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 7 for information
about getting publications and
forms.
What Property
Qualifies?
Terms you may
need to know
(see Glossary):
Adjusted basis
Basis
Class life
Structural
components
Tangible
property
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.
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.
Tangible
personal property.
Other tangible
property (except
buildings and their
structural
components) used as:
An
integral
part of
manufacturing,
production,
or
extraction
or of
furnishing
transportation,
communications,
electricity,
gas, water,
or sewage
disposal
services,
A
research
facility
used in
connection
with any of
the
activities
in (a)
above, or
A
facility
used in
connection
with any of
the
activities
in (a) for
the bulk
storage of
fungible
commodities.
Single purpose
agricultural
(livestock) or
horticultural
structures.
Storage
facilities (except
buildings and their
structural
components) used in
connection with
distributing
petroleum or any
primary product of
petroleum.
Off-the-shelf
computer software.
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.
Single
purpose agricultural
(livestock) or
horticultural
structures. A
single purpose
agricultural (livestock)
or horticultural
structure is qualifying
property for purposes of
the section 179
deduction.
Agricultural structure.
A single purpose
agricultural (livestock)
structure is any
building or enclosure
specifically designed,
constructed, and used
for both the following
reasons.
To house,
raise, and feed
a particular
type of
livestock and
its produce.
To house the
equipment,
including any
replacements,
needed to house,
raise, or feed
the livestock.
For this purpose,
livestock includes
poultry.
Single purpose
structures are
qualifying property if
used, for example, to
breed chickens or hogs,
produce milk from dairy
cattle, or produce
feeder cattle or pigs,
broiler chickens, or
eggs. The facility must
include, as an integral
part of the structure or
enclosure, equipment
necessary to house,
raise, and feed the
livestock.
Horticultural structure.
A single purpose
horticultural structure
is either of the
following.
A greenhouse
specifically
designed,
constructed, and
used for the
commercial
production of
plants.
A structure
specifically
designed,
constructed, and
used for the
commercial
production of
mushrooms.
Use
of structure.
A structure must be
used only for the
purpose that qualified
it. For example, a hog
pen will not be
qualifying property if
you use it to house
poultry. Similarly,
using part of your
greenhouse to sell
plants will make the
greenhouse nonqualifying
property.
If a structure
includes work space, the
work space can be used
only for the following
activities.
Stocking,
caring for, or
collecting
livestock or
plants or their
produce.
Maintaining
the enclosure or
structure.
Maintaining
or replacing the
equipment or
stock enclosed
or housed in the
structure.
Off-the-shelf computer
software.
Off-the-shelf computer
software that is placed
in service after 2002 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.
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% Χ
$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.
It is acquired
by one member of a
controlled group
from another member
of the same group.
Its basis is
determined either
In whole
or in part
by its
adjusted
basis in the
hands of the
person from
whom it was
acquired, or
Under
the
stepped-up
basis rules
for property
acquired
from a
decedent.
It is acquired
from a related
person.
Related
persons.
Related persons are
described under
Related persons
in chapter 1 in the
discussion on property
owned or used in 1986
under
Can You Use MACRS To
Depreciate Your Property.
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?
Terms you may
need to know
(see Glossary):
Basis
Class life
Certain property does not
qualify for the section 179
deduction. This includes the
following.
Land and
Improvements
Land and improvements,
such as buildings and other
permanent structures and
their components, are real
property, not personal
property and 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 in the preceding
discussions 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.
Property you
manufacture or
produce and
lease to others.
Property you
purchase and
lease to others
if both the
following tests
are met.
The
term of
the
lease
(including
options
to
renew)
is less
than 50%
of the
property's
class
life.
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
either of the following
types of equipment.
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.
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.
You must complete the
construction,
reconstruction, or
erection of the
equipment. For property
you acquire, the
original use of the
property must begin with
you. 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.
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?
Terms you may
need to know
(see Glossary):
Adjusted basis
Basis
Placed in
service
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. Also, see the special
rules for applying the limits
for partnerships and S
corporations later under
Partnerships and Partners
and under S Corporations.
