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

Updated 7/15/2013 to reflect that the IRS will issue monthly updates. 

IR-2013-62, June 24, 2013

WASHINGTON ― Internal Revenue Service Principal Deputy Commissioner Danny Werfel today issued a report outlining new actions and next steps to fix problems uncovered with the IRS’ review of tax-exempt applications and improve the wider processes and operations in place at the IRS.

The three-part report covers a wide range of areas Werfel and his leadership team examined during the past month. The report cites actions to hold management accountable and identifies immediate steps to help put the process for approving tax-exempt applications back on track. Werfel also outlines actions needed to protect and improve wider IRS operations, ranging from compliance areas to taxpayer service.

“It is critical that the IRS takes steps to ensure accountability, address the problems uncovered in recent weeks and improve the operations of the IRS to continue to carry out our critical mission on behalf of the public,” Werfel said. “We have made a number of changes already, more are in the works and even more will develop as we move forward.”

Importantly, the initial IRS review shows no signs of intentional wrongdoing by IRS personnel or involvement by parties outside the IRS in the activities described in the recent TIGTA  report.  However, the report notes that investigations are ongoing, and that the IRS is committed to a full fact-finding effort to provide the public answers to these and other important questions.

“The IRS is committed to correcting its mistakes, holding people accountable, and establishing control elements that will help us mitigate the risks we face,” Werfel said. “This report is a critical first step in the process of restoring trust in this critical institution. We have more work in front of us, but we believe we are on the right track to move forward.”

Werfel’s report, titled “Charting a Path Forward at the IRS: Initial Assessment and Plan of Action,” covers three primary areas:

Accountability. This covers the steps being taken to ensure accountability for the mismanagement described in last month’s Treasury Inspector General for Tax Administration (TIGTA) report:

  • The report finds that significant management and judgment failures occurred, as outlined in the TIGTA report. These contributed to the inappropriate treatment of taxpayers applying for tax- exempt status. 
  • To address this, new leadership has been installed across all five executive management levels involved in the chain of command connected to these matters. In addition, the IRS has empaneled an Accountability Review Board to provide recommendations within 60 days (and later as needed) on any additional personnel actions that should be taken.

Fixing the Problems with the Review of Applications for Tax-Exempt Status. This part covers several process improvements underway to ensure that taxpayers are treated appropriately and effectively in the review of applications for tax-exempt status:  

  • The report outlines a new voluntary process to help certain applicants gain fast-track approval to operate as a 501(c)(4) tax-exempt entity if they are being reviewed for advocacy questions and  have been in our application backlog for more than 120 days. This self-certification process allows them a streamlined path to tax-exempt status if they certify they will operate within specified limits and thresholds of political and social welfare activities. In addition, the IRS has added new technical and program staff to assist with reviewing 501(c)(4) applications.
  • The IRS also suspended the use of any “be-on-the-lookout,” or BOLO lists in the application process for tax-exempt status.

Review of IRS Operations and Risks. The report identifies a series of actions to ensure taxpayers that selection criteria across the IRS are appropriate and that taxpayers are aware of how they can seek assistance if they have concerns about the IRS. The report further outlines steps underway to ensure that critical program or operational risks within the IRS are identified early, raised to the right decision-makers and shared timely with key stakeholders:

  • The report calls for establishing an Enterprise Risk Management Program to provide a common framework for capturing, reporting and addressing risk areas across the IRS.  This will improve timeliness in bringing information to the attention of the IRS Commissioner and other IRS leaders as well as key stakeholders to help prevent future instances of inappropriate treatment or mismanagement.
  • Although there is no current evidence that selection criteria in other IRS organizations is inappropriate, the nature of the problems identified in the tax-exempt application process warrants a review of certain process controls within the IRS.  The IRS will initiate a comprehensive, agency-wide review of compliance selection criteria.  Results will be shared with the Department of the Treasury, the IRS Oversight Board, and the Chairpersons of the House Ways and Means Committee and the Senate Finance Committee.
  • The IRS will initiate additional internal and external education and outreach about the role of the National Taxpayer Advocate in assisting taxpayers in resolving problems they encounter with the IRS. 

In addition to posting the report on IRS.gov, the IRS will provide monthly updates to the progress made on the TIGTA report’s recommendations and provide other developments related to this effort.

Related Items:

  • Recommended Actions — Status of recommended actions from the Treasury Inspector General for Tax Administration (TIGTA) on IRS's Exempt Organizations (EO) Division (updated as appropriate) and other information
  • FS-2013-7, Highlights from the IRS Report
  • FS-2013-8, IRS Offers New Streamlined Option to Certain 501(c)(4) Groups Caught in Application Backlog

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Page Last Reviewed or Updated: 04-Sep-2013

