2.   Electing the Section 179 Deduction

Introduction

You can elect to recover all or part of the cost of certain qualifying property, up to a limit, by deducting it in the year you place the property in service. This is the section 179 deduction. You can elect the section 179 deduction instead of recovering the cost by taking depreciation deductions.

Estates and trusts cannot elect the section 179 deduction.

This chapter explains what property does and does not qualify for the section 179 deduction, what limits apply to the deduction (including special rules for partnerships and corporations), and how to elect it. It also explains when and how to recapture the deduction.

Useful Items - You may want to see:

Publication

  • 537 Installment Sales

  • 544 Sales and Other Dispositions of Assets

  • 954 Tax Incentives for Distressed Communities

Form (and Instructions)

  • 4562 Depreciation and Amortization

  • 4797 Sales of Business Property

See chapter 6 for information about getting publications and forms.

What Property Qualifies?

To qualify for the section 179 deduction, your property must meet all the following requirements.

  • It must be eligible property.

  • It must be acquired for business use.

  • It must have been acquired by purchase.

  • It must not be property described later under What Property Does Not Qualify .

The following discussions provide information about these requirements and exceptions.

Eligible Property

To qualify for the section 179 deduction, your property must be one of the following types of depreciable property.

  1. Tangible personal property.

  2. Other tangible property (except buildings and their structural components) used as:

    1. An integral part of manufacturing, production, or extraction or of furnishing transportation, communications, electricity, gas, water, or sewage disposal services,

    2. A research facility used in connection with any of the activities in (a) above, or

    3. A facility used in connection with any of the activities in (a) for the bulk storage of fungible commodities.

  3. Single purpose agricultural (livestock) or horticultural structures. See chapter 7 of Publication 225 for definitions and information regarding the use requirements that apply to these structures.

  4. Storage facilities (except buildings and their structural components) used in connection with distributing petroleum or any primary product of petroleum.

  5. Off-the-shelf computer software.

  6. Qualified real property (described below).

Tangible personal property.   Tangible personal property is any tangible property that is not real property. It includes the following property.
  • Machinery and equipment.

  • Property contained in or attached to a building (other than structural components), such as refrigerators, grocery store counters, office equipment, printing presses, testing equipment, and signs.

  • Gasoline storage tanks and pumps at retail service stations.

  • Livestock, including horses, cattle, hogs, sheep, goats, and mink and other furbearing animals.

  The treatment of property as tangible personal property for the section 179 deduction is not controlled by its treatment under local law. For example, property may not be tangible personal property for the deduction even if treated so under local law, and some property (such as fixtures) may be tangible personal property for the deduction even if treated as real property under local law.

Off-the-shelf computer software.   Off-the-shelf computer software placed in service during the tax year is qualifying property for purposes of the section 179 deduction. This is computer software that is readily available for purchase by the general public, is subject to a nonexclusive license, and has not been substantially modified. It includes any program designed to cause a computer to perform a desired function. However, a database or similar item is not considered computer software unless it is in the public domain and is incidental to the operation of otherwise qualifying software.

Qualified real property.   You can elect to treat certain qualified real property you placed in service as section 179 property for tax years beginning in 2013. If this election is made, the term “section 179 property” will include any qualified real property that is:
  • Qualified leasehold improvement property,

  • Qualified restaurant property, or

  • Qualified retail improvement property.

The maximum section 179 expense deduction that can be elected for qualified section 179 real property is $250,000 of the maximum section 179 deduction of $500,000 in 2013. For more information, see Special rules for qualified section 179 real property, later. Also, see Election for certain qualified section 179 real property, later, for information on how to make this election.

Qualified leasehold improvement property.   Generally, this is any improvement to an interior part of a building (placed in service before January 1, 2014) that is nonresidential real property, provided all of the requirements discussed in chapter 3 under Qualified leasehold improvement property are met.

