#### § 1.280F-5T Leased property (temporary).

(a) *In general.* Except as otherwise provided in this section, the limitation on cost recovery deductions and the investment tax credit provided in section 280F (a) and (b) and §§ 1.280F-2T and 1.280F-3T do not apply to any listed property leased or held for leasing by any person regularly engaged in the business of leasing listed property. If a person is not regularly engaged in the business of leasing listed property, the limitations on cost recovery deductions and the investment tax credit provided in section 280F and §§ 1.280F-2T and 1.280F-3T apply to such property leased or held for leasing by such person. The special rules for lessees set out in this section apply with respect to all lessees of listed property, even those whose lessors are not regularly engaged in the business of leasing listed property. For rules on determining inclusion amounts with respect to passenger automobiles, see paragraphs (d), (e) and (g) of this section, and see § 1.280F-7(a). For rules on determining inclusion amounts with respect to other listed property, see paragraphs (f) and (g) of this section, and see § 1.280F-7(b).

(b) *Section 48(d) election.* If a lessor elects under section 48(d) with respect to any listed property to treat the lessee as having acquired such property, the amount of the investment tax credit allowed to the lessee is subject to the limitation prescribed in § 1.280F-3T(b) (1) and (2). If a lessor elects under section 48(d) with respect to any passenger automobile to treat the lessee as having acquired such automobile, the amount of the investment tax credit allowed to the lessee is also subject to the limitations prescribed in § 1.280F-2T (a) and (i).

(c) *Regularly engaged in the business of leasing.* For purposes of paragraph (a) of this section, a person shall be considered regularly engaged in the business of leasing listed property only if contracts to lease such property are entered into with some frequency over a continuous period of time. The determination shall be made on the basis of the facts and circumstances in each case, taking into account the nature of the person's business in its entirety. Occasional or incidental leasing activity is insufficient. For example, a person leasing only one passenger automobile during a taxable year is not regularly engaged in the business of leasing automobiles. In addition, an employer that allows an employee to use the employer's property for personal purposes and charges such employee for the use of the property is not regularly engaged in the business of leasing with respect to the property used by the employee.

(d) *Inclusions in income of lessees of passenger automobiles leased after June 18, 1984, and before April 3, 1985* —

(1) *In general.* If a taxpayer leases a passenger automobile after June 18, 1984, but before April 3, 1985, for each taxable year (except the last taxable year) during which the taxpayer leases the automobile, the taxpayer must include in gross income an inclusion amount (prorated for the number of days of the lease term included in that taxable year), determined under this paragraph (d)(1), and multiplied by the business/investment use (as defined in § 1.280F-6(d)(3)(i)) for the particular taxable year. The inclusion amount:

(i) Is 7.5 percent of the excess (if any) of the automobile's fair market value over $16,500 for each of the first three taxable years during which a passenger automobile is leased.

(ii) Is 6 percent of the excess (if any) of the automobile's fair market value over $22,500 for the fourth taxable year during which a passenger automobile is leased.

(iii) Is 6 percent of the excess (if any) of the automobile's fair market value over $28,500 for the fifth taxable year during which a passenger automobile is leased.

(iv) Is 6 percent of the excess (if any) of the automobile's fair market value over $34,500 for the sixth taxable year during which a passenger automobile is leased.

For the seventh and subsequent taxable years during which a passenger automobile is leased, the inclusion amount is 6 percent of the excess (if any) of the automobile's fair market value over the sum of (A) $16,500 and (B) $6,000 multiplied by the number of such taxable years in excess of three years. *See* paragraph (g)(2) of this section for the definition of fair market value.

(2) *Additional inclusion amount when less than predominant use in a qualified business use.*

(i) If a passenger automobile, which is leased after June 18, 1984, and before April 3, 1985, is not used predominantly in a qualified business use during a taxable year, the lessee must add to gross income in the first taxable year that the automobile is not so used (and only in that year) an inclusion amount determined under this paragraph (d)(2). This inclusion amount is in addition to the amount required to be included in gross income under paragraph (d)(1) of this section.

