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Etax com 2. Etax com   Electing the Section 179 Deduction Table of Contents Introduction Useful Items - You may want to see: What Property Qualifies?Eligible Property Property Acquired for Business Use Property Acquired by Purchase What Property Does Not Qualify?Land and Improvements Excepted Property How Much Can You Deduct?Dollar Limits Business Income Limit Partnerships and Partners S Corporations Other Corporations How Do You Elect the Deduction? When Must You Recapture the 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. Etax com This is the section 179 deduction. Etax com You can elect the section 179 deduction instead of recovering the cost by taking depreciation deductions. Etax com Estates and trusts cannot elect the section 179 deduction. Etax com 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. Etax com It also explains when and how to recapture the deduction. Etax com 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. Etax com What Property Qualifies? To qualify for the section 179 deduction, your property must meet all the following requirements. Etax com It must be eligible property. Etax com It must be acquired for business use. Etax com It must have been acquired by purchase. Etax com It must not be property described later under What Property Does Not Qualify . Etax com The following discussions provide information about these requirements and exceptions. Etax com Eligible Property To qualify for the section 179 deduction, your property must be one of the following types of depreciable property. Etax com Tangible personal property. Etax com 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. Etax com Single purpose agricultural (livestock) or horticultural structures. Etax com See chapter 7 of Publication 225 for definitions and information regarding the use requirements that apply to these structures. Etax com Storage facilities (except buildings and their structural components) used in connection with distributing petroleum or any primary product of petroleum. Etax com Off-the-shelf computer software. Etax com Qualified real property (described below). Etax com Tangible personal property. Etax com   Tangible personal property is any tangible property that is not real property. Etax com It includes the following property. Etax com Machinery and equipment. Etax com 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. Etax com Gasoline storage tanks and pumps at retail service stations. Etax com Livestock, including horses, cattle, hogs, sheep, goats, and mink and other furbearing animals. Etax com   The treatment of property as tangible personal property for the section 179 deduction is not controlled by its treatment under local law. Etax com 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. Etax com Off-the-shelf computer software. Etax com   Off-the-shelf computer software placed in service during the tax year is qualifying property for purposes of the section 179 deduction. Etax com 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. Etax com It includes any program designed to cause a computer to perform a desired function. Etax com 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. Etax com Qualified real property. Etax com   You can elect to treat certain qualified real property you placed in service as section 179 property for tax years beginning in 2013. Etax com 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. Etax com 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. Etax com For more information, see Special rules for qualified section 179 real property, later. Etax com Also, see Election for certain qualified section 179 real property, later, for information on how to make this election. Etax com Qualified leasehold improvement property. Etax com   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. Etax com   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. Etax com A transaction to which section 381(a) applies, 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, 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 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. Etax com Examples include the following. Etax com A complete liquidation of a subsidiary. Etax com A transfer to a corporation controlled by the transferor. Etax com An exchange of property by a corporation solely for stock or securities in another corporation in a reorganization. Etax com Qualified restaurant property. Etax com   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. Etax com 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. Etax com Qualified retail improvement property. Etax com   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. Etax com 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. Etax com The improvement is placed in service more than 3 years after the date the building was first placed in service. Etax com 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. Etax com 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. Etax com A transaction to which section 381(a) applies, 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, 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 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. Etax com Examples include the following. Etax com A complete liquidation of a subsidiary. Etax com A transfer to a corporation controlled by the transferor. Etax com An exchange of property by a corporation solely for stock or securities in another corporation in a reorganization. Etax com 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. Etax com 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. Etax com Partial business use. Etax com   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. Etax com If you use the property more than 50% for business, multiply the cost of the property by the percentage of business use. Etax com Use the resulting business cost to figure your section 179 deduction. Etax com Example. Etax com May Oak bought and placed in service an