Use Part I of Form 4562 to
figure your section 179
deduction.
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.
Silver Leaf's basis
in the new property
includes both the
adjusted basis of the
property traded and the
cash paid. However, 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).
Depreciating any remaining
cost. If you deduct
only part of the cost of
your qualifying property as
a section 179 deduction, you
generally can take the
special depreciation
allowance (or Liberty Zone
depreciation allowance) and
MACRS depreciation on the
cost you do not deduct. To
figure your basis used to
determine the special
depreciation allowance (or
Liberty Zone depreciation
allowance), you must
subtract the amount of the
section 179 deduction from
the cost of the qualifying
property. The result is then
reduced by the amount of
your special depreciation
allowance and the remaining
cost is used to figure any
MACRS depreciation
deduction. For information
on how to figure the special
depreciation allowance (or
Liberty Zone depreciation
allowance) and MACRS
depreciation, see chapters 3
and 4, respectively.
Dollar
Limits
The total amount you can
elect to deduct under
section 179 for most
property in 2004 generally
cannot be more than
$102,000. 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 $102,000. You do
not have to claim the full
$102,000.
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 2004, you bought
and placed in service a
$105,000 tractor and a
$2,000 circular saw for
your business. You elect
to deduct $100,000 for
the tractor and the
entire $2,000 for the
saw, a total of
$102,000. This is the
maximum amount you can
deduct. Your $2,000
deduction for the saw
completely recovered its
cost. Your basis for
depreciation is zero.
The basis for
depreciation of your
tractor is $5,000. You
figure this by
subtracting your
$100,000 section 179
deduction for the
tractor from the
$105,000 cost of the
tractor.
Situations affecting
dollar limit.
Under certain
circumstances, the
general dollar limit on
the section 179
deduction must be
reduced or increased or
there may be an
additional dollar limit.
The general dollar limit
is affected by any of
the following
situations.
The cost of
qualifying
property you
placed in
service during
the year is more
than $410,000.
You placed
qualified
property in
service in the
New York Liberty
Zone.
Your
business is an
enterprise zone
business.
You placed
in service a
passenger
automobile or a
sport utility
vehicle.
Reduced
Dollar Limit
for Cost
Exceeding
$410,000
If the cost of your
qualifying section 179
property placed in
service in a year is
over $410,000, you must
reduce the dollar limit
(but not below zero) by
the amount of cost over
$410,000. If the cost of
your section 179
property placed in
service during 2004 is
$512,000 or more, you
cannot take a section
179 deduction.
Example.
This year, Jane
Ash placed in
service machinery
costing $482,000.
This cost is $72,000
more than $410,000,
so she must reduce
her dollar limit to
$30,000 ($102,000 -
$72,000).
Liberty Zone
Property
Certain benefits,
including an increased
section 179 deduction,
are available for
certain property you
place in service in the
New York Liberty Zone
(Liberty Zone). The
Liberty Zone is the area
located on or south of
Canal Street, East
Broadway (east of its
intersection with Canal
Street), or Grand Street
(east of its
intersection with East
Broadway) in the Borough
of Manhattan in the City
of New York, New York.
Reduced dollar
limit. You
take into account
only 50% (instead of
100%) of the cost of
qualified Liberty
Zone property placed
in service in a year
when figuring the
reduced dollar limit
for costs exceeding
$410,000 (explained
earlier). See
Qualified
property
under
Increased dollar
limit,
next, for an
explanation of
property that
qualifies.
Increased dollar
limit. The
dollar limit on the
section 179
deduction is
increased for
qualified property.
The increase is the
smaller of the
following amounts.
$35,000.
The cost
of section
179 property
that is
qualified
property
(discussed
next) placed
in service
during the
year
(including
such
property
placed in
service by
your spouse,
even if you
are filing a
separate
return).
Qualified
property.
To qualify for the
increased section
179 deduction, your
property must be
section 179 property
that is either:
Qualified
Liberty Zone
property, or
Property
that would
be qualified
Liberty Zone
property
except that
it is
eligible for
the special
depreciation
allowance.