(ii) If the fair market value (as defined in paragraph (h)(2) of this section) of the automobile is greater than $16,500, the inclusion amount is determined by multiplying the average of the business/investment use (as defined in paragraph (h)(3) of this section) by the appropriate dollar amount from the table in paragraph (d)(2)(iii) of this section. If the fair market value (as defined in paragraph (h)(2) of this section) of the automobile is $16,500 or less, the inclusion amount is the product of the fair market value of the automobile, the average business/investment use, and the applicable percentage from the table in paragraph (d)(2)(iv) of this section.

(iii) The dollar amount is determined under the following table:

| If a passenger automobile is not predominantly used in a qualified business use during— | The dollar amount: |
| --- | --- |
| Lease term (years) |
| 1 | 2 | 3 | 4 or more |
| The first taxable year of the lease term | $350 | $700 | $1,350 | $1,850 |
| The second taxable year of the lease term | | | 650 | 1,250 |
| The third taxable year of the lease term | | | | 650 |

(iv) The applicable percentage is determined under the following table:

| If a passenger automobile is not predominantly used in a qualified business use during— | The applicable percentage: |
| --- | --- |
| Lease term (years) |
| 1 | 2 | 3 | 4 or more |
| The first taxable year of the lease term | 3.0 | 6.0 | 10.2 | 13.2 |
| The second taxable year of the lease term | | 1.25 | 6.2 | 10.4 |
| The third taxable year of the lease term | | | 2.25 | 6.5 |
| The fourth taxable year of the lease term | | | | 1.7 |
| The fifth taxable year of the lease term | | | | 0.5 |

(e) *Inclusions in income of lessees of passenger automobiles leased after April 2, 1985, and before January 1, 1987* —

(1) *In general.* For any passenger automobile that is leased after April 2, 1985, and before January 1, 1987, for each taxable year (except the last taxable year) during which the taxpayer leases the automobile, the taxpayer must include in gross income an inclusion amount determined under subparagraphs (2) through (5) of this paragraph (e). Additional inclusion amounts when a passenger automobile is not used predominantly in a qualified business use during a taxable year are determined under paragraph (e)(6) of this section. *See* paragraph (h)(2) of this section for the definition of fair market value.

(2) *Fair market value not greater than $50,000: years one through three.* For any passenger automobile that has a fair market value not greater than $50,000, the inclusion amount for each of the first three taxable years during which the automobile is leased is determined as follows:

(i) For the appropriate range of fair market values in the table in paragraph (e)(2)(iv) of this section, select the dollar amount from the column for the quarter of the taxable year in which the automobile is first used under the lease,

(ii) Prorate the dollar amount for the number of days of the lease term included in the taxable year, and

(iii) Multiply the prorated dollar amount by the business/investment use for the taxable year.

