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Lessee’s Inclusion Amount: Business Depreciation (2025 IRS Guide)

This guide covers “Lessee’s Inclusion Amount” within business depreciation. The following material presents the IRS treatment of this topic, including the qualifications, exceptions, and examples in the source section. Read the rules alongside the facts of your own situation before deciding what to report, deduct, or document.

Adapted from Publication 946 (2025), How To Depreciate Property, published by the Internal Revenue Service. This guide retains the source edition’s years, amounts, deadlines, and examples. It is guidance for that edition, not a statement that the same figures apply to every tax year.

Context for these rules

You can claim the section 179 deduction and a special depreciation allowance for listed property and depreciate listed property using GDS and a declining balance method if the property meets the business-use requirement. To meet this requirement, listed property must be used predominantly (more than 50% of its total use) for qualified business use. There is also a 25% test for business aircraft (discussed earlier). If this requirement is not met, the following rules apply.

  • Property not used predominantly for qualified business use during the year it is placed in service does not qualify for the section 179 deduction.

  • Property not used predominantly for qualified business use during the year it is placed in service does not qualify for a special depreciation allowance.

  • Any depreciation deduction under MACRS for property not used predominantly for qualified business use during any year must be figured using the straight line method over the ADS recovery period. This rule applies each year of the recovery period.

  • Excess depreciation on property previously used predominantly for qualified business use must be recaptured (included in income) in the first year in which it is no longer used predominantly for qualified business use.

  • A lessee must add an inclusion amount to income in the first year in which the leased property is not used predominantly for qualified business use.

Lessee’s Inclusion Amount

If you use leased listed property other than a passenger automobile for business/investment use, you must include an amount in your income in the first year your qualified business-use percentage is 50% or less. Your qualified business-use percentage is the part of the property’s total use that is qualified business use (defined earlier). For the inclusion amount rules for a leased passenger automobile, see Leasing a Car in chapter 4 of Pub. 463.

The inclusion amount is the sum of Amount A and Amount B, described next. However, see the special rules for the inclusion amount, later, if your lease begins in the last 9 months of your tax year or is for less than 1 year.

Amount A.

Amount A is:

  1. The FMV of the property, multiplied by

  2. The business/investment use for the first tax year the qualified business-use percentage is 50% or less, multiplied by

  3. The applicable percentage from Table A-19 in Appendix A.

The FMV of the property is the value on the first day of the lease term. If the capitalized cost of an item of listed property is specified in the lease agreement, you must treat that amount as the FMV.

Amount B.

Amount B is:

  1. The FMV of the property, multiplied by

  2. The average of the business/investment use for all tax years the property was leased that precede the first tax year the qualified business-use percentage is 50% or less, multiplied by

  3. The applicable percentage from Table A-20 in Appendix A.

Maximum inclusion amount.

The inclusion amount cannot be more than the sum of the deductible amounts of rent for the tax year in which the lessee must include the amount in gross income.

Inclusion amount worksheet.

The following worksheet is provided to help you figure the inclusion amount for leased listed property.

Inclusion Amount Worksheet for Leased Listed Property

1. Fair market value _____
2. Business/investment use for first year business use is 50% or less _____
3. Multiply line 1 by line 2 _____
4. Rate (%) from Table A-19 _____
5. Multiply line 3 by line 4. This is Amount A _____
6. Fair market value _____
7. Average business/investment use for years property leased before the first year business use is 50% or less . . . . . . . . . . . . . _____
8. Multiply line 6 by line 7 _____
9. Rate (%) from Table A-20 _____
10. Multiply line 8 by line 9. This is Amount B _____
11. Add line 5 and line 10. This is your inclusion amount. Enter here and as other income on the form or schedule on which you originally took the deduction (for example, Schedule C or F (Form 1040), Schedule 1 (Form 1040), Form 1120, etc.) _____

Example.

On February 1, 2023, Larry House, a calendar year taxpayer, leased and placed in service an item of listed property with an FMV of $3,000. The lease is for a period of 5 years. Larry does not use the item of listed property at a regular business establishment, so it is listed property. Larry’s business use of the property (all of which is qualified business use) is 80% in 2023, 60% in 2024, and 40% in 2025. Larry must add an inclusion amount to gross income for 2025, the first tax year Larry’s qualified business-use percentage is 50% or less. The item of listed property has a 5-year recovery period under both GDS and ADS. 2025 is the third tax year of the lease, so the applicable percentage from Table A-19 is −19.8%. The applicable percentage from Table A-20 is 22%. Larry’s deductible rent for the item of listed property for 2025 is $800.