See
What Is
Qualified Liberty
Zone Property
in chapter 3 for an
explanation of
qualified Liberty
Zone property. See
What Is
Qualified Property
in chapter 3 for an
explanation of
property eligible
for the special
depreciation
allowance.
Enterprise
Zone
Businesses
Certain benefits,
including an increased
section 179 deduction,
are available to
enterprise zone
businesses for certain
property placed in
service in an
empowerment zone.
Reduced dollar
limit. 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
$410,000 (explained
earlier).
Increased dollar
limit. The
dollar limit on the
section 179
deduction is
increased if your
business qualifies
as an enterprise
zone business. The
increase is the
smaller of the
following amounts.
$35,000.
The cost
of section
179 property
that is also
qualified
zone
property
(including
such
property
placed in
service by
your spouse,
even if you
are filing a
separate
return).
For definitions of enterprise
zone business
and qualified
zone property,
see Publication 954,
Tax Incentives for
Distressed
Communities.
Additional
Limit for
Passenger
Automobiles
For a passenger
automobile that is
qualified property (as
explained in chapter 3
under
What Is Qualified
Property)
placed in service in
2004, the total section
179 and depreciation
deductions (including
the special depreciation
allowance) is limited.
For more information,
see
Do the Passenger
Automobile Limits Apply
in chapter 5.
Section 179
Deduction
Limit for
Sport
Utility and
Certain
Other
Vehicles
You cannot elect to
expense more than
$25,000 of the cost of
any sport utility
vehicle (SUV) and
certain other vehicles
placed in service after
October 22, 2004. This
rule applies to any
4-wheeled vehicle
primarily designed or
used to carry passengers
over public streets,
roads, or highways, that
is not subject to the
passenger automobile
limits, and is rated at
more than 6,000 pounds
gross vehicle weight and
not more than 14,000
pounds gross vehicle
weight. For vehicles
rated at 6,000 pounds or
less gross vehicle
weight, the passenger
automobile limits
(discussed in chapter 5)
apply. 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 an open
cargo area of at
least six feet
in interior
length or a
covered box not
readily
accessible from
the passenger
compartment, or
That has a
fully enclosed
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.
Joint returns.
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.
Separate returns.
If you and your
spouse file separate
returns, you are
treated as one
taxpayer for the
dollar limit,
including the
reduction for costs
over $410,000. You
must allocate the
dollar limit (after
any reduction)
between you. You
must allocate 50% to
each, 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 $410,000
of qualified
farm machinery
in 2004. His
wife has her own
business, and
she bought and
placed in
service $7,000
of qualified
business
equipment. Their
combined dollar
limit is
$95,000. This is
because they
must figure the
limit as if they
were one
taxpayer. They
reduce the
$102,000 dollar
limit by the
$7,000 excess of
their costs over
$410,000.
They elect to
allocate the
$95,000 dollar
limit as
follows.
$90,250
($95,000
x 95%)
to Mr.
Elm's
machinery.
$4,750
($95,000
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
$47,500 ($95,000
Χ 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
$410,000).
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.
$95,000The
dollar
limit
less the
cost of
section
179
property
over
$410,000.
$32,000The
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. See
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.
During the year,
the XYZ corporation
purchased and placed
in service
qualifying section
179 property that
cost $102,000. It
elects to expense
the entire $102,000
cost under section
179. The XYZ
corporation also
gave a charitable
contribution of
$10,000 during the
year. A
corporation's
deduction for
charitable
contributions cannot
be more than 10% of
its taxable income,
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
$122,000. XYZ
figures its section
179 deduction and
its deduction for
charitable
contributions as
follows.
Step 1
Taxable
income
figured
without
either
deduction is
$122,000.
Step 2
Using
$122,000 as
taxable
income,
XYZ's
hypothetical
section 179
deduction is
$102,000.
Step 3
$20,000
($122,000 -
$102,000).
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
$120,000
($122,000 -
$2,000).
Step 6
Using
$120,000
(from Step
5) as
taxable
income, XYZ
figures the
actual
section 179
deduction.