(iv) *Dollar amounts: Years 1-3:*

| Fair market value | Taxable year quarter |
| --- | --- |
| Greater than— | But not greater than— | 4th | 3d | 2d | 1st |
| $11,250 | $11,500 | $8 | $7 | $6 | $6 |
| 11,500 | 11,750 | 24 | 21 | 19 | 17 |
| 11,750 | 12,000 | 40 | 35 | 32 | 29 |
| 12,000 | 12,250 | 56 | 49 | 44 | 40 |
| 12,250 | 12,500 | 72 | 64 | 57 | 52 |
| 12,500 | 12,750 | 88 | 78 | 70 | 63 |
| 12,750 | 13,000 | 104 | 92 | 83 | 75 |
| 13,000 | 13,250 | 120 | 106 | 95 | 86 |
| 13,250 | 13,500 | 144 | 128 | 115 | 104 |
| 13,500 | 13,750 | 172 | 153 | 137 | 124 |
| 13,750 | 14,000 | 200 | 177 | 159 | 145 |
| 14,000 | 14,250 | 228 | 202 | 182 | 165 |
| 14,250 | 14,500 | 256 | 227 | 204 | 185 |
| 14,500 | 14,750 | 284 | 252 | 226 | 206 |
| 14,750 | 15,000 | 312 | 277 | 249 | 226 |
| 15,000 | 15,250 | 340 | 302 | 271 | 246 |
| 15,250 | 15,500 | 369 | 327 | 293 | 266 |
| 15,500 | 15,750 | 397 | 352 | 316 | 287 |
| 15,750 | 16,000 | 425 | 377 | 338 | 307 |
| 16,000 | 16,250 | 453 | 402 | 360 | 327 |
| 16,250 | 16,500 | 481 | 426 | 383 | 348 |
| 16,500 | 16,750 | 509 | 451 | 405 | 368 |
| 16,750 | 17,000 | 537 | 476 | 428 | 388 |
| 17,000 | 17,500 | 579 | 514 | 461 | 419 |
| 17,500 | 18,000 | 635 | 563 | 506 | 459 |
| 18,000 | 18,500 | 691 | 613 | 550 | 500 |
| 18,500 | 19,000 | 748 | 663 | 595 | 541 |
| 19,000 | 19,500 | 804 | 713 | 640 | 581 |
| 19,500 | 20,000 | 860 | 763 | 685 | 622 |
| 20,000 | 20,500 | 916 | 812 | 729 | 662 |
| 20,500 | 21,000 | 972 | 862 | 774 | 703 |
| 21,000 | 21,500 | 1,028 | 912 | 819 | 744 |
| 21,500 | 22,000 | 1,084 | 962 | 863 | 784 |
| 22,000 | 23,000 | 1,169 | 1,036 | 930 | 845 |
| 23,000 | 24,000 | 1,281 | 1,136 | 1,020 | 926 |
| 24,000 | 25,000 | 1,393 | 1,236 | 1,109 | 1,007 |
| 25,000 | 26,000 | 1,506 | 1,335 | 1,199 | 1,089 |
| 26,000 | 27,000 | 1,618 | 1,435 | 1,288 | 1,170 |
| 27,000 | 28,000 | 1,730 | 1,534 | 1,377 | 1,251 |
| 28,000 | 29,000 | 1,842 | 1,634 | 1,467 | 1,332 |
| 29,000 | 30,000 | 1,955 | 1,734 | 1,556 | 1,413 |
| 30,000 | 31,000 | 2,067 | 1,833 | 1,646 | 1,495 |
| 31,000 | 32,000 | 2,179 | 1,933 | 1,735 | 1,576 |
| 32,000 | 33,000 | 2,292 | 2,032 | 1,824 | 1,657 |
| 33,000 | 34,000 | 2,404 | 2,132 | 1,914 | 1,738 |
| 34,000 | 35,000 | 2,516 | 2,232 | 2,003 | 1,819 |
| 35,000 | 36,000 | 2,629 | 2,331 | 2,093 | 1,901 |
| 36,000 | 37,000 | 2,741 | 2,431 | 2,182 | 1,982 |
| 37,000 | 38,000 | 2,853 | 2,530 | 2,271 | 2,063 |
| 38,000 | 39,000 | 2,965 | 2,630 | 2,361 | 2,144 |
| 39,000 | 40,000 | 3,078 | 2,730 | 2,450 | 2,225 |
| 40,000 | 41,000 | 3,190 | 2,829 | 2,540 | 2,307 |
| 41,000 | 42,000 | 3,302 | 2,929 | 2,629 | 2,388 |
| 42,000 | 43,000 | 3,415 | 3,028 | 2,718 | 2,469 |
| 43,000 | 44,000 | 3,527 | 3,128 | 2,808 | 2,550 |
| 44,000 | 45,000 | 3,639 | 3,228 | 2,897 | 2,631 |
| 45,000 | 46,000 | 3,752 | 3,327 | 2,987 | 2,713 |
| 46,000 | 47,000 | 3,864 | 3,427 | 3,076 | 2,794 |
| 47,000 | 48,000 | 3,976 | 3,526 | 3,165 | 2,875 |
| 48,000 | 49,000 | 4,088 | 3,626 | 3,255 | 2,956 |
| 49,000 | 50,000 | 4,201 | 3,726 | 3,344 | 3,037 |