item of section 179 property costing $11,000. Etax com She used the property 80% for her business and 20% for personal purposes. Etax com The business part of the cost of the property is $8,800 (80% × $11,000). Etax com Property Acquired by Purchase To qualify for the section 179 deduction, your property must have been acquired by purchase. Etax com For example, property acquired by gift or inheritance does not qualify. Etax com Property is not considered acquired by purchase in the following situations. Etax com It is acquired by one component member of a controlled group from another component member of the same group. Etax com 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. Etax com It is acquired from a related person. Etax com Related persons. Etax com   Related persons are described under Related persons earlier. Etax com 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. Etax com Example. Etax com Ken Larch is a tailor. Etax com He bought two industrial sewing machines from his father. Etax com He placed both machines in service in the same year he bought them. Etax com They do not qualify as section 179 property because Ken and his father are related persons. Etax com He cannot claim a section 179 deduction for the cost of these machines. Etax com What Property Does Not Qualify? Certain property does not qualify for the section 179 deduction. Etax com This includes the following. Etax com Land and Improvements Land and land improvements do not qualify as section 179 property. Etax com Land improvements include swimming pools, paved parking areas, wharves, docks, bridges, and fences. Etax com 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. Etax com Certain property you lease to others (if you are a noncorporate lessor). Etax com Certain property used predominantly to furnish lodging or in connection with the furnishing of lodging. Etax com Air conditioning or heating units. Etax com Property used predominantly outside the United States, except property described in section 168(g)(4) of the Internal Revenue Code. Etax com 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. Etax com Property used by governmental units or foreign persons or entities, except property used under a lease with a term of less than 6 months. Etax com Leased property. Etax com   Generally, you cannot claim a section 179 deduction based on the cost of property you lease to someone else. Etax com This rule does not apply to corporations. Etax com However, you can claim a section 179 deduction for the cost of the following property. Etax com Property you manufacture or produce and lease to others. Etax com Property you purchase and lease to others if both the following tests are met. Etax com The term of the lease (including options to renew) is less than 50% of the property's class life. Etax com 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. Etax com Property used for lodging. Etax com   Generally, you cannot claim a section 179 deduction for property used predominantly to furnish lodging or in connection with the furnishing of lodging. Etax com However, this does not apply to the following types of property. Etax com 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. Etax com 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. Etax com Any certified historic structure to the extent its basis is due to qualified rehabilitation expenditures. Etax com Any energy property. Etax com Energy property. Etax com   Energy property is property that meets the following requirements. Etax com It is one of the following types of property. Etax com 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. Etax com 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. Etax com Equipment used to produce, distribute, or use energy derived from a geothermal deposit. Etax com For electricity generated by geothermal power, this includes equipment up to (but not including) the electrical transmission stage. Etax com Qualified fuel cell property or qualified microturbine property placed in service after December 31, 2005, and before January 1, 2017. Etax com The construction, reconstruction, or erection of the property must be completed by you. Etax com For property you acquire, the original use of the property must begin with you. Etax com 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. Etax com   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). Etax com How Much Can You Deduct? Your section 179 deduction is generally the cost of the qualifying property. Etax com However, the total amount you can elect to deduct under section 179 is subject to a dollar limit and a business income limit. Etax com These limits apply to each taxpayer, not to each business. Etax com However, see Married Individuals under Dollar Limits , later. Etax com For a passenger automobile, the total section 179 deduction and depreciation deduction are limited. Etax com See Do the Passenger Automobile Limits Apply in chapter 5 . Etax com 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. Etax com Trade-in of other property. Etax com   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. Etax com Example. Etax com Silver Leaf, a retail bakery, traded two ovens having a total adjusted basis of $680 for a new oven costing $1,320. Etax com They received an $800 trade-in allowance for the old ovens and paid $520 in cash for the new oven. Etax com The bakery also traded a used van with an adjusted basis of $4,500 for a new van costing $9,000. Etax com They received a $4,800 trade-in allowance on the used van and paid $4,200 in cash for the new van. Etax com Only the portion of the new property's basis paid by cash qualifies for the section 179 deduction. Etax com Therefore, Silver Leaf's qualifying costs for the section 179 deduction are $4,720 ($520 + $4,200). Etax com 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. Etax com 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. Etax com You do not have to claim the full $500,000. Etax com 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. Etax