Question

Which one of the following statements is correct regarding an asset that is used for both business and personal purposes?

Option 1: The deductible business expense is determined by prorating the expenses based on the percentage of time it is used for business.
Option 2: One-half of the expense related to the asset is deductible as a business expense.
Option 3: None of the expense related to the asset is deductible since this treatment would lend itself to taxpayer abuse.
Option 4: The entire amount of any expense related to the asset is deductible since it is necessary to have the asset for the business.

Answer 1

The entire amount of any expense related to an asset that is used for both business and personal purposes is not deductible. Only the portion of the expense that is directly related to the business use of the asset is deductible.

Step-by-step explanation:

Option 4: The statement that the entire amount of any expense related to the asset is deductible since it is necessary to have the asset for the business is incorrect.

When an asset is used for both business and personal purposes, only the portion of the expense that is directly related to the business use of the asset is deductible. The portion of the expense that is related to personal use is not deductible.

For example, if you use your personal vehicle for both business and personal purposes, you can deduct the expenses related to the business use of the vehicle, such as fuel costs and maintenance, but not the expenses related to personal use, such as commuting to and from work.

The correct statement regarding an asset used for both business and personal purposes is not the one suggesting that the entire amount of any expense related to the asset is deductible because it is necessary for the business. Instead, the tax-deductible portion of expenses related to a dual-purpose asset depends on the percentage of time or use that is specifically for business. Only the costs attributed to business use are typically eligible for a deduction on your taxes. When an asset like a house, land, or vehicle is used for both personal and business reasons, the taxpayer must allocate the expenses between the business-use portion and the personal-use portion on their balance sheet and tax return.