Dollar Amounts: Years 1-3

(3) *Fair market value not greater than $50,000: years four through six.* For any passenger automobile that has a fair market value greater than $18,000, but not greater than $50,000, the inclusion amount for the fourth, fifth, and sixth taxable years during which the automobile is leased is determined as follows:

(i) For the appropriate range of fair market values in the table in paragraph (e)(3)(iv) of this section, select the dollar amount from the column for the taxable year in which the automobile is used under the lease,

(ii) Prorate the dollar amount for the number of days of the lease term included in the taxable year, and

(iii) Multiply this dollar amount by the business/investment use for the taxable year.

(iv) Dollar Amounts: Years 4-6:

| Fair market value | Year |
| --- | --- |
| Greater than— | But not greater than— | 4 | 5 | 6 |
| $18,000 | $18,500 | $15 | | |
| 18,500 | 19,000 | 45 | | |
| 19,000 | 19,500 | 75 | | |
| 19,500 | 20,000 | 105 | | |
| 20,000 | 20,500 | 135 | | |
| 20,500 | 21,000 | 165 | | |
| 21,000 | 21,500 | 195 | | |
| 21,500 | 22,000 | 225 | | |
| 22,000 | 23,000 | 270 | | |
| 23,000 | 24,000 | 330 | $42 | |
| 24,000 | 25,000 | 390 | 102 | |
| 25,000 | 26,000 | 450 | 162 | |
| 26,000 | 27,000 | 510 | 222 | |
| 27,000 | 28,000 | 570 | 282 | |
| 28,000 | 29,000 | 630 | 342 | $54 |
| 29,000 | 30,000 | 690 | 402 | 114 |
| 30,000 | 31,000 | 750 | 462 | 174 |
| 31,000 | 32,000 | 810 | 522 | 234 |
| 32,000 | 33,000 | 870 | 582 | 294 |
| 33,000 | 34,000 | 930 | 642 | 354 |
| 34,000 | 35,000 | 990 | 702 | 414 |
| 35,000 | 36,000 | 1,050 | 762 | 474 |
| 36,000 | 37,000 | 1,110 | 822 | 534 |
| 37,000 | 38,000 | 1,170 | 882 | 594 |
| 38,000 | 39,000 | 1,230 | 942 | 654 |
| 39,000 | 40,000 | 1,290 | 1,002 | 714 |
| 40,000 | 41,000 | 1,350 | 1,062 | 774 |
| 41,000 | 42,000 | 1,410 | 1,122 | 834 |
| 42,000 | 43,000 | 1,470 | 1,182 | 894 |
| 43,000 | 44,000 | 1,530 | 1,242 | 954 |
| 44,000 | 45,000 | 1,590 | 1,302 | 1,014 |
| 45,000 | 46,000 | 1,650 | 1,362 | 1,074 |
| 46,000 | 47,000 | 1,710 | 1,422 | 1,134 |
| 47,000 | 48,000 | 1,770 | 1,482 | 1,194 |
| 48,000 | 49,000 | 1,830 | 1,542 | 1,254 |
| 49,000 | 50,000 | 11,890 | 1,602 | 1,314 |

Dollar Amounts: Years 4-6

(4) *Fair market value greater than $50,000: years one through six.*

(i) For any passenger automobile that has a fair market value greater than $50,000, the inclusion amount for the first six taxable years during which the automobile is leased is determined as follows:

(A) Determine the dollar amount by using the appropriate formula in paragraph (e)(4)(ii) of this section,

(B) Prorate the dollar amount for the number of days of the lease term included in the taxable year, and

(C) Multiply this dollar amount by the business/investment use for the taxable year.