  In addition, an improvement made by the lessor does not qualify as qualified leasehold improvement property to any subsequent owner unless it is acquired from the original lessor by reason of the lessor’s death or in any of the following types of transactions.
  1. A transaction to which section 381(a) applies,

  2. A mere change in the form of conducting the trade or business so long as the property is retained in the trade or business as qualified leasehold improvement property and the taxpayer retains a substantial interest in the trade or business,

  3. A like-kind exchange, involuntary conversion, or re-acquisition of real property to the extent that the basis in the property represents the carryover basis, or

  4. Certain nonrecognition transactions to the extent that your basis in the property is determined by reference to the transferor’s or distributor’s basis in the property. Examples include the following.

    1. A complete liquidation of a subsidiary.

    2. A transfer to a corporation controlled by the transferor.

    3. An exchange of property by a corporation solely for stock or securities in another corporation in a reorganization.

Qualified restaurant property.   Qualified restaurant property is any section 1250 property that is a building or an improvement to a building placed in service after December 31, 2008, and before January 1, 2014. Also, more than 50% of the building’s square footage must be devoted to preparation of meals and seating for on-premise consumption of prepared meals.

Qualified retail improvement property.   Generally, this is any improvement (placed in service after December 31, 2008, and before January 1, 2014) to an interior portion of nonresidential real property if it meets the following requirements.
  1. The portion is open to the general public and is used in the retail trade or business of selling tangible property to the general public.

  2. The improvement is placed in service more than 3 years after the date the building was first placed in service.

  3. The expenses are not for the enlargement of the building, any elevator or escalator, any structural components benefiting a common area, or the internal structural framework of the building.

In addition, an improvement made by the lessor does not qualify as qualified retail improvement property to any subsequent owner unless it is acquired from the original lessor by reason of the lessor’s death or in any of the following types of transactions.
  1. A transaction to which section 381(a) applies,

  2. A mere change in the form of conducting the trade or business so long as the property is retained in the trade or business as qualified leasehold improvement property and the taxpayer retains a substantial interest in the trade or business,

  3. A like-kind exchange, involuntary conversion, or re-acquisition of real property to the extent that the basis in the property represents the carryover basis, or

  4. Certain nonrecognition transactions to the extent that your basis in the property is determined by reference to the transferor’s or distributor’s basis in the property. Examples include the following.

    1. A complete liquidation of a subsidiary.

    2. A transfer to a corporation controlled by the transferor.

    3. An exchange of property by a corporation solely for stock or securities in another corporation in a reorganization.

Property Acquired for Business Use

To qualify for the section 179 deduction, your property must have been acquired for use in your trade or business. Property you acquire only for the production of income, such as investment property, rental property (if renting property is not your trade or business), and property that produces royalties, does not qualify.

Partial business use.   When you use property for both business and nonbusiness purposes, you can elect the section 179 deduction only if you use the property more than 50% for business in the year you place it in service. If you use the property more than 50% for business, multiply the cost of the property by the percentage of business use. Use the resulting business cost to figure your section 179 deduction.

Example.

May Oak bought and placed in service an item of section 179 property costing $11,000. She used the property 80% for her business and 20% for personal purposes. The business part of the cost of the property is $8,800 (80% × $11,000).

Property Acquired by Purchase

To qualify for the section 179 deduction, your property must have been acquired by purchase. For example, property acquired by gift or inheritance does not qualify.

Property is not considered acquired by purchase in the following situations.

  1. It is acquired by one component member of a controlled group from another component member of the same group.

  2. Its basis is determined either—

    1. In whole or in part by its adjusted basis in the hands of the person from whom it was acquired, or

    2. Under the stepped-up basis rules for property acquired from a decedent.

  3. It is acquired from a related person.

Related persons.   Related persons are described under Related persons earlier. However, to determine whether property qualifies for the section 179 deduction, treat as an individual's family only his or her spouse, ancestors, and lineal descendants and substitute "50%" for "10%" each place it appears.

Example.

Ken Larch is a tailor. He bought two industrial sewing machines from his father. He placed both machines in service in the same year he bought them. They do not qualify as section 179 property because Ken and his father are related persons. He cannot claim a section 179 deduction for the cost of these machines.

What Property Does Not Qualify?

Certain property does not qualify for the section 179 deduction. This includes the following.

Land and Improvements

Land and land improvements do not qualify as section 179 property. Land improvements include swimming pools, paved parking areas, wharves, docks, bridges, and fences.

