| Pub. 946, How To Depreciate Property |
2004 Tax Year |
Chapter 2 - Electing the Section 179 Deduction
This is archived information that pertains only to the 2004 Tax Year. If you
are looking for information for the current tax year, go to the Tax Prep Help Area.
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:
See chapter 7 for information about getting publications and forms.
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.
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% × $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):
Certain property does not qualify for the section 179 deduction. This includes the following.
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.
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).
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.
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).
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.
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.
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.
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 × 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.
-
$95,000—The dollar limit less the cost of section 179 property over $410,000.
-
$32,000—The total they elected to expense on their separate returns.
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.
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.
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 × 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.
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