(ii) The dollar amount is computed as follows:

(A) If the automobile is first used under the lease in the fourth quarter of a taxable year, the dollar amount for each of the first three taxable years during which the automobile is leased is the sum of—

(*1*) $124, and

(*2*) 11 percent of the excess of the automobile's fair market value over $13,200.

(B) If the automobile is first used under the lease in the third quarter of a taxable year, the dollar amount for each of the first three taxable years during which the automobile is leased is the sum of—

(*1*) $110, and

(*2*) 10 percent of the excess of the automobile's fair market value over $13,200.

(C) If the automobile is first used under the lease in the second quarter of a taxable year, the dollar amount for each of the first three taxable years during which the automobile is leased is the sum of—

(*1*) $100, and

(*2*) 9 percent of the excess of the automobile's fair market value over $13,200.

(D) If the automobile is first used under the lease in the first quarter of a taxable year, the dollar amount for each of the first three taxable years during which the automobile is leased is the sum of—

(*1*) $90, and

(*2*) 8 percent of the excess of the automobile's fair market value over $13,200.

(E) For the fourth taxable year during which the automobile is leased, the dollar amount is 6 percent of the excess of the automobile's fair market value over $18,000.

(F) For the fifth taxable year during which the automobile is leased, the dollar amount is 6 percent of the excess of the automobile's fair market value over $22,800.

(G) For the sixth taxable year during which the automobile is leased, the dollar amount is 6 percent of the excess of the automobile's fair market value over $27,600.

(5) *Seventh and subsequent taxable years.*

(i) For any passenger automobile that has a fair market value less than or equal to $32,400, the inclusion amount for the seventh and subsequent taxable years during which the automobile is leased is zero.

(ii) For any passenger automobile that has a fair market value greater than $32,400, the inclusion amount for the seventh and subsequent taxable years during which the automobile is leased is 6 percent of—

(A) The excess (if any) of the automobile's fair market value, over

(B) The sum of—

(*1*) $13,200 and

(*2*) $4,800 multiplied by the number of taxable years in excess of three years.

(6) *Additional inclusion amount when less than predominant use in a qualified business use.*

(i) If a passenger automobile, which is leased after April 2, 1985, and before January 1, 1987, is not predominantly used in a qualified business use during a taxable year, the lessee must add to gross income in the first taxable year that the automobile is not so used (and only in that year) an inclusion amount determined under this paragraph (e)(6). This inclusion amount is in addition to the amount required to be included in gross income under paragraph (e) (2), (3), (4), and (5) of this section.

(ii) If the fair market value (as defined in paragraph (h)(2) of this section) of the automobile is greater than $11,250, the inclusion amount is determined by multiplying the average of the business/investment use (as defined in paragraph (h)(3) of this section) by the appropriate dollar amount from the table in paragraph (e)(6)(iii) of this section. If the fair market value of the automobile is $11,250 or less, the inclusion amount is the product of the fair market value of the automobile, the average business/investment use, and the applicable percentage from the table in paragraph (e)(6)(iv) of this section.

(iii) The dollar amount is determined under the following table:

| If a passenger automobile is not predominantly used in a qualified business use during— | The dollar amount is: |
| --- | --- |
| Lease term (years)— |
| 1 | 2 | 3 | 4 or more |
| The first taxable year of the lease term | $350 | $700 | $1,150 | $1,500 |
| The second taxable year of the lease term | | 150 | 700 | 1,200 |
| The third taxable year of the lease term | | | 250 | 750 |

(iv) The applicable percentage is determined under the following table:

| If a passenger automobile is not predominantly used in a qualified business use during— | The applicable percentage: |
| --- | --- |
| Lease term (years)— |
| 1 | 2 | 3 | 4 or more |
| The first taxable year of the lease term | 3.0 | 6.0 | 10.2 | 13.2 |
| The second taxable year of the lease term | | 1.25 | 6.2 | 10.4 |
| The third taxable year of the lease term | | | 2.25 | 6.5 |
| The fourth taxable year of the lease term | | | | 1.7 |
| The fifth taxable year of the lease term | | | | 0.5 |

(f) *Inclusions in income of lessees of listed property other than passenger automobiles* —

(1) *In general.* If listed property other than a passenger automobile is not used predominantly in a qualified business use in any taxable year in which such property is leased, the lessee must add an inclusion amount to gross income in the first taxable year in which such property is not so predominantly used (and only in that year). This inclusion amount is determined under paragraph (f)(2) of this section for property leased after June 18, 1984, and before January 1, 1987. The inclusion amount is determined under § 1.280F-7(b) for property leased after December 31, 1986.