Excepted Property

Even if the requirements explained earlier under What Property Qualifies are met, you cannot elect the section 179 deduction for the following property.

  • Certain property you lease to others (if you are a noncorporate lessor).

  • Certain property used predominantly to furnish lodging or in connection with the furnishing of lodging.

  • Air conditioning or heating units.

  • Property used predominantly outside the United States, except property described in section 168(g)(4) of the Internal Revenue Code.

  • Property used by certain tax-exempt organizations, except property used in connection with the production of income subject to the tax on unrelated trade or business income.

  • Property used by governmental units or foreign persons or entities, except property used under a lease with a term of less than 6 months.

Leased property.   Generally, you cannot claim a section 179 deduction based on the cost of property you lease to someone else. This rule does not apply to corporations. However, you can claim a section 179 deduction for the cost of the following property.
  1. Property you manufacture or produce and lease to others.

  2. Property you purchase and lease to others if both the following tests are met.

    1. The term of the lease (including options to renew) is less than 50% of the property's class life.

    2. For the first 12 months after the property is transferred to the lessee, the total business deductions you are allowed on the property (other than rents and reimbursed amounts) are more than 15% of the rental income from the property.

Property used for lodging.   Generally, you cannot claim a section 179 deduction for property used predominantly to furnish lodging or in connection with the furnishing of lodging. However, this does not apply to the following types of property.
  • Nonlodging commercial facilities that are available to those not using the lodging facilities on the same basis as they are available to those using the lodging facilities.

  • Property used by a hotel or motel in connection with the trade or business of furnishing lodging where the predominant portion of the accommodations is used by transients.

  • Any certified historic structure to the extent its basis is due to qualified rehabilitation expenditures.

  • Any energy property.

Energy property.   Energy property is property that meets the following requirements.
  1. It is one of the following types of property.

    1. Equipment that uses solar energy to generate electricity, to heat or cool a structure, to provide hot water for use in a structure, or to provide solar process heat, except for equipment used to generate energy to heat a swimming pool.

    2. Equipment placed in service after December 31, 2005, and before January 1, 2017, that uses solar energy to illuminate the inside of a structure using fiber-optic distributed sunlight.

    3. Equipment used to produce, distribute, or use energy derived from a geothermal deposit. For electricity generated by geothermal power, this includes equipment up to (but not including) the electrical transmission stage.

    4. Qualified fuel cell property or qualified microturbine property placed in service after December 31, 2005, and before January 1, 2017.

  2. The construction, reconstruction, or erection of the property must be completed by you.

  3. For property you acquire, the original use of the property must begin with you.

  4. The property must meet the performance and quality standards, if any, prescribed by Income Tax Regulations in effect at the time you get the property.

  For periods before February 14, 2008, energy property does not include any property that is public utility property as defined by section 46(f)(5) of the Internal Revenue Code (as in effect on November 4, 1990).

How Much Can You Deduct?

Your section 179 deduction is generally the cost of the qualifying property. However, the total amount you can elect to deduct under section 179 is subject to a dollar limit and a business income limit. These limits apply to each taxpayer, not to each business. However, see Married Individuals under Dollar Limits , later. For a passenger automobile, the total section 179 deduction and depreciation deduction are limited. See Do the Passenger Automobile Limits Apply in chapter 5 .

If you deduct only part of the cost of qualifying property as a section 179 deduction, you can generally depreciate the cost you do not deduct.

Trade-in of other property.   If you buy qualifying property with cash and a trade-in, its cost for purposes of the section 179 deduction includes only the cash you paid.

Example.

Silver Leaf, a retail bakery, traded two ovens having a total adjusted basis of $680 for a new oven costing $1,320. They received an $800 trade-in allowance for the old ovens and paid $520 in cash for the new oven. The bakery also traded a used van with an adjusted basis of $4,500 for a new van costing $9,000. They received a $4,800 trade-in allowance on the used van and paid $4,200 in cash for the new van.

Only the portion of the new property's basis paid by cash qualifies for the section 179 deduction. Therefore, Silver Leaf's qualifying costs for the section 179 deduction are $4,720 ($520 + $4,200).

