehicle. That's another listed property specifically. We're assuming it's less than 6,000 pounds. We'll talk about that later. Cameras, tripods, lenses that are related to a camera, cellular phones and other similar properties. So any asset that's being used for both personal can be used for personal and business at the same time. Now, for a long period of time, computer and its peripheral equipment were considered listed properties. By the end of 2017, they removed it because now they consider computer is basically a business property. Before we proceed any further, I have a public announcement about my company, farhatlectures.com. Farhat accounting lectures is a supplemental educational tool that's going to help you with your CPA exam preparation as well as your accounting courses. My CPA material is aligned with your CPA review course such as Becker, Roger, Wiley, Gleam, Miles. My accounting courses are aligned with your accounting courses broken down by chapter and topics. My resources consist of lectures, multiple choice questions, true-false questions as well as exercises. Go ahead, start your free trial today. How do we depreciate personal property? Well, it all depends on the usage of that personal property. If the personal property is not mainly used for business, pre-dominantly used for business, we have this term. If it's not, we cannot section, we cannot take section 179. We cannot take bonus depreciation. We cannot use makers. Hold on a second. Those are the three methods that we use for tax purposes. Well, guess what? We're going to go back to our favorite depreciation method and that's the straight line method. Now, remember, we'll use in the straight line method, but for the first year, we always assume half a rate. So if we're looking at an asset, how do we find out what's the straight line rate? So if we're looking at an asset with five year, we'll take one divided by five equal to 20%. So in year one, 20% except in year one, we multiply it by 50%. So year one is 10%. But the rate for year two is 20%, for year three, 20%, for year four, year five, 20%. And in year six, you will take the remaining 10%. So that's the rate. So if you're looking at a property of 10 years, what's the straight line rate? One divided by 10, which is equal to 10%. For year one, you multiply the rate by 50%. So for year one, it's 5%. Then it's 10, 10, 10, 10, all the way until year 10. Then year 11, you will take the additional 5%. What do we mean by predominantly used for business or mainly used for business? For something to be considered used for business, the business use of this asset has to be more than 50%. Now, how do we measure this 50% based on business use and production? So if we're using this asset, using and producing more than 50% and we can count this maybe a car through a mileage, an asset through its hours, how many hours we're spending on it or some sort of an output, we don't include the income in this test. So we don't say, well, it's generating more than 50% of our income. No, it's use, business use and production. So if the 50% test is met, it means we are using this asset more than 50% of the time for business. Because remember, any asset will have to be split between business and personal, business use and personal use. If the business use is more than 50%, well, it's predominantly business use, mainly business use. If that's the case, then we can use Maker with some limitation. We'll talk about the limitation later, which is the percentage of use and for vehicles, we have other limitations. If the asset is not used mainly for business, it means it failed the 50% test. So we're using it 70% personal, 30% business. Then we use the SSL straight line method, use the straight line method. What happened if the proportion of a business decline to 50% or less after the property has been put in service for a year? So you put an asset, it was for predominantly business purpose. Then a year or two later, it fell because you're no longer using it as much for business. What do we have to do? Well, we have to recapture any excess cost recovery. Don't worry, we'll work an example. So let's start with a simple example to illustrate the 50% concept with listed property. Maria puts a listed asset categorized under a five-year Maker's property class into a service August 3, 2022, with a cost of 10,000. She opt not to claim any extra first-year depreciation. When Maria uses the asset, 40% for business and 25% for income production, it is not considered primarily for business use. Why? Because for business purposes, it's only 40%. We don't count the income production in this test. Now, when we depreciate this asset, what percentage do we use? Since, well, it's not 50%, we're going to be using the straight line method. Now, what is the, how do we depreciate this? We're going to depreciate this at 26% usage. The straight line recovery method is applied and Maria's yearly cost recovery is 10,000 times 