(2) *Inclusion amount for property leased after June 18, 1984, and before January 1, 1987.* The inclusion amount for property leased after June 18, 1984, and before January 1, 1987, is the product of the following amounts:

(i) The fair market value (as defined in paragraph (h)(2) of this section) of the property,

(ii) The average business/investment use (as defined in paragraph (h)(3) of this section), and

(iii) The applicable percentage (as determined under paragraph (f)(3) of this section).

(3) *Applicable percentages.* The applicable percentages for 3-, 5-, and 10-year recovery property are determined according to the following tables:

(i) In the case of 3-year recovery property:

| Taxable year during lease term | For the first taxable year in which the business use percentage is 50 percent or less, the applicable percentage for such taxable year is— |
| --- | --- |
| 1 | 2 | 3 | 4 | 5 | 6 and later |
| For a lease term of: | | | | | | |
| 1 year | 3.0 | | | | | |
| 2 years | 6.0 | 1.25 | | | | |
| 3 years | 10.2 | 6.2 | 2.25 | | | |
| 4 or more years | 13.2 | 10.4 | 6.5 | 1.7 | 0.5 | 0 |

(ii) In the case of 5-year recovery property:

| Taxable year during lease term | For the first taxable year in which the business use percentage is 50 percent or less, the applicable percentage for such taxable year is— |
| --- | --- |
| 1 | 2 | 3 | 4 | 5 | 6 | 7 | 8 | 9 | 10 | 11 | 12 |
| For a lease term of: | | | | | | | | | | | | |
| 1 year | 2.7 | | | | | | | | | | | |
| 2 years | 5.3 | 1.2 | | | | | | | | | | |
| 3 years | 9.9 | 6.1 | 1.6 | | | | | | | | | |
| 4 years | 14.4 | 11.1 | 7.3 | 2.3 | | | | | | | | |
| 5 years | 18.4 | 15.7 | 12.4 | 8.2 | 3.0 | | | | | | | |
| 6 or more years | 21.8 | 19.6 | 16.7 | 13.5 | 9.6 | 5.25 | 4.4 | 3.6 | 2.8 | 1.8 | 1.0 | 0 |

(iii) In the case of 10-year recovery property:

| Taxable year during lease term | For the first taxable year in which the business use percentage is 50 pct or less, the applicable percentage for such taxable year is— |
| --- | --- |
| 1 | 2 | 3 | 4 | 5 | 6 | 7 | 8 | 9 | 10 | 11 | 12 | 13 | 14 | 15 |
| For a lease term of: | | | | | | | | | | | | | | | |
| 1 year | 2.5 | | | | | | | | | | | | | | |
| 2 years | 5.1 | .6 | | | | | | | | | | | | | |
| 3 years | 9.8 | 5.6 | 1.0 | | | | | | | | | | | | |
| 4 years | 14.0 | 10.3 | 6.2 | 1.4 | | | | | | | | | | | |
| 5 years | 17.9 | 14.5 | 10.9 | 6.7 | 1.8 | | | | | | | | | | |
| 6 years | 21.3 | 18.3 | 15.1 | 11.4 | 7.1 | 2.1 | | | | | | | | | |
| 7 years | 21.9 | 19.0 | 15.9 | 12.4 | 8.4 | 3.9 | 2.4 | | | | | | | | |
| 8 years | 22.4 | 19.6 | 16.7 | 13.4 | 9.7 | 5.5 | 4.5 | 2.7 | | | | | | | |
| 9 years | 22.9 | 20.2 | 17.4 | 14.3 | 10.9 | 7.0 | 6.4 | 5.1 | 3.0 | | | | | | |
| 10 years | 23.5 | 20.9 | 18.2 | 15.2 | 11.9 | 8.3 | 8.1 | 7.2 | 5.7 | 3.3 | | | | | |
| 11 years | 23.9 | 21.4 | 18.8 | 16.0 | 12.8 | 9.3 | 9.4 | 8.9 | 7.7 | 5.9 | 3.1 | | | | |
| 12 years | 24.3 | 21.9 | 19.3 | 16.5 | 13.4 | 10.1 | 10.3 | 10.0 | 9.3 | 7.8 | 5.5 | 2.9 | | | |
| 13 years | 24.7 | 22.2 | 19.7 | 16.9 | 14.0 | 10.7 | 11.1 | 11.0 | 10.4 | 9.2 | 7.4 | 5.2 | 2.7 | | |
| 14 years | 25.0 | 22.5 | 20.1 | 17.3 | 14.4 | 11.1 | 11.6 | 11.7 | 11.3 | 10.3 | 8.8 | 6.9 | 4.8 | 2.5 | |
| 15 or more years | 25.3 | 22.8 | 20.3 | 17.5 | 14.7 | 11.5 | 12.0 | 12.2 | 11.9 | 11.1 | 9.8 | 8.2 | 6.5 | 4.5 | 2.3 |

(g) *Special rules applicable to inclusions in income of lessees.* This paragraph (g) applies to the inclusions in gross income of lessees prescribed under paragraphs (d)(2), (e)(6), or (f) of this section, or prescribed under § 1.280F-7(b).

(1) *Lease term commences within 9 months of the end of lessee's taxable year.* If:

(i) The lease term commences within 9 months before the close of the lessee's taxable year,

(ii) The property is not predominantly used in a qualified business use during that portion of the taxable year, and

(iii) The lease term continues into the lessee's subsequent taxable year, then the inclusion amount is added to gross income in the lessee's subsequent taxable year and the amount is determined by taking into account the average of the business/investment use for both taxable years and the applicable percentage for the taxable year in which the lease term begins (or, in the case of a passenger automobile with a fair market value greater than $16,500, the appropriate dollar amount for the taxable year in which the lease term begins).

(2) *Lease term less than one year.* If the lease term is less than one year, the amount which must be added to gross income is an amount that bears the same ratio to the inclusion amount determined before the application of this paragraph (g)(2) as the number of days in the lease term bears to 365.

(3) *Maximum inclusion amount.* The inclusion amount shall not exceed the sum of all deductible amounts in connection with the use of the listed property properly allocable to the lessee's taxable year in which the inclusion amount must be added to gross income.

(h) *Definitions* —

(1) *Lease term.* In determining the term of any lease for purposes of this section, the rules of section 168(i)(3)(A) shall apply.

(2) *Fair market value.* For purposes of this section, the fair market value of listed property is such value on the first day of the lease term. If the capitalized cost of listed property is specified in the lease agreement, the lessee shall treat such amount as the fair market value of the property.

(3) *Average business/investment use.* For purposes of this section, the average business/investment use of any listed property is the average of the business/investment use for the first taxable year in which the business use percentage is 50 percent or less and all preceding taxable years in which such property is leased. See paragraph (g)(1) of this section for special rule when lease term commences within 9 months before the end of the lessee's taxable year.

(i) *Examples.* This section may be illustrated by the following examples.

# Example 1.

On January 1, 1985, A, a calendar year taxpayer, leases and places in service a passenger automobile with a fair market value of $55,000. The lease is to be for a period of four years. During taxable years 1985 and 1986, A uses the automobile exclusively in a trade or business. Under paragraph (d)(1) of this section, A must include in gross income in both 1985 and 1986, $2,887.50 (*i.e.,* ($55,000−$16,500) × 7.5%).