Dollar Limits

The total amount you can elect to deduct under section 179 for most property placed in service in 2013 generally cannot be more than $500,000. If you acquire and place in service more than one item of qualifying property during the year, you can allocate the section 179 deduction among the items in any way, as long as the total deduction is not more than $500,000. You do not have to claim the full $500,000.

Qualified real property (described earlier) that you elected to treat as section 179 real property is limited to $250,000 of the maximum deduction of $500,000 for 2013.

The amount you can elect to deduct is not affected if you place qualifying property in service in a short tax year or if you place qualifying property in service for only a part of a 12-month tax year.

After you apply the dollar limit to determine a tentative deduction, you must apply the business income limit (described later) to determine your actual section 179 deduction.

Example.

In 2013, you bought and placed in service $500,000 in machinery and a $25,000 circular saw for your business. You elect to deduct $475,000 for the machinery and the entire $25,000 for the saw, a total of $500,000. This is the maximum amount you can deduct. Your $25,000 deduction for the saw completely recovered its cost. Your basis for depreciation is zero. The basis for depreciation of your machinery is $25,000. You figure this by subtracting your $475,000 section 179 deduction for the machinery from the $500,000 cost of the machinery.

Situations affecting dollar limit.   Under certain circumstances, the general dollar limits on the section 179 deduction may be reduced or increased or there may be additional dollar limits. The general dollar limit is affected by any of the following situations.
  • The cost of your section 179 property placed in service exceeds $2,000,000.

  • Your business is an enterprise zone business.

  • You placed in service a sport utility or certain other vehicles.

  • You are married filing a joint or separate return.

Costs exceeding $2,000,000

If the cost of your qualifying section 179 property placed in service in a year is more than $2,000,000, you generally must reduce the dollar limit (but not below zero) by the amount of cost over $2,000,000. If the cost of your section 179 property placed in service during 2013 is $2,500,000 or more, you cannot take a section 179 deduction.

Example.

In 2013, Jane Ash placed in service machinery costing $2,100,000. This cost is $100,000 more than $2,000,000, so she must reduce her dollar limit to $400,000 ($500,000 − $100,000).

Enterprise Zone Businesses

An increased section 179 deduction is available to enterprise zone businesses for qualified zone property placed in service during the tax year, in an empowerment zone. For more information including the definitions of “enterprise zone business” and “qualified zone property,” see sections 1397A, 1397C, and 1397D of the Internal Revenue Code.

The dollar limit on the section 179 deduction is increased by the smaller of:

  • $35,000, or

  • The cost of section 179 property that is also qualified zone property placed in service before January 1, 2014 (including such property placed in service by your spouse, even if you are filing a separate return).

Note.   You take into account only 50% (instead of 100%) of the cost of qualified zone property placed in service in a year when figuring the reduced dollar limit for costs exceeding $2,000,000 (explained earlier).

Sport Utility and Certain Other Vehicles

You cannot elect to expense more than $25,000 of the cost of any heavy sport utility vehicle (SUV) and certain other vehicles placed in service during the tax year. This rule applies to any 4-wheeled vehicle primarily designed or used to carry passengers over public streets, roads, or highways, that is rated at more than 6,000 pounds gross vehicle weight and not more than 14,000 pounds gross vehicle weight. However, the $25,000 limit does not apply to any vehicle:

  • Designed to seat more than nine passengers behind the driver's seat,

  • Equipped with a cargo area (either open or enclosed by a cap) of at least six feet in interior length that is not readily accessible from the passenger compartment, or

  • That has an integral enclosure fully enclosing the driver compartment and load carrying device, does not have seating rearward of the driver's seat, and has no body section protruding more than 30 inches ahead of the leading edge of the windshield.

Married Individuals

If you are married, how you figure your section 179 deduction depends on whether you file jointly or separately. If you file a joint return, you and your spouse are treated as one taxpayer in determining any reduction to the dollar limit, regardless of which of you purchased the property or placed it in service. If you and your spouse file separate returns, you are treated as one taxpayer for the dollar limit, including the reduction for costs over $2,000,000. You must allocate the dollar limit (after any reduction) between you equally, unless you both elect a different allocation. If the percentages elected by each of you do not total 100%, 50% will be allocated to each of you.