Because the
taxable
income is at
least
$102,000,
XYZ can take
a $102,000
section 179
deduction.
Step 7
$20,000
($122,000 -
$102,000).
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 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.
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
$410,000, 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 $410,000) 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
Publication 541,
Partnerships, 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 2004, Beech
Partnership placed in
service section 179
property with a total
cost of $432,000. The
partnership must reduce
its dollar limit by
$22,000 ($432,000 -
$410,000). Its maximum
section 179 deduction is
$80,000 ($102,000 -
$22,000), 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
$100,000, so it can
deduct the full $80,000.
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
2004, 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 $410,000 and
his dollar limit is not
reduced. His maximum
section 179 deduction is
$102,000. He elects to
expense all of the
$70,000 in section 179
deductions allocated
from the partnerships,
plus $32,000 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 $22,000
($102,000 - $80,000) of
the elected section 179
costs to 2005. 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
section 179, 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
determined based on the
partnership tax year
that ends with or within
the partner's tax year.
Example.
John and James Oak
are equal partners in
Oak Company. Oak Company
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, 2004, Oak
Company's taxable income
from the active conduct
of its business is
$80,000, of which
$70,000 was earned
during 2003. John and
James each include
$40,000 (each partner's
entire share) of
partnership taxable
income in computing
their business income
limit for the 2004 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, or 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.
It is figured
before deducting any
net operating loss
deduction or special
deductions (as
reported on the
corporation's income
tax return).
It is adjusted
for items of income
or deduction not
derived from a trade
or business actively
conducted by the
corporation during
the tax year.
How Do You Elect the
Deduction?
Terms you may
need to know
(see Glossary):
Listed property
Placed in
service
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.
File Form 4562 with either of
the following.
Your original tax
return filed for the
year the property was
placed in service
(whether or not you file
it timely).
For tax years
beginning after 2002 and
before 2008, an amended
return for the
applicable tax year. 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 be filed
within the time
prescribed by law for
the applicable tax year.
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.
Revoking an
election.
An election (or any
specification made in the
election) to take a section
179 deduction for a tax year
beginning after 2002 and
before 2008, can be revoked
by filing an amended return.
The amended return must be
filed within the time
prescribed by law for the
applicable tax year. The
amended return must also
include any resulting
adjustments to taxable
income. Once made, the
revocation is irrevocable.
When Must You
Recapture the
Deduction?
Terms you may
need to know
(see Glossary):
Disposition
Exchange
Recapture
Recovery period
Section 1245
property
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 .
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.
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.
Subtract the
depreciation figured
in (1) from the
section 179
deduction you
claimed. The result
is the amount you
must recapture.
Example.
In January 2002, Paul
Lamb, a calendar year
taxpayer, bought and
placed in service
section 179 property
costing $10,000. The
property is not listed
property. He elected a
$5,000 section 179
deduction for the
property. He used the
property only for
business in 2002 and
2003. In 2004, he used
the property 40% for
business and 60% for
personal use. He figures
his recapture amount as
follows.
Section 179
deduction
claimed
(2002)
$5,000.00
Minus:
Allowable
depreciation
(instead of
section 179
deduction):
2002
$1,666.50
2003
2,222.50
2004
($740.50 Χ
40%
(business))
296.20
4,185.20
2004
Recapture
amount
$ 814.80
Paul must include
$814.80 in income for
2004.
Qualified
zone property. 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. For information on
the increased section 179
deduction available to
enterprise zone businesses,
see Enterprise Zone
Businesses under
How Much Can You Deduct,
earlier. For an explanation
of qualified zone property,
see Publication 954.
Qualified
Liberty Zone property.
If any qualified Liberty
Zone property placed in
service during the year
ceases to be used in the
Liberty Zone in a later
year, the benefit of the
increased section 179
deduction must be reported
as other income on your
return. For information on
the increased section 179
deduction available for
Liberty Zone property, see
Liberty Zone Property
under How Much Can You Deduct,
earlier. For an explanation
of qualified Liberty Zone
property, see
What Is Qualified Liberty
Zone Property in
chapter 3.