# Example 2.

The facts are the same as in *Example 1,* and in addition, A uses the automobile only 45 percent in a trade or business during 1987. Under paragraph (d)(1) of this section for 1987, A must include in gross income $1,299.38 (*i.e.,* ($55,000−$16,500) × 7.5% × 45%). In addition, under paragraph (d)(2) of this section, A must also include in gross income in 1987, $530.85 (*i.e.,* $650 × 81.67%, average business/investment use).

# Example 3.

On August 1, 1985, B, a calendar year taxpayer, leases and places in service an item of listed property which is 5-year recovery property, with a fair market value of $10,000. The lease is to be for a period of 5 years. B's qualified business use of the property is 40 percent in 1985, 100 percent in 1986, and 90 percent in 1987. Under paragraphs (f)(1) and (g)(1) of this section, before the application of paragraph (g)(3) of this section, B must include in gross income in 1986, $1,288.00 (*i.e.,* $10,000 × 70% × 18.4%, the product of the fair market value, the average business use for both taxable years, and the applicable percentage for year one from the table in paragraph (f)(3)(iii) of this section).

# Example 4.

On October 1, 1985, C, a calendar year taxpayer, leases and places in service an item of listed property which is 3-year recovery property with a fair market value of $15,000. The lease term is 6 months (ending March 31, 1986) during which C uses the property 45 percent in a trade or business, the only business/investment use. Under paragraphs (f)(1) and (g) (1) and (2) of this section, before the application of paragraph (g)(3) of this section, C must include in gross income in 1986, $100.97 (*i.e.,* $15,000 × 45% × 3% × 182/365, the product of the fair market value, the average business use for both taxable years, and the applicable percentage for year one from the table in paragraph (f)(3)(i) of this section, prorated for the length of the lease term).

# Example 5.

On July 15, 1985, A, a calendar year taxpayer, leases and places in service a passenger automobile with a fair market value of $45,300. The lease is for a period of 5 years, during which A uses the automobile exclusively in a trade or business. Under paragraph (e) (2) and (3) of this section, for taxable years 1985 through 1989, A must include the following amounts in gross income:

| Taxable year | Dollar amount | Proration | Business use (percent) | Inclusion |
| --- | --- | --- | --- | --- |
| 1985 | $3,327 | 170/365 | 100 | $1,550 |
| 1986 | 3,327 | 365/365 | 100 | 3,327 |
| 1987 | 3,327 | 365/365 | 100 | 3,327 |
| 1988 | 1,650 | 366/366 | 100 | 1,650 |
| 1989 | 1,362 | 365/365 | 100 | 1,362 |

# Example 6.

The facts are the same as in *Example 1,* except that A uses the automobile only 45 percent in a trade or business during 1987 through 1990. Under § 1.280F-5T(e)(6), A must include in gross income for taxable year 1987, the first taxable year in which the automobile is not used predominantly in a trade or business, an additional amount based on the average business/investment use for taxable years 1985 through 1987. For taxable years 1985 through 1989, A must include the following amounts in gross income:

| Taxable year | Dollar amount | Proration | Business use (percent) | Inclusion |
| --- | --- | --- | --- | --- |
| 1985 | $3,327 | 170/365 | 100 | $1,550 |
| 1986 | 3,327 | 365/365 | 100 | 3,327 |
| 1987 | 3,327 | 365/365 | 45 | 1,497 |
| | 750 | | 81.67 | 612 |
| 1988 | 1,650 | 366/366 | 45 | 743 |
| 1989 | 1,362 | 365/365 | 45 | 613 |

(98 Stat. 494, 26 U.S.C. 280F; 68A Stat. 917, 26 U.S.C. 7805)

[T.D. 7986, 49 FR 42710, Oct. 24, 1984, as amended by T.D. 8061, 50 FR 46038, Nov. 6, 1985; T.D. 8218, 53 FR 29881, Aug. 9, 1988; T.D. 8473, 58 FR 19060, Apr. 12, 1993; T.D. 9133, 69 FR 35514, June 25, 2004]