Example.

Jack Elm is married. He and his wife file separate returns. Jack bought and placed in service $2,000,000 of qualified farm machinery in 2013. His wife has her own business, and she bought and placed in service $30,000 of qualified business equipment. Their combined dollar limit is $470,000. This is because they must figure the limit as if they were one taxpayer. They reduce the $500,000 dollar limit by the $30,000 excess of their costs over $2,000,000.

They elect to allocate the $470,000 dollar limit as follows.

  • $446,500 ($470,000 x 95%) to Mr. Elm's machinery.

  • $23,500 ($470,000 x 5%) to Mrs. Elm's equipment.

If they did not make an election to allocate their costs in this way, they would have to allocate $235,000 ($470,000 × 50%) to each of them.

Joint return after filing separate returns.   If you and your spouse elect to amend your separate returns by filing a joint return after the due date for filing your return, the dollar limit on the joint return is the lesser of the following amounts.
  • The dollar limit (after reduction for any cost of section 179 property over $2,000,000).

  • The total cost of section 179 property you and your spouse elected to expense on your separate returns.

Example.

The facts are the same as in the previous example except that Jack elected to deduct $30,000 of the cost of section 179 property on his separate return and his wife elected to deduct $2,000. After the due date of their returns, they file a joint return. Their dollar limit for the section 179 deduction is $32,000. This is the lesser of the following amounts.

  • $470,000—The dollar limit less the cost of section 179 property over $2,000,000.

  • $32,000—The total they elected to expense on their separate returns.

Business Income Limit

The total cost you can deduct each year after you apply the dollar limit is limited to the taxable income from the active conduct of any trade or business during the year. Generally, you are considered to actively conduct a trade or business if you meaningfully participate in the management or operations of the trade or business.

Any cost not deductible in one year under section 179 because of this limit can be carried to the next year. Special rules apply to a 2013 deduction of qualified section 179 real property that is disallowed because of the business income limit. See Special rules for qualified section 179 property under Carryover of disallowed deduction, later.

Taxable income.   In general, figure taxable income for this purpose by totaling the net income and losses from all trades and businesses you actively conducted during the year. Net income or loss from a trade or business includes the following items.
  • Section 1231 gains (or losses).

  • Interest from working capital of your trade or business.

  • Wages, salaries, tips, or other pay earned as an employee.

For information about section 1231 gains and losses, see chapter 3 in Publication 544.

  In addition, figure taxable income without regard to any of the following.
  • The section 179 deduction.

  • The self-employment tax deduction.

  • Any net operating loss carryback or carryforward.

  • Any unreimbursed employee business expenses.

Two different taxable income limits.   In addition to the business income limit for your section 179 deduction, you may have a taxable income limit for some other deduction. You may have to figure the limit for this other deduction taking into account the section 179 deduction. If so, complete the following steps.
Step Action
1 Figure taxable income without the section 179 deduction or the other deduction.
2 Figure a hypothetical section 179 deduction using the taxable income figured in Step 1.
3 Subtract the hypothetical section 179 deduction figured in Step 2 from the taxable income figured in Step 1.
4 Figure a hypothetical amount for the other deduction using the amount figured in Step 3 as taxable income.
5 Subtract the hypothetical other deduction figured in Step 4 from the taxable income figured in 
Step 1.
6 Figure your actual section 179 deduction using the taxable income figured in Step 5.
7 Subtract your actual section 179 deduction figured in Step 6 from the taxable income figured in Step 1.
8 Figure your actual other deduction using the taxable income figured in Step 7.

Example.

On February 1, 2013, the XYZ corporation purchased and placed in service qualifying section 179 property that cost $500,000. It elects to expense the entire $500,000 cost under section 179. In June, the corporation gave a charitable contribution of $10,000. A corporation's limit on charitable contributions is figured after subtracting any section 179 deduction. The business income limit for the section 179 deduction is figured after subtracting any allowable charitable contributions. XYZ's taxable income figured without the section 179 deduction or the deduction for charitable contributions is $520,000. XYZ figures its section 179 deduction and its deduction for charitable contributions as follows.

