179 Recapture, Are drones Listed Property?

Taxpayer purchased drones for use in his schedule C business over the past 3 years. Wondering if drones are considered listed property. Took Sec. 179 on drones each year. In 2022 he is not longer self-employed, working as an employee on W-2. Since business use has dropped to less than 50% (I assume he cannot consider use as an employee as business use) seems he would need to recapture the excess Sec.179. Questions, is it over MACRs or straight-line (listed property), and I would assume it's subject to SE tax and eligible for QBI. Thoughts/comments? Thanks.

I suppose you're considering the drones to be "Property generally used for entertainment, recreation, or amusement (including photographic, phonographic, communication, and video recording equipment)" and therefore listed property. I don't necessarily agree, but I'm not really an expert on drones.

Are the drones being used in his W-2 job? If so, I don't see why that would make it non-business use. For example, employers can still reimburse employees for the business (i.e., employment-related) use of their car and stuff.

The method of depreciation used in figuring the recapture amount (and future potential depreciation deductions) depends on whether it's listed property or not.

If you do end up with a taxable recapture amount (which I doubt, personally), it would go on Sch. C line 6 in the year it dropped to 50% or less business use (if indeed it did). That makes it subject to SE tax and eligible for QBI.

Thanks for your input. If I can establish using it as an employee, which he does, constitutes business use I would agree with you and is the better conclusion for sure.

I'd like to focus specifically on whether 179 recapture applies, as fascinating as the rest is (like whether a drone is "generally" used the way beardenjv says above.) Didn't Amazon use them for deliveries?

Even if the change in use in 2022 is considered a change to non-business use, it's not necessarily the year for 179 recapture. Let's say it goes from 100% business use to 0%, but not until, say, November 30. Wouldn't it still be 91-2/3% (11/12) business use in 2022? I read this reg. as saying the recapture would be in the following year.

If a taxpayer's section 179 property is not used predominantly in a trade or business of the taxpayer at any time before the end of the property's recovery period, the taxpayer must recapture in the taxable year in which the section 179 property is not used predominantly in a trade or business any benefit derived from expensing such property.

. And I don't know the recovery period of a drone, but if we're past that, doesn't it leave us with no 179 recapture?

That excerpt is from reg. 1.179-1(e), which goes on to explain predominant use.

Predominant use. Property will be treated as not used predominantly in a trade or business of the taxpayer if 50 percent or more of the use of such property during any taxable year within the recapture period is for a use other than in a trade or business of the taxpayer.

. Then the reg. refers to not just the listed property rules but also the investment credit rules, and in so doing explains that there is no tax benefit rule here, and

in the case of an individual who does not elect to itemize deductions under section 63(g) in the taxable year of recapture, the amount allowable as a deduction under section 168 in the taxable year of recapture shall be determined by treating property used in the production of income other than rents or royalties as being property used for personal purposes.

. That's a doozy. I'll have to think about what itemized deductions have to do with it, but one of you will tell me before I figure it out. And I digress, because what we need to figure out is whether a switch to using the property as an employee is or is not a switch to personal use. We all know there is such a thing as being in the trade or business of being an employee, but just for certain purposes. Again, one of you will find that rule and let us know how if at all that applies here.

Here's the reg. https://www.law.cornell.edu/cfr/text/26/1.179-1

Even if the change in use in 2022 is considered a change to non-business use, it's not necessarily the year for 179 recapture. Let's say it goes from 100% business use to 0%, but not until, say, November 30. Wouldn't it still be 91-2/3% (11/12) business use in 2022? I read this reg. as saying the recapture would be in the following year.

If a taxpayer's section 179 property is not used predominantly in a trade or business of the taxpayer at any time before the end of the property's recovery period, the taxpayer must recapture in the taxable year in which the section 179 property is not used predominantly in a trade or business any benefit derived from expensing such property.

.

I agree. Usually when I've done a 179 recapture, the result is a Sch. C for the year after the year in which they went out of business, with nothing on it except the recapture income.

And I don't know the recovery period of a drone, but if we're past that, doesn't it leave us with no 179 recapture?

Correct. But I bet the depreciable life is either 5 or 7 years, which is more than the 3 years the drone has been used so far.

That excerpt is from reg. 1.179-1(e), which goes on to explain predominant use.

Predominant use. Property will be treated as not used predominantly in a trade or business of the taxpayer if 50 percent or more of the use of such property during any taxable year within the recapture period is for a use other than in a trade or business of the taxpayer.

. Then the reg. refers to not just the listed property rules but also the investment credit rules, and in so doing explains that there is no tax benefit rule here, and

in the case of an individual who does not elect to itemize deductions under section 63(g) in the taxable year of recapture, the amount allowable as a deduction under section 168 in the taxable year of recapture shall be determined by treating property used in the production of income other than rents or royalties as being property used for personal purposes.

. That's a doozy. I'll have to think about what itemized deductions have to do with it, but one of you will tell me before I figure it out. And I digress, because what we need to figure out is whether a switch to using the property as an employee is or is not a switch to personal use. We all know there is such a thing as being in the trade or business of being an employee, but just for certain purposes. Again, one of you will find that rule and let us know how if at all that applies here.

Well, I haven't really done the research to find the rule, but as I recall from pre-TCJA, I'm pretty sure Sec. 179 deduction was allowed for property used by an employee. Now, after TCJA, employee's unreimbursed expenses aren't deductible (with a few exceptions), but they're still reimbursable, and I would be surprised if the pretty short language in the TCJA disallowing employees' deductions changed the nature of what qualifies for Sec. 179. For example, assuming you take the position that depreciation is reimbursable, I figure this taxpayer's new employer could reimburse the Sec. 179 depreciation on the next drone the employee buys.

He has no schedule C income in 2022, so 2021 would be the last year used being self-employed.

There are drones that cost $100 at best buy, then there are commercial workhorses that are as big as a VW Beetle and cost five figures. Context is important.

Don't you need a license from the FAA to fly drones for commercial purposes? Does he have one?

These were in the $10k-$20k range, I do not know about the license, the rules or whether he has one.

Better question is, why doesn't he have a Schedule C any more?

I bet if you asked the right questions enough times you would hear him say, "oh yeah, I did do a couple of jobs on the weekends during the year" that he got paid cash for, and didn't want to report it.

And these days when people switch jobs every year, it is perfectly plausible that he could be working for someone as a contractor next month, and needs that Schedule C again. And then you have to uncapture the recapture, if possible.

Some taxpayers think they can only have a W-2 or Schedule C, when in reality a lot of taxpayers can and do have both simultaneously.

So keep asking, and tell him it is to his benefit in this case to report any side income he may have earned.