com 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. Etax com 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. Etax com Example. Etax com In 2013, you bought and placed in service $500,000 in machinery and a $25,000 circular saw for your business. Etax com You elect to deduct $475,000 for the machinery and the entire $25,000 for the saw, a total of $500,000. Etax com This is the maximum amount you can deduct. Etax com Your $25,000 deduction for the saw completely recovered its cost. Etax com Your basis for depreciation is zero. Etax com The basis for depreciation of your machinery is $25,000. Etax com You figure this by subtracting your $475,000 section 179 deduction for the machinery from the $500,000 cost of the machinery. Etax com Situations affecting dollar limit. Etax com   Under certain circumstances, the general dollar limits on the section 179 deduction may be reduced or increased or there may be additional dollar limits. Etax com The general dollar limit is affected by any of the following situations. Etax com The cost of your section 179 property placed in service exceeds $2,000,000. Etax com Your business is an enterprise zone business. Etax com You placed in service a sport utility or certain other vehicles. Etax com You are married filing a joint or separate return. Etax com 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. Etax com 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. Etax com Example. Etax com In 2013, Jane Ash placed in service machinery costing $2,100,000. Etax com This cost is $100,000 more than $2,000,000, so she must reduce her dollar limit to $400,000 ($500,000 − $100,000). Etax com 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. Etax com 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. Etax com 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). Etax com Note. Etax com   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). Etax com 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. Etax com 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. Etax com 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. Etax com Married Individuals If you are married, how you figure your section 179 deduction depends on whether you file jointly or separately. Etax com 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. Etax com 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. Etax com You must allocate the dollar limit (after any reduction) between you equally, unless you both elect a different allocation. Etax com If the percentages elected by each of you do not total 100%, 50% will be allocated to each of you. Etax com Example. Etax com Jack Elm is married. Etax com He and his wife file separate returns. Etax com Jack bought and placed in service $2,000,000 of qualified farm machinery in 2013. Etax com His wife has her own business, and she bought and placed in service $30,000 of qualified business equipment. Etax com Their combined dollar limit is $470,000. Etax com This is because they must figure the limit as if they were one taxpayer. Etax com They reduce the $500,000 dollar limit by the $30,000 excess of their costs over $2,000,000. Etax com They elect to allocate the $470,000 dollar limit as follows. Etax com $446,500 ($470,000 x 95%) to Mr. Etax com Elm's machinery. Etax com $23,500 ($470,000 x 5%) to Mrs. Etax com Elm's equipment. Etax com 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. Etax com Joint return after filing separate returns. Etax com   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. Etax com The dollar limit (after reduction for any cost of section 179 property over $2,000,000). Etax com The total cost of section 179 property you and your spouse elected to expense on your separate returns. Etax com Example. Etax com 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. Etax com After the due date of their returns, they file a joint return. Etax com Their dollar limit for the section 179 deduction is $32,000. Etax com This is the lesser of the following amounts. Etax com $470,000—The dollar limit less the cost of section 179 property over $2,000,000. Etax com $32,000—The total they elected to expense on their separate returns. Etax com 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. Etax com 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. Etax com Any cost not deductible in one year under section 179 because of this limit can be carried to the next year. Etax com Special rules apply to a 2013 deduction of qualified section 179 real property that is disallowed because of the business income limit. Etax com See Special rules for qualified section 179 property under Carryover of disallowed deduction, later. Etax com Taxable income. Etax com   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. Etax com Net income or loss from a trade or business includes the following items. Etax com Section 1231 gains (or losses). Etax com Interest from working capital of your trade or business. Etax com Wages, salaries, tips, or other pay earned as an employee. Etax com For information about section 1231 gains and losses, see chapter 3 in Publication 544. Etax com   In addition, figure taxable income without regard to any of the following. Etax com The section 179 deduction. Etax com The self-employment tax deduction. Etax com Any net operating loss carryback or carryforward. Etax com Any unreimbursed employee business expenses. Etax com Two different taxable income limits. Etax com   In addition to the business income limit for your section 179 deduction, you may have a taxable income limit for some other deduction. Etax com You may have to figure the limit for this other deduction taking into account the section 179 deduction. Etax com If so, complete the following steps. Etax com Step Action 1 Figure taxable income without the section 179 deduction or the other deduction. Etax com 2 Figure a hypothetical section 179 deduction using the taxable income figured in Step 1. Etax com 3 Subtract the hypothetical section 