Step 1– Taxable income figured without either deduction is $520,000.

Step 2– Using $520,000 as taxable income, XYZ's hypothetical section 179 deduction is $500,000.

Step 3– $20,000 ($520,000 − $500,000).

Step 4– Using $20,000 (from Step 3) as taxable income, XYZ's hypothetical charitable contribution (limited to 10% of taxable income) is $2,000.

Step 5– $518,000 ($520,000 − $2,000).

Step 6– Using $518,000 (from Step 5) as taxable income, XYZ figures the actual section 179 deduction. Because the taxable income is at least $500,000, XYZ can take a $500,000 section 179 deduction.

Step 7– $20,000 ($520,000 − $500,000).

Step 8– Using $20,000 (from Step 7) as taxable income, XYZ's actual charitable contribution (limited to 10% of taxable income) is $2,000.

Carryover of disallowed deduction.   You can carry over for an unlimited number of years the cost of any section 179 property you elected to expense but were unable to because of the business income limit. This disallowed deduction amount is shown on line 13 of Form 4562. You use the amount you carry over to determine your section 179 deduction in the next year. Enter that amount on line 10 of your Form 4562 for the next year.

  If you place more than one property in service in a year, you can select the properties for which all or a part of the costs will be carried forward. Your selections must be shown in your books and records. For this purpose, treat section 179 costs allocated from a partnership or an S corporation as one item of section 179 property. If you do not make a selection, the total carryover will be allocated equally among the properties you elected to expense for the year.

  If costs from more than one year are carried forward to a subsequent year in which only part of the total carryover can be deducted, you must deduct the costs being carried forward from the earliest year first.

Special rules for qualified section 179 real property.   You can carry over to 2013 a 2012 deduction attributable to qualified section 179 real property that you elected to expense but were unable to take because of the business income limitation. Any such 2012 carryover amounts that are not deducted in 2013, plus any 2013 disallowed section 179 expense deductions attributable to qualified real property, are not carried over to 2014. Instead these amounts are treated as property placed in service on the first day of 2013 for purposes of computing depreciation (including the special depreciation allowance, if applicable). See section 179(f) of the Internal Revenue Code and Notice 2013-59 for more information.

If there is a sale or other disposition of your property (including a transfer at death) before you can use the full amount of any outstanding carryover of your disallowed section 179 deduction, neither you nor the new owner can deduct any of the unused amount. Instead, you must add it back to the property's basis.

Partnerships and Partners

The section 179 deduction limits apply both to the partnership and to each partner. The partnership determines its section 179 deduction subject to the limits. It then allocates the deduction among its partners.

Each partner adds the amount allocated from partnerships (shown on Schedule K-1 (Form 1065), Partner's Share of Income, Deductions, Credits, etc.) to his or her nonpartnership section 179 costs and then applies the dollar limit to this total. To determine any reduction in the dollar limit for costs over $2,000,000, the partner does not include any of the cost of section 179 property placed in service by the partnership. After the dollar limit (reduced for any nonpartnership section 179 costs over $2,000,000) is applied, any remaining cost of the partnership and nonpartnership section 179 property is subject to the business income limit.

Partnership's taxable income.   For purposes of the business income limit, figure the partnership's taxable income by adding together the net income and losses from all trades or businesses actively conducted by the partnership during the year. See the Instructions for Form 1065 for information on how to figure partnership net income (or loss). However, figure taxable income without regard to credits, tax-exempt income, the section 179 deduction, and guaranteed payments under section 707(c) of the Internal Revenue Code.

Partner's share of partnership's taxable income.   For purposes of the business income limit, the taxable income of a partner engaged in the active conduct of one or more of a partnership's trades or businesses includes his or her allocable share of taxable income derived from the partnership's active conduct of any trade or business.

Example.