10%. Where is the 10% coming from? Remember, it's a five-year asset, one divided by five equal to 20%. The first year will take half of it, which is 10%. Multiply by 65%. Again, why 65%? Well, because we combine the 40% and the 25% for depreciation purpose, not for the 50% test. So, we can use the 25% for the depreciation calculation, not for the 50% test. Okay, keep that in mind. On the other hand, let's assume Maria employs the property 60% for business and uses 25% for income production. Well, here, what's the majority of the use? It's a business use. We surpass the 50% test. Well, what do we use now? Which method do we use? Well, now we have to use makers. We have to use makers. Why? Because we are using this mainly for business more than 50%. How do we compute makers? We're going to take 10,000 times the makers rate for five years, which is 20%, giving from the tables maker, times 85%. Why 85%? 60% plus 25%. So, for the depreciation, we do use the income production. So, for depreciation purposes, use the 85%, which is 60 plus 25%. For the 50% test, you cannot use the 25% production of income. I don't need anyway, because I'm already using the asset 60% of the time. Now, let's talk about a special type of listed property. And that's auto, auto vehicles, passenger auto, okay? Additional restrictions are applied to vehicles when it comes to cost recovery. Now, why? Why that's the case? Well, Congress says, look, I am not going to give you a deduction. What happened is this? If you are well off, what you can do is you can buy expensive vehicle. And what happened? And use this expensive vehicle for your business. Okay? Because you can afford it. And if you can afford it, most likely you're in a high tax bracket. So, you can get an expensive vehicle, enjoy the expensive vehicle, and get a good tax deduction. Because your tax rate is high, and what's happening is the government is subsidizing this vehicle. So, what happened is, because of these potential abuses, these monetary limits were established due to suspicious that tax system were utilized to subsidize vehicle that were excessively costly and necessarily costly and luxurious for the business. Therefore, say, okay, you want to buy an expensive vehicle, that's fine. But we're going to limit you. We're going to say how to deal with this luxury, autoluxury limit. Okay? In the context of tax purposes, a passenger automobile is defined as a four-wheeled vehicle, designed to use on public street roads and highway with unloaded gross vehicle weight, rating not exceeding 6,000 pounds. So, here we're looking at vehicles less than 6,000 pounds. Now, it's also important to note that this definition don't include vehicles used for transporting people or property for compensation. Like if this is your cab, those limits don't apply, including those are used for Uber or Lyft, if that's what you are doing, ambulances, trucks, and vans, because those are used for business purposes. Now, let's talk about the limit. Let's dive a little bit more into the limit. And I'm going to use the year 2023 as an example. You could be viewing this lecture in 2025, 2027. Those numbers will change. Just want to let you know, that's why I highlighted the year. But the concept is the same. The first year, you are limited to 12,200. The second year, 19,500. The third year, 11,700. The fourth in any future years is 6,960. Again, those will change. Now, if the car is mainly used for business, the first year recovery, you can add 8,000 to it. Therefore, the first year, you can take 20,200. They're trying to help you out if it's used for business. Also, low luxury auto limits must be adjusted for personal use. So, if you're not using it mainly for, if you're not 100% for business, then you have to take into account adjust the personal use. Now, the best way to illustrate this is to take a look at an example. And to look at an example, I'm going to take you to an Excel sheet because I'm going to be computing the makers table. It's important that you see the computation, how this is being done. So, let's move to the Excel sheet. Here, we're going to assume that Adam purchased a car and it cost Adam $65,000. A vehicle less than 6,000 pound. The business use is 80%. Therefore, the personal use is 20%. And we're looking for the sake of illustration the year 2023. And here are the limit, 12,200. The second year, 19,500. Third year, 11,700. Fourth year and subsequent year, 6,960. Now, we are using this, the vehicle is a five-year asset. So, the makers rate are year 120%, 32%, 19.2%, 11.52%, 11.52%, and year 6, 5.76%. Now, if you don't know what makers is, you want to go to the makers, mid-year convention and mid-quarter just to understand makers. Now, how do we compute, how do we compute the depreciation for this vehicle? So, it's a personal property and it's not being used for business 100%. How do we do that? Well, for the year 2023, let's compute makers. What is makers? Makers will take