179 deduction figured in Step 2 from the taxable income figured in Step 1. Etax com 4 Figure a hypothetical amount for the other deduction using the amount figured in Step 3 as taxable income. Etax com 5 Subtract the hypothetical other deduction figured in Step 4 from the taxable income figured in Step 1. Etax com 6 Figure your actual section 179 deduction using the taxable income figured in Step 5. Etax com 7 Subtract your actual section 179 deduction figured in Step 6 from the taxable income figured in Step 1. Etax com 8 Figure your actual other deduction using the taxable income figured in Step 7. Etax com Example. Etax com On February 1, 2013, the XYZ corporation purchased and placed in service qualifying section 179 property that cost $500,000. Etax com It elects to expense the entire $500,000 cost under section 179. Etax com In June, the corporation gave a charitable contribution of $10,000. Etax com A corporation's limit on charitable contributions is figured after subtracting any section 179 deduction. Etax com The business income limit for the section 179 deduction is figured after subtracting any allowable charitable contributions. Etax com XYZ's taxable income figured without the section 179 deduction or the deduction for charitable contributions is $520,000. Etax com XYZ figures its section 179 deduction and its deduction for charitable contributions as follows. Etax com Step 1– Taxable income figured without either deduction is $520,000. Etax com Step 2– Using $520,000 as taxable income, XYZ's hypothetical section 179 deduction is $500,000. Etax com Step 3– $20,000 ($520,000 − $500,000). Etax com 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. Etax com Step 5– $518,000 ($520,000 − $2,000). Etax com Step 6– Using $518,000 (from Step 5) as taxable income, XYZ figures the actual section 179 deduction. Etax com Because the taxable income is at least $500,000, XYZ can take a $500,000 section 179 deduction. Etax com Step 7– $20,000 ($520,000 − $500,000). Etax com 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. Etax com Carryover of disallowed deduction. Etax com   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. Etax com This disallowed deduction amount is shown on line 13 of Form 4562. Etax com You use the amount you carry over to determine your section 179 deduction in the next year. Etax com Enter that amount on line 10 of your Form 4562 for the next year. Etax com   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. Etax com Your selections must be shown in your books and records. Etax com For this purpose, treat section 179 costs allocated from a partnership or an S corporation as one item of section 179 property. Etax com If you do not make a selection, the total carryover will be allocated equally among the properties you elected to expense for the year. Etax com   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. Etax com Special rules for qualified section 179 real property. Etax com   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. Etax com 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. Etax com 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). Etax com See section 179(f) of the Internal Revenue Code and Notice 2013-59 for more information. Etax com 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. Etax com Instead, you must add it back to the property's basis. Etax com Partnerships and Partners The section 179 deduction limits apply both to the partnership and to each partner. Etax com The partnership determines its section 179 deduction subject to the limits. Etax com It then allocates the deduction among its partners. Etax com Each partner adds the amount allocated from partnerships (shown on Schedule K-1 (Form 1065), Partner's Share of Income, Deductions, Credits, etc. Etax com ) to his or her nonpartnership section 179 costs and then applies the dollar limit to this total. Etax com 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. Etax com 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. Etax com Partnership's taxable income. Etax com   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. Etax com See the Instructions for Form 1065 for information on how to figure partnership net income (or loss). Etax com 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. Etax com Partner's share of partnership's taxable income. Etax com   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. Etax com Example. Etax com In 2013, Beech Partnership placed in service section 179 property with a total cost of $2,025,000. Etax com The partnership must reduce its dollar limit by $25,000 ($2,025,000 − $2,000,000). Etax com Its maximum section 179 deduction is $475,000 ($500,000 − $25,000), and it elects to expense that amount. Etax com 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. Etax com It allocates $40,000 of its section 179 deduction and $50,000 of its taxable income to Dean, one of its partners. Etax com 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. Etax com 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. Etax com He had a net loss of $5,000 from that business for the year. Etax com 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. Etax com His maximum section 179 deduction is $500,000. Etax com 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. Etax com 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). Etax com He carries over $45,000 ($125,000 − $80,000) of the elected section 179 costs to 2014. Etax com 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. Etax com Different tax years. Etax com   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. Etax com Example. Etax com John and James Oak are equal partners in Oak Partnership. Etax com Oak Partnership uses a tax year ending January 31. Etax com John and James both use a tax year ending December 31. Etax com 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. Etax com 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. Etax com Adjustment of partner's basis in partnership. Etax