In 2013, Beech Partnership placed in service section 179 property with a total cost of $2,025,000. The partnership must reduce its dollar limit by $25,000 ($2,025,000 − $2,000,000). Its maximum section 179 deduction is $475,000 ($500,000 − $25,000), and it elects to expense that amount. The partnership's taxable income from the active conduct of all its trades or businesses for the year was $600,000, so it can deduct the full $475,000. It allocates $40,000 of its section 179 deduction and $50,000 of its taxable income to Dean, one of its partners.

In addition to being a partner in Beech Partnership, Dean is also a partner in the Cedar Partnership, which allocated to him a $30,000 section 179 deduction and $35,000 of its taxable income from the active conduct of its business. He also conducts a business as a sole proprietor and, in 2013, placed in service in that business qualifying section 179 property costing $55,000. He had a net loss of $5,000 from that business for the year.

Dean does not have to include section 179 partnership costs to figure any reduction in his dollar limit, so his total section 179 costs for the year are not more than $2,000,000 and his dollar limit is not reduced. His maximum section 179 deduction is $500,000. He elects to expense all of the $70,000 in section 179 deductions allocated from the partnerships ($40,000 from Beech Partnership plus $30,000 from Cedar Partnership), plus $55,000 of his sole proprietorship's section 179 costs, and notes that information in his books and records. However, his deduction is limited to his business taxable income of $80,000 ($50,000 from Beech Partnership, plus $35,000 from Cedar Partnership minus $5,000 loss from his sole proprietorship). He carries over $45,000 ($125,000 − $80,000) of the elected section 179 costs to 2014. He allocates the carryover amount to the cost of section 179 property placed in service in his sole proprietorship, and notes that allocation in his books and records.

Different tax years.   For purposes of the business income limit, if the partner's tax year and that of the partnership differ, the partner's share of the partnership's taxable income for a tax year is generally the partner's distributive share for the partnership tax year that ends with or within the partner's tax year.

Example.

John and James Oak are equal partners in Oak Partnership. Oak Partnership uses a tax year ending January 31. John and James both use a tax year ending December 31. For its tax year ending January 31, 2013, Oak Partnership's taxable income from the active conduct of its business is $80,000, of which $70,000 was earned during 2012. John and James each include $40,000 (each partner's entire share) of partnership taxable income in computing their business income limit for the 2013 tax year.

Adjustment of partner's basis in partnership.   A partner must reduce the basis of his or her partnership interest by the total amount of section 179 expenses allocated from the partnership even if the partner cannot currently deduct the total amount. If the partner disposes of his or her partnership interest, the partner's basis for determining gain or loss is increased by any outstanding carryover of disallowed section 179 expenses allocated from the partnership.

Adjustment of partnership's basis in section 179 property.   The basis of a partnership's section 179 property must be reduced by the section 179 deduction elected by the partnership. This reduction of basis must be made even if a partner cannot deduct all or part of the section 179 deduction allocated to that partner by the partnership because of the limits.

S Corporations

Generally, the rules that apply to a partnership and its partners also apply to an S corporation and its shareholders. The deduction limits apply to an S corporation and to each shareholder. The S corporation allocates its deduction to the shareholders who then take their section 179 deduction subject to the limits.

Figuring taxable income for an S corporation.   To figure taxable income (or loss) from the active conduct by an S corporation of any trade or business, you total the net income and losses from all trades or businesses actively conducted by the S corporation during the year.

  To figure the net income (or loss) from a trade or business actively conducted by an S corporation, you take into account the items from that trade or business that are passed through to the shareholders and used in determining each shareholder's tax liability. However, you do not take into account any credits, tax-exempt income, the section 179 deduction, and deductions for compensation paid to shareholder-employees. For purposes of determining the total amount of S corporation items, treat deductions and losses as negative income. In figuring the taxable income of an S corporation, disregard any limits on the amount of an S corporation item that must be taken into account when figuring a shareholder's taxable income.

Other Corporations

A corporation's taxable income from its active conduct of any trade or business is its taxable income figured with the following changes.

  1. It is figured before deducting the section 179 deduction, any net operating loss deduction, and special deductions (as reported on the corporation's income tax return).

  2. It is adjusted for items of income or deduction included in the amount figured in 1, above, not derived from a trade or business actively conducted by the corporation during the tax year.

How Do You Elect the Deduction?

