This section discusses the depreciation and section 179 deductions you may be entitled to take for furniture and equipment you use in your home for business or work as an employee. These deductions are available whether or not you qualify to deduct expenses for the business use of your home.

This section explains the different rules for each of the following.

1. Listed property.
2. Property bought for business use.
3. Personal property converted to business use.

Listed Property

If you use certain types of property, called listed property, in your home, special rules apply. Listed property includes any property of a type generally used for entertainment, recreation, and amusement (including photographic, phonographic, communication, and video recording equipment). Listed property also includes computers and related equipment unless they are used in a qualifying office in your home. If you use your computer in a qualifying office in your home, see Property Bought for Business Use, later.

More-than-50%-use test. If you bought listed property and placed it in service during the year, you must use it more than 50% for business (including work as an employee) to claim a section 179 deduction or an accelerated depreciation deduction.

If your business use of listed property is 50% or less, you cannot take a section 179 deduction and you must depreciate the property using the Alternate Depreciation System (ADS) (straight line method). For more information on ADS, see chapter 3 in Publication 946.

Listed property meets the more-than-50%-use test for any year if its qualified business use is more than 50% of its total use. You must allocate the use of any item of listed property used for more than one purpose during the year among its various uses. You cannot use the percentage of investment use as part of the percentage of qualified business use to meet the more-than-50%-use test. However, you do use the combined total of business and investment use to figure your depreciation deduction for the property.

Example 1. Sarah does not qualify to claim a deduction for the business use of her home, but she uses her home computer 40% of the time for a business she operates out of her home. She also uses the computer 50% of the time to manage her investments. Sarah's home computer is listed property because it is not used in a qualified office in her home. Because she does not use the computer more than 50% for business, she cannot elect a section 179 deduction. She can use her combined business/investment use (90%) to figure her depreciation deduction using ADS.

Example 2. If Sarah uses her computer 60% of the time for her business and 30% for managing her investments, her computer meets the more-than-50%-use test. She can elect a section 179 deduction. She can use her combined business/investment use (90%) to figure her depreciation deduction using the General Depreciation System (GDS).

Employee. If you use your own listed property (or listed property you rent) in your work as an employee, the property is business-use property only if you meet the following requirements.

• The use is for your employer's convenience.
• The use is required as a condition of your employment.

"As a condition of your employment" means the use of the property is necessary for you to properly perform your work. Whether the use of the property is required for this purpose depends on all the facts and circumstances. Your employer does not have to tell you specifically to use the property. Nor is a statement by your employer to that effect sufficient.

Years following the year placed in service. If, in a year after you place an item of listed property in service, you fail to meet the more-than-50%-use test for that item of property, you may be required to do the following.

1. Figure depreciation, beginning with the year you no longer use the property more than 50% for business, using the straight line method.
2. Figure any excess depreciation (include any section 179 deduction on the property in figuring excess depreciation) and add it to:
1. Your gross income, and
2. The adjusted basis of your property.

For more information, see Recapture of Excess Depreciation under Do the Business-Use Limits Apply? in Publication 946.

Reporting and recordkeeping requirements. If you use listed property in your business, you must file Form 4562 to claim a depreciation or section 179 deduction. Begin with Part V, Section A, of that form.

You cannot take any depreciation or section 179 deduction for the use of listed property unless you can prove your business/investment use with adequate records or sufficient evidence to support your own statements.

To meet the adequate records requirement, you must maintain an account book, diary, log, statement of expense, trip sheet, or similar record or other documentary evidence that is sufficient to establish business/investment use. For more information on what records to keep, see What Records Must Be Kept? in chapter 4 of Publication 946.

Property Bought for Business Use

If you bought certain property to use in your business, you can do any one of the following (subject to the limits discussed later).

• Elect a section 179 deduction for the full cost of the property.
• Take part of the cost as a section 179 deduction and depreciate the balance.
• Depreciate the full cost of the property.

Section 179 Deduction

You can claim the section 179 deduction for the cost of depreciable tangible personal property bought for use in your trade or business. You can choose how much (subject to the limit) of the cost you want to deduct under section 179 and how much you want to depreciate. You can spread the section 179 deduction over several items of property in any way you choose as long as the total does not exceed the maximum allowable. You cannot take a section 179 deduction for the basis of the business part of your home.

You elect the section 179 deduction by completing Part 1 of Form 4562.

More information. For more information on the section 179 deduction, see chapter 2 in Publication 946.

Depreciation

Use Part II of Form 4562 to claim your deduction for depreciation on property placed in service during the year. Do not include any costs deducted in Part I (section 179 deduction).

Most business property used in a home office is either 5-year or 7-year property under MACRS.

• 5-year property includes computers and peripheral equipment, typewriters, calculators, adding machines, and copiers.
• 7-year property includes office furniture and fixtures such as desks, files, and safes.

Under MACRS, you generally use the half-year convention, which allows you to deduct a half year of depreciation in the first year you use the property in your business. If you place more than 40% of your depreciable property in service during the last 3 months of your tax year, you must use the mid-quarter convention instead of the half-year convention. See Publication 946 for an exception for 2001.

After you have determined the cost of the depreciable property (minus any section 179 deduction taken on the property) and whether it is 5-year or 7-year property, use the table, shown next, to figure your depreciation if the half-year convention applies.

MACRS Percentage Table
for 5- and 7-Year Property
Using Half-Year Convention

Recovery Year	5-Year Property	7-Year Property
1	20.00%	14.29%
2	32.00%	24.49%
3	19.20%	17.49%
4	11.52%	12.49%
5	11.52%	8.93%
6	5.76%	8.92%
7		8.93%
8		4.46%

See Publication 946 for a discussion of the mid-quarter convention and for complete MACRS percentage tables.

Example. During the year, Donald Kent bought a desk and three chairs for use in his office. His total bill for the furniture was $1,975. His taxable business income for the year was $3,000 without any deduction for the office furniture. Donald can elect to do one of the following.

1. Take a section 179 deduction for the full cost of the office furniture.
2. Take part of the cost of the furniture as a section 179 deduction and depreciate the balance.
3. Depreciate the full cost of the office furniture.

The furniture is 7-year property. If Donald does not take a section 179 deduction, he multiplies $1,975, the cost of the furniture, by 14.29% (.1429) to get his depreciation deduction of $282.23.

Personal Property Converted to Business Use

If you use property in your home office that was used previously for personal purposes, you cannot take a section 179 deduction for the property. You can depreciate it, however. The method of depreciation you use depends on when you first used the property for personal purposes.

If you began using the property for personal purposes after 1986 and change it to business use in 2001, depreciate the property under MACRS.

The basis for depreciation of property changed from personal to business use is the lesser of the following.

1. The adjusted basis of the property on the date of change.
2. The fair market value of the property on the date of change.

If you began using the property for personal purposes after 1980 and before 1987 and change it to business use in 2001, you generally depreciate the property under the accelerated cost recovery system (ACRS). However, if the depreciation under ACRS is greater in the first year than the depreciation under MACRS, you must depreciate it under MACRS. For information on ACRS, see Publication 534, Depreciating Property Placed in Service Before 1987.

If you began using the property for personal purposes before 1981 and change it to business use in 2001, depreciate the property by the straight line or declining balance method based on salvage value and useful life.

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