The containment amount is an increase in the taxable income of the taxpayer or a decrease in the tax deduction when using listed properties for rent in their business. The taxpayer must include the containment amount in their taxable income for the year, either as other income or as a reduction in the rental tax deduction. The listed properties for rent must meet certain criteria set by the Internal Revenue Service. Containment amounts are reported in different ways depending on the type of listed property for rent and the type of activity it was used for. The containment amount reduces the tax deduction for passenger vehicles that have a market value at the time of rental that exceeds a certain amount. The containment amount for listed rental properties other than passenger vehicles must be included for each year in which the property’s business use percentage is 50% or less.
How does the containment amount work?
The effect of the containment amount depends on the type of listed rental property that you rented: a passenger vehicle or a non-vehicle listed property. These properties are typically used for entertainment or leisure purposes in addition to being used in your business.
The containment amount for passenger vehicles is activated when the fair market value of the vehicle exceeds a certain amount determined by the Internal Revenue Service (IRS) based on the date of the vehicle’s lease. The containment amount for non-passenger listed rental properties is activated based on the business use percentage of the property when it is 50% or less for the tax year.
Example of the containment amount
The containment amount is an increase in the taxpayer’s income or a reduction in the taxpayer’s deduction for listed properties used in the taxpayer’s business. Listed properties are those used for both business and personal purposes, such as a car or camera used by the company for non-business purposes.
You may deduct part of the rental payments associated with using your car for business purposes if you leased a vehicle for business purposes in 2022 and its market value exceeded $56,000. However, this deduction must be reduced by the containment amount specified by the Internal Revenue Service.
Leased passenger vehicles
You are typically eligible for a deduction from one of the following items if you leased a vehicle for business purposes:
- A standard amount per mile based on the number of miles you drove the vehicle for business purposes during the year.
- Actual vehicle expenses related to using the vehicle for business purposes during the year.
The taxpayer often calculates the deduction based on both the standard mileage deduction method and the actual expenses method, then uses the method that results in the larger deduction. However, you must use the standard mileage deduction method in all subsequent lease years if you choose to use that method in one year.
Calculating leased passenger vehicle deductions
You can calculate your deduction based on the standard mileage rate by starting with the total number of miles you drove the vehicle for business purposes during the year. Then multiply this number by the standard mileage rate for the year or other period specified by the IRS, which is adjusted annually for inflation.
Note: You can also deduct any fees and parking charges you pay while driving your leased vehicle for business purposes.
For example, you may be eligible to deduct vehicle expenses of $5,850 if you drove your vehicle for business purposes for 10,000 miles during the year 2022 when the standard mileage rate for business purposes was 58.5 cents per mile: 10,000 × 0.585 = $5,850. This assumes you are using the standard mileage deduction method and that the containment amount does not apply.
You can total the actual expenses incurred during the year if you choose to use the actual expenses method for the leased vehicle. This includes costs such as fuel, oil, repairs, and rental payments. Multiply this amount by the business use percentage of the vehicle, which is usually calculated as the miles driven during the year for business purposes divided by the total miles driven in the vehicle during the year.
Let’s assume
You incurred $12,000 in total car expenses for the year. You drove the car a total of 10,000 miles during the year, with 7,500 miles of that driven for business purposes. Your car expense deduction based on the actual expense method will be $9,000, regardless of the inclusion amount. The calculations will be as follows: 7,500 / 10,000 = 0.75 (75%), then 0.75 × 12,000 = $9,000.
Inclusion Amount for Passenger Vehicles Leased
You must reduce your deduction by the inclusion amount if your vehicle is a passenger car such as a car, truck, or van with a fair market value at the start of the lease greater than the amount shown in this table. The amount is based on the lease start date and type of vehicle. You must have used this leased vehicle in your business for at least 30 days during the tax year.
| Lease Start Year | Fair Market Value |
|---|---|
| 2022 | $56,000 |
| 2021 | $51,000 |
| 2018 – 2020 | $50,000 |
| 2013 – 2017 | $19,000 |
| 2010 – 2012 | $18,500 |
| 2014 – 2017 | $19,500 |
| 2010 – 2013 | $19,000 |
Assume you leased your vehicle on September 1, 2022, and it had a fair market value of $71,000. There are 122 days between September 1, 2022, and December 31, 2022, and there are 356 days in the year. Therefore, you used the vehicle for 34.26% of the year: 122 / 356 = 0.3426 (34.26%).
Use the IRS worksheet to find the inclusion amount for the first tax year of your lease, or 2022. This amount is prorated based on the number of days the vehicle was used for business (34.26%) plus the business use percentage of the vehicle. You would get the inclusion amount of $12.30: 0.34 (34.26%) × 0.75 (75%) × $19 = $4.84.
Your initial deduction amount will be reduced by $4.84 in this example to arrive at a final actual car expense deduction of $8,995.16: $9,000 – $4.84 = $8,995.16.
How to Report the Inclusion Amount
The place to report the inclusion amount for the leased vehicle depends on the purpose for which you use the vehicle.
| Activity | Where to Report the Inclusion Amount |
|---|---|
| Employment as a reserve officer in the armed forces, qualified performing artist, local or state government official compensated, or as a person with a disability claiming work-related expenses related to the disability | Deduct the stated amount on Form 2106, Section C, Line 24b by the inclusion amount. |
| Sole Proprietorship | Deduct the stated amount on Schedule C, Line 20a by the inclusion amount. |
| Agricultural Business | Deduct the stated amount on Schedule F, Line 24a by the inclusion amount. |
Inclusion Amounts for Other Listed Property Leased
Taxpayers must increase their income by the inclusion amount for that tax year if the percentage of business use of the property for listed property other than passenger vehicles is 50% or less. The inclusion amount for such properties is determined by the sum of two amounts: “Amount A” and “Amount B.” These amounts are defined as follows:
- The amount
Source: https://www.thebalancemoney.com/what-is-an-inclusion-amount-5207546
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