the cost times the rate, which is 20%. And the only thing different here is we have to adjust for business use times 80%. So, if we take 65,000 times 20%, times 80%, based according to makers, it's 10,400. Now, is this the answer? No, why? Because we are limited, when it comes to auto, we are limited. We are limited to what? Well, we are limited year one to 12,200. You might say, great, makers tells me it's 10,400, year one is 12,200. I should be able to take 10,400. And the answer is wrong. What you have to do, you have to take the first year limit that's given by the IRS and adjust it for 80%. Now we'll take 12,200 multiplied by 80%. We see that the recovery limitation, recovery limitation, recovery limitation is 9,760. How much depreciation are you allowed to take? You are allowed to take for year one, which is year 2023, 9,760, done for year one. How about year two? Well, let's compute makers for year two. Well, 65,000 times year two times 32% times what else? Times the business use 80%. If we do that, we come up with 16,640. Well, the limit for year two is 19,500. Well, we're good to go. No, not yet. We have to take the 19,000. We have to take the 19,500, subject this to an 80% business use. Which will give us 15,600. Therefore, we have to take 15, we're limited to 15,600. Well, and that's all we have to do for year three. Same concept year 2025. Here are the limit for year three. And this is the makers. I'm sure you can find the answers for this and this is what you do. So if it's less than the recovery limitation, for example, makers here is less than the recovery limitation. Therefore, we'll take makers. But we have to look at makers and look at the recovery limitation and choose the lower. The lower is recovery limitation. Lower is recovery limitation in year 2028. Makers happens to be smaller. So let's go back to the presentation. And this is what we did where I showed you how we computed this on Excel sheet. These are the limitation. Now, what happened if Adam keep using the scar beyond 2028? Okay. His cost recovery depreciation will be restricted to the lower of the recoverable basis or the recovery limitation, which is calculated for our purposes, 6,960. Because going after year four, multiplied by the business use 80%, 5568. Now for the purpose, how do we compute recoverable basis? So we have to know how to compute recoverable basis. In this context, the recoverable basis is calculated as if, as though the entire limitation was permitted regardless of whether it was or it was not. So when we compute the recoverable basis for this type of depreciation, we'll take 65,000 minus 12,200. What's 12,200? Year one limit. Remember, we did not take this much in year one, but this is what we do. We assume, we ignore, we ignore all the adjustments and we subtract 12,200 minus 19,500 minus 11,700 minus 69,60 minus 69,60, so on and so forth. So this is what we do for this purpose. Just be aware of that. Now also you have to be careful when you are doing computation for depreciation, partial depreciation, many students fall into this common mistake. Let me clarify it. Let's assume Noah begins using a pre-owned vehicle on April 2nd, which was purchased for 26,200. The vehicle is used 70% for business and 30% for personal. Well, what can we do now? First of all, which convention, which method do we use? Is it the SNL or is it makers? And we use makers. It's mostly a mostly business. So the allowable cost recovery is 3,668. How? 26,200 multiplied by 20% rate maker table multiplied by 70%. Here's what happened. Here's what happened. Some students, what they do, they will take 12,200 and they multiply it by 70%. No, you don't do that. You don't take 12,200 multiplied by 70%. The way you compute the depreciation, it's makers, you will take 26,200 times 20%, okay? 26,200 times 20%, that's the maker depreciation. And this happens to be 5,240, it's way below the limit. But you also have to reduce it by 70% to come up with the 3,680 times 70%, will give us 3,668, not 3,680. Now let's talk about a different type of vehicle and those are SUVs, sport utility vehicle. Certain SUVs are exempt from the luxury auto limitation since they are not categorized as passenger automobile. So remember we talked about the limitation, well the SUVs, they have special rules. These vehicles are subject though to a 28,900 limit on section 179. So when it comes to section 179, they are limited to that much, which is that's a lot anyway. Okay, the restriction is applicable to SUVs with gross vehicle weight exceeding 6,000 but less than 14,000. So we're talking about SUVs that has more than 6,000 pound, less than 14,000. Again, they are basically, we don't have to worry about the limits that we talked about earlier, year one, year two, year three, year four, like for the passenger. Now SUVs, let's look at an example. Let's assume Adam purchased this new white Range Rover and let's assume it's more than 6,000 pound less than 14,000. It