Larry uses the inclusion amount worksheet to figure the amount that must be included in income for 2025. Larry’s inclusion amount is $224, which is the sum of −$238 (Amount A) and $462 (Amount B).

Inclusion Amount Worksheet for Leased Listed Property

1. Fair market value $3,000
2. Business/investment use for first year business use is 50% or less 40%
3. Multiply line 1 by line 2 1,200
4. Rate (%) from Table A-19 −19.8%
5. Multiply line 3 by line 4. This is Amount A −238
6. Fair market value 3,000
7. Average business/investment use for years property leased before the first year business use is 50% or less 70%
8. Multiply line 6 by line 7 2,100
9. Rate (%) from Table A-20 22.0%
10. Multiply line 8 by line 9. This is Amount B 462
11. Add line 5 and line 10. This is your inclusion amount. Enter here and as other income on the form or schedule on which you originally took the deduction (for example, Schedule C or F (Form 1040), Schedule 1 (Form 1040), Form 1120, etc.) $224

Lease beginning in the last 9 months of your tax year.

The inclusion amount is subject to a special rule if all the following apply.

  • The lease term begins within 9 months before the close of your tax year.

  • You do not use the property predominantly (more than 50%) for qualified business use during that part of the tax year.

  • The lease term continues into your next tax year.

Under this special rule, add the inclusion amount to income in the next tax year. Figure the inclusion amount by taking into account the average of the business/investment use for both tax years (line 2 of the Inclusion Amount Worksheet for Leased Listed Property) and the applicable percentage for the tax year the lease term begins. Skip lines 6 through 9 of the worksheet and enter zero on line 10.

Example 1.

On August 1, 2024, Julie Rule, a calendar year taxpayer, leased and placed in service an item of listed property. The property is 5-year property with an FMV of $10,000. Julie’s property has a recovery period of 5 years under ADS. The lease is for 5 years. Julie’s business use of the property was 50% in 2024 and 90% in 2025. Julie paid rent of $3,600 for 2024, of which $3,240 is deductible. Julie must include $147 in income in 2025. The $147 is the sum of Amount A and Amount B. Amount A is $147 ($10,000 × 70% (0.70) × 2.1% (0.021)), the product of the FMV, the average business use for 2024 and 2025, and the applicable percentage for year 1 from Table A-19. Amount B is zero.

Lease for less than 1 year.

A special rule for the inclusion amount applies if the lease term is less than 1 year and you do not use the property predominantly (more than 50%) for qualified business use. The amount included in income is the inclusion amount (figured as described in the preceding discussions) multiplied by a fraction. The numerator of the fraction is the number of days in the lease term, and the denominator is 365 (or 366 for leap years).

The lease term for listed property includes options to renew. If you have two or more successive leases that are part of the same transaction (or a series of related transactions) for the same or substantially similar property, treat them as one lease.

Example 2.

On October 1, 2024, John Joyce, a calendar year taxpayer, leased and placed in service an item of listed property that is 3-year property. This property had an FMV of $15,000 and a recovery period of 5 years under ADS. The lease term was 6 months (ending on March 31, 2025), during which John used the property 45% in business. John must include $71 in income in 2025. The $71 is the sum of Amount A and Amount B. Amount A is $71 ($15,000 × 45% (0.45) × 2.1% (0.021) × 183/365), the product of the FMV, the average business use for both years, and the applicable percentage for year 1 from Table A-19, prorated for the length of the lease. Amount B is zero.

Where to report the inclusion amount.

Report the inclusion amount figured (as described in the preceding discussions) as other income on the same form or schedule on which you took the deduction for your rental costs. For example, report the inclusion amount as other income on Schedule C (Form 1040) if you took the deduction on Schedule C. If you took the deduction for rental costs on Form 2106, report the inclusion amount as other income on Schedule 1 (Form 1040), line 8z.

Using the guidance

Keep the documents that establish the dates, amounts, and circumstances described above. References to other chapters, forms, worksheets, or earlier and later sections refer to the linked IRS publication. Check the full publication and its updates before relying on a rule for a different tax year or a situation not addressed here.

Sources and further reading

The cited U.S. government text is in the public domain. Source accessed October 28, 2026. Fynoptic has organized this material for educational use and is independent of, and not endorsed by, the IRS.

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