com   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. Etax com 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. Etax com Adjustment of partnership's basis in section 179 property. Etax com   The basis of a partnership's section 179 property must be reduced by the section 179 deduction elected by the partnership. Etax com 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. Etax com S Corporations Generally, the rules that apply to a partnership and its partners also apply to an S corporation and its shareholders. Etax com The deduction limits apply to an S corporation and to each shareholder. Etax com The S corporation allocates its deduction to the shareholders who then take their section 179 deduction subject to the limits. Etax com Figuring taxable income for an S corporation. Etax com   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. Etax com   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. Etax com However, you do not take into account any credits, tax-exempt income, the section 179 deduction, and deductions for compensation paid to shareholder-employees. Etax com For purposes of determining the total amount of S corporation items, treat deductions and losses as negative income. Etax com 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. Etax com 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. Etax com 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). Etax com 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. Etax com How Do You Elect the Deduction? You elect to take the section 179 deduction by completing Part I of Form 4562. Etax com If you elect the deduction for listed property (described in chapter 5), complete Part V of Form 4562 before completing Part I. Etax com For property placed in service in 2013, file Form 4562 with either of the following. Etax com Your original 2013 tax return, whether or not you file it timely. Etax com An amended return for 2013 filed within the time prescribed by law. Etax com 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. Etax com The amended return must also include any resulting adjustments to taxable income. Etax com You must keep records that show the specific identification of each piece of qualifying section 179 property. Etax com These records must show how you acquired the property, the person you acquired it from, and when you placed it in service. Etax com Election for certain qualified section 179 real property. Etax com   You can elect to expense certain qualified real property that you placed in service as section 179 property for tax years beginning in 2013. Etax com 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. Etax com   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. Etax com Your original 2013 tax return, whether or not you file it timely. Etax com An amended return for 2013 filed within the time prescribed by law. Etax com The amended return must also include any adjustments to taxable income. Etax com   The statement should indicate your election to expense certain qualified real property under section 179(f) on your return. Etax com 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. Etax com Also, report this on line 6 of Form 4562. Etax com    The maximum section 179 expense deduction that can be taken for qualified section 179 real property is limited to $250,000. Etax com Revoking an election. Etax com   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. Etax com The amended return must be filed within the time prescribed by law. Etax com The amended return must also include any resulting adjustments to taxable income. Etax com Once made, the revocation is irrevocable. Etax com 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. Etax com 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. Etax com You also increase the basis of the property by the recapture amount. Etax com Recovery periods for property are discussed under Which Recovery Period Applies in chapter 4 . Etax com If you sell, exchange, or otherwise dispose of the property, do not figure the recapture amount under the rules explained in this discussion. Etax com Instead, use the rules for recapturing depreciation explained in chapter 3 of Publication 544 under Section 1245 Property. Etax com 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. Etax com 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. Etax com Instead, use the rules for recapturing excess depreciation in chapter 5 under What Is the Business-Use Requirement. Etax com Figuring the recapture amount. Etax com   To figure the amount to recapture, take the following steps. Etax com Figure the depreciation that would have been allowable on the section 179 deduction you claimed. Etax com Begin with the year you placed the property in service and include the year of recapture. Etax com Subtract the depreciation figured in (1) from the section 179 deduction you claimed. Etax com The result is the amount you must recapture. Etax com Example. Etax com In January 2011, Paul Lamb, a calendar year taxpayer, bought and placed in service section 179 property costing $10,000. Etax com The property is not listed property. Etax com The property is 3-year property. Etax com He elected a $5,000 section 179 deduction for the property and also elected not to claim a special depreciation allowance. Etax com He used the property only for business in 2011 and 2012. Etax com In 2013, he used the property 40% for business and 60% for personal use. Etax com He figures his recapture amount as follows. Etax com Section 179 deduction claimed (2011) $5,000. Etax com 00 Minus: Allowable depreciation using Table A-1 (instead of section 179 deduction):   2011 $1,666. Etax com 50   2012 2,222. Etax com 50   2013 ($740. Etax com 50 × 40% (business)) 296. Etax com 20 4,185. Etax com 20 2013 — Recapture amount $ 814. Etax com 80 Paul must include $814. Etax com 80 in income for 2013. Etax com 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. Etax com Prev  Up  Next   Home   More Online Publications