happens to be 8 and Adam's using this 100% for business purposes. And Adam chose not to take the bonus depreciation. How much can Adam take in cost recovery for this vehicle? Starting with section 179, we can take 28,900. Then we apply makers. We chose not to use the bonus depreciation. This would have came next, but we chose not to. We're going to take 70,000 minus whatever we took for section 179. We're going to multiply this by 20%, which is the maker five year asset will give us 8,220 for a total amount of 37,120. Now also, Adam can choose the bonus depreciation and get the full deduction for this SUV. How? Well, they will take 128,900 for section 179 and they will take the remaining, the 41,100 bonus depreciation and get the full deduction. Now would Adam want to do that? Well, for tax planning, he may or may not want to do that. Listed property. What happened if listed property drops below or fails the 50% usage test? Well, listed property failing the 50% test upon placement must be recovered using which method? The straight line. No additional first year depreciation. We already talked about this. What happened if you initially placed the asset? It was more than 50%, then it dropped to less than 50%. Well, if you fail the greater than 50% after the property is in use, you will go back to the straight line for the remaining life of the asset at that point. Once you fail the test, then you are in straight line. Now cost recovery of passenger auto under the straight line listed property still subject to annual limits. So you're still subject to those limits. If you are dealing with a with an auto, a passenger auto. Let's look at an example. On July 7, John places in service an automobile that costs 15,000. The auto is used 40% for business, 60% for personal. Well, is it mostly business or personal? Personal. Which method do we use? The straight line method. We'll take 15,000 times 10% times 40%. Where's the 10% coming from? It's a five year asset. One divided by five will give me the straight line rate. The first year I only take half of it, which will give us 10%. Assume the automobile has a cost of 60,000 instead. Same concept. We will take 60,000 times 10% times 40%, which is 2,400. Remember, both computation, we still have to look at the limit. The limit. Remember, there's a limit. And what's the limit? The limit for year one for passenger auto is 12,200. We're dealing with an auto of 40%. The limit is 4,840, which we can take the 2,400. Remember, you cannot exceed the first year limit. So the straight line method is applicable irrespective of any future increase in the property business usage percentage beyond 50%. So once that's 50% is in, once that straight line is in, it will be used. So if the percentage of use exceeds that, well, we would still use the straight line. However, we'll increase the percentage of usage. Let's take a look at this. Assume in 2024, the business use became 260 and the person was 40. We would still be using the straight line. However, we're going to take 60,000 times. Remember, this is 2024, year two. Year two, remember the straight line method is every year is 20% after the first year times 60%. Notice all that we did is we change. So we're still using the SNL, the straight line method. However, we increase the business use percentage to 60, which is 7,200. 7,200 is less than the limit for year two, which is 19,500 multiplied by 60%. Remember, you always have to, when it comes to passenger auto, you have to compare this to the limit. And those limits will change from year to year. What happened if we change from business use back to personal use? Okay. So in the business usage of listed property drops to 50% or less after the property year of service, the property becomes subject to cost recovery recapture. Well, guess what? We're going to go back and do some computation and recover some cost. And we're going to recover that cost as ordinary income. Simply put, we took the deduction. We liked it. We enjoyed it. Now we're going to go back and recapture some of that deduction as ordinary income. Now, how do we recapture the excess amount of depreciation claimed in prior years through makers over the sum of permitted under the straight line? So that's the excess recovery. Simply put, you can look at how much you took for makers. Assume you use the straight line. Makers, it's going to be more than the straight line. And that excess amount, capture in your taxes for that year as ordinary income. Yike, right? So let's take a look at an example. On January 3rd, 2023, Adam acquired a new vehicle worth 30,000. The business usage was 80% in 2023, great business, mainly 70% in 2024, great business, mainly 40% in 2025. Whoops, we dropped below 50. Then we went up to 60% in 2026. Now, Adam chose not to take the first year depreciation. Let's look at the depreciation recapture that we have to do in the year 2025. So now we are standing at year 2025 when we dropped to 40%. So from the year 2023, here's what we have to do. We have to compute makers. How much makers we took? We took 30,000 times 20% from the maker five year table times 80% business use. We took 4,800. Remember, we always have to make sure we are, you know, we don't exceed the limit. The limit is 9,760. 