You elect to take the section 179 deduction by completing Part I of Form 4562.

If you elect the deduction for listed property (described in chapter 5), complete Part V of Form 4562 before completing Part I.

For property placed in service in 2013, file Form 4562 with either of the following.

  • Your original 2013 tax return, whether or not you file it timely.

  • An amended return for 2013 filed within the time prescribed by law. An election made on an amended return must specify the item of section 179 property to which the election applies and the part of the cost of each such item to be taken into account. The amended return must also include any resulting adjustments to taxable income.

You must keep records that show the specific identification of each piece of qualifying section 179 property. These records must show how you acquired the property, the person you acquired it from, and when you placed it in service.

Election for certain qualified section 179 real property.   You can elect to expense certain qualified real property that you placed in service as section 179 property for tax years beginning in 2013. If you elect to treat this property as section 179 property, you must elect the application of the special rules for qualified real property described in section 179(f) of the Internal Revenue Code.

  To make the election, attach a statement indicating you are “electing the application of section 179(f) of the Internal Revenue Code” with either of the following.
  • Your original 2013 tax return, whether or not you file it timely.

  • An amended return for 2013 filed within the time prescribed by law. The amended return must also include any adjustments to taxable income.

  The statement should indicate your election to expense certain qualified real property under section 179(f) on your return. It must specify one or more of the three types of qualified property (described under Qualified real property ) to which the election applies, the cost of each such type, and the portion of the cost of each such property to be taken into account. Also, report this on line 6 of Form 4562.

  
The maximum section 179 expense deduction that can be taken for qualified section 179 real property is limited to $250,000.

Revoking an election.   An election (or any specification made in the election) to take a section 179 deduction for 2013 can be revoked without IRS approval by filing an amended return. The amended return must be filed within the time prescribed by law. The amended return must also include any resulting adjustments to taxable income. Once made, the revocation is irrevocable.

When Must You Recapture the Deduction?

You may have to recapture the section 179 deduction if, in any year during the property's recovery period, the percentage of business use drops to 50% or less. In the year the business use drops to 50% or less, you include the recapture amount as ordinary income in Part IV of Form 4797. You also increase the basis of the property by the recapture amount. Recovery periods for property are discussed under Which Recovery Period Applies in chapter 4 .

If you sell, exchange, or otherwise dispose of the property, do not figure the recapture amount under the rules explained in this discussion. Instead, use the rules for recapturing depreciation explained in chapter 3 of Publication 544 under Section 1245 Property. For qualified real property (described earlier), see Notice 2013-59 for determining the portion of the gain that is attributable to section 1245 property upon the sale or other disposition of qualified real property.

If the property is listed property (described in chapter 5 ), do not figure the recapture amount under the rules explained in this discussion when the percentage of business use drops to 50% or less. Instead, use the rules for recapturing excess depreciation in chapter 5 under What Is the Business-Use Requirement.

Figuring the recapture amount.   To figure the amount to recapture, take the following steps.
  1. Figure the depreciation that would have been allowable on the section 179 deduction you claimed. Begin with the year you placed the property in service and include the year of recapture.

  2. Subtract the depreciation figured in (1) from the section 179 deduction you claimed. The result is the amount you must recapture.

Example.

In January 2011, Paul Lamb, a calendar year taxpayer, bought and placed in service section 179 property costing $10,000. The property is not listed property. The property is 3-year property. He elected a $5,000 section 179 deduction for the property and also elected not to claim a special depreciation allowance. He used the property only for business in 2011 and 2012. In 2013, he used the property 40% for business and 60% for personal use. He figures his recapture amount as follows.

Section 179 deduction claimed (2011) $5,000.00
Minus: Allowable depreciation using Table A-1 
(instead of section 179 deduction):
 
2011 $1,666.50  
2012 2,222.50  
2013 ($740.50 × 40% (business)) 296.20 4,185.20
2013 — Recapture amount $ 814.80

Paul must include $814.80 in income for 2013.

If any qualified zone property placed in service during the year ceases to be used in an empowerment zone by an enterprise zone business in a later year, the benefit of the increased section 179 deduction must be reported as other income on your return.


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