4,800 is good for makers. What we do now, we have to compute as if we were using the straight line. If we were using the straight line, we'll take 30,000 times 10%. Again, I don't want to keep repeating how we're the 10% coming from times 80% for the straight line. We would use 2,400. The limit again, we're good with the limit. Now, in that year, in year 2023, we have to recapture 2,400 of access depreciation because makers was 4,800. The straight line was 2,400. We're not done yet. We have to go back. We have to go to 2024. Again, compute makers 30,000 times the maker rate makers rate of 32%, you know, five year class asset. If you don't know where this is coming from, it's a five year class asset makers. If not, go to my makers cost recovery lecture times 70%. The answer for makers for the year was 6,720. We're below the limit. We don't have to worry about the limit. Now we'll do the same computation using the straight line 30,000 times 20% times 70%. Again, now we'll take the difference between the two and this is access depreciation we have to recapture. So the total recapture access depreciation is ordinary income for 2025 is year 3 plus year 2023 plus year 2024. A total of 6,720. Oh boy, that was unexpected. We'll have to recapture as ordinary income. So what's going to happen in year 2026? Now we're back above 60%. Well post 2025, we have to stick now with the straight line. Although we went back above the 50%, we have to stick with the straight line. Okay, let's keep going with the example. For the year 2025, how do we take the depreciation? We'll take 30,000 times 20% times 40%. Because in year 5, we took was used at 40%. So this is the depreciation. Again, we don't have to worry about the limit. We're below the limit. So 2025, this is the depreciation expense that we take in 2026. Now we're back to 60%. Well, that's great. But we have to stick now with the straight line because we fell below 50%. 30,000 times the straight line rate, 20%, times 60%, 3,600. Again, I always check the limit. You are below the limit. Let's take a look at a summary of the listed property cost recovery. Because what makes this a little bit confusing is you have a vehicle. So you have the limitation on the vehicle. So let's take a look at how do we deal with this? Let's take a look at this map. Well, is the property mainly used for business? If the answer is yes, you ask yourself, is this a passenger automobile? If the answer is yes, so you're dealing with a vehicle that's mainly used for business. How do we do this computation? Well, we're going to be using makers. If it's mainly used for business makers, subject to recovery limitation and reduced by personal use percentage. Simply put, you have to go and look at the tables for every year you are limited. And you're also when you compute the depreciation for makers, you have to prorate it by the take out the personal use, only keep the business use. If the property is not an automobile, if it's not an automobile, we're not dealing with an automobile, then we'll use makers. We're not subject to any recovery limitation. Remember, when other assets, we don't say the government tells you that's the maximum you can take. You're not subject to that. However, you have to reduce the depreciation by any personal percentage. Personal percentage, you take them out. You only use it for business. Again, is the property mainly used for business? If the answer is no, then you ask yourself, if it's not mainly used for business, is this a vehicle? And if the answer is yes, now you're dealing with a vehicle, but that vehicle is less than 50% used for a business. What's the difference between this yes and this yes? Well, under this yes, you would use the straight line method, again, subject to recovery limitation, just like the makers and reduced by personal usage. Again, here we are dealing with a personal property used less than 50% and not a vehicle. If it's not a vehicle, what do we do? And it's not used mainly for business, use the straight line. We are not subject to any recovery limitation like an arrow and reduced by personal use percentage. I hope this slide gave you a summary of everything that we did up to this point. Now, the best way to deal with this is to go to Farhat Lectures, look at additional lectures about makers, mid-quarter convention, cost recovery, work MCQs, true-false. Look at the notes to give you a better picture whether you are an accounting student, a CPA candidate, an enrolled agent. Invest in yourself. Your career is important. Learn this so you can pass your exam, pass your certification so you can get somewhere. Good luck, study hard and stay safe.