The Free State Taxes File

Free state taxes file 9. Free state taxes file   Dispositions of Property Used in Farming Table of Contents Introduction Topics - This chapter discusses: Useful Items - You may want to see: Section 1231 Gains and LossesNonrecaptured section 1231 losses. Free state taxes file Depreciation RecaptureSection 1245 Property Section 1250 Property Installment Sale Other Dispositions Other GainsExceptions. Free state taxes file Amount to report as ordinary income. Free state taxes file Applicable percentage. Free state taxes file Amount to report as ordinary income. Free state taxes file Applicable percentage. Free state taxes file Introduction When you dispose of property used in your farm business, your taxable gain or loss is usually treated as ordinary income (which is taxed at the same rates as wages and interest income) or capital gain (which is generally taxed at lower rates) under the rules for section 1231 transactions. Free state taxes file When you dispose of depreciable property (section 1245 property or section 1250 property) at a gain, you may have to recognize all or part of the gain as ordinary income under the depreciation recapture rules. Free state taxes file Any gain remaining after applying the depreciation recapture rules is a section 1231 gain, which may be taxed as a capital gain. Free state taxes file Gains and losses from property used in farming are reported on Form 4797, Sales of Business Property. Free state taxes file Table 9-1 contains examples of items reported on Form 4797 and refers to the part of that form on which they first should be reported. Free state taxes file Topics - This chapter discusses: Section 1231 gains and losses Depreciation recapture Other gains Useful Items - You may want to see: Publication 544 Sales and Other Dispositions of Assets Form (and Instructions) 4797 Sales of Business Property See chapter 16 for information about getting publications and forms. Free state taxes file Section 1231 Gains and Losses Section 1231 gains and losses are the taxable gains and losses from section 1231 transactions (explained below). Free state taxes file Their treatment as ordinary or capital gains depends on whether you have a net gain or a net loss from all of your section 1231 transactions in the tax year. Free state taxes file Table 9-1. Free state taxes file Where to First Report Certain Items on Form 4797 Type of property Held 1 year  or less Held more than  1 year 1 Depreciable trade or business property:       a Sold or exchanged at a gain Part II Part III (1245, 1250)   b Sold or exchanged at a loss Part II Part I 2 Farmland held less than 10 years for which soil, water, or land clearing expenses were deducted:       a Sold at a gain Part II Part III (1252)   b Sold at a loss Part II Part I 3 All other farmland Part II Part I 4 Disposition of cost-sharing payment property described in section 126 Part II Part III (1255) 5 Cattle and horses used in a trade or business for draft, breeding, dairy, or sporting purposes: Held less  than 24 mos. Free state taxes file Held 24 mos. Free state taxes file  or more   a Sold at a gain Part II Part III (1245)   b Sold at a loss Part II Part I   c Raised cattle and horses sold at a gain Part II Part I 6 Livestock other than cattle and horses used in a trade or business for draft, breeding, dairy, or sporting purposes: Held less  than 12 mos. Free state taxes file Held 12 mos. Free state taxes file   or more   a Sold at a gain Part II Part III (1245)   b Sold at a loss Part II Part I   c Raised livestock sold at a gain Part II Part I If you have a gain from a section 1231 transaction, first determine whether any of the gain is ordinary income under the depreciation recapture rules (explained later). Free state taxes file Do not take that gain into account as section 1231 gain. Free state taxes file Section 1231 transactions. Free state taxes file   Gain or loss on the following transactions is subject to section 1231 treatment. Free state taxes file Sale or exchange of cattle and horses. Free state taxes file The cattle and horses must be held for draft, breeding, dairy, or sporting purposes and held for 24 months or longer. Free state taxes file Sale or exchange of other livestock. Free state taxes file This livestock must be held for draft, breeding, dairy, or sporting purposes and held for 12 months or longer. Free state taxes file Other livestock includes hogs, mules, sheep, goats, donkeys, and other fur-bearing animals. Free state taxes file Other livestock does not include poultry. Free state taxes file Sale or exchange of depreciable personal property. Free state taxes file This property must be used in your business and held longer than 1 year. Free state taxes file Generally, property held for the production of rents or royalties is considered to be used in a trade or business. Free state taxes file Examples of depreciable personal property include farm machinery and trucks. Free state taxes file It also includes amortizable section 197 intangibles. Free state taxes file Sale or exchange of real estate. Free state taxes file This property must be used in your business and held longer than 1 year. Free state taxes file Examples are your farm or ranch (including barns and sheds). Free state taxes file Sale or exchange of unharvested crops. Free state taxes file The crop and land must be sold, exchanged, or involuntarily converted at the same time and to the same person, and the land must have been held longer than 1 year. Free state taxes file You cannot keep any right or option to reacquire the land directly or indirectly (other than a right customarily incident to a mortgage or other security transaction). Free state taxes file Growing crops sold with a leasehold on the land, even if sold to the same person in a single transaction, are not included. Free state taxes file Distributive share of partnership gains and losses. Free state taxes file Your distributive share must be from the sale or exchange of property listed above and held longer than 1 year (or for the required period for certain livestock). Free state taxes file Cutting or disposal of timber. Free state taxes file Special rules apply if you owned the timber longer than 1 year and elect to treat timber cutting as a sale or exchange, or you enter into a cutting contract, as described in chapter 8 under Timber . Free state taxes file Condemnation. Free state taxes file The condemned property (defined in chapter 11) must have been held longer than 1 year. Free state taxes file It must be business property or a capital asset held in connection with a trade or business or a transaction entered into for profit, such as investment property. Free state taxes file It cannot be property held for personal use. Free state taxes file Casualty or theft. Free state taxes file The casualty or theft must have affected business property, property held for the production of rents or royalties, or investment property (such as notes and bonds). Free state taxes file You must have held the property longer than 1 year. Free state taxes file However, if your casualty or theft losses are more than your casualty or theft gains, neither the gains nor the losses are taken into account in the section 1231 computation. Free state taxes file Section 1231 does not apply to personal casualty gains and losses. Free state taxes file See chapter 11 for information on how to treat those gains and losses. Free state taxes file If the property is not held for the required holding period, the transaction is not subject to section 1231 treatment, and any gain or loss is ordinary income reported in Part II of Form 4797. Free state taxes file See Table 9-1. Free state taxes file Property for sale to customers. Free state taxes file   A sale, exchange, or involuntary conversion of property held mainly for sale to customers is not a section 1231 transaction. Free state taxes file If you will get back all, or nearly all, of your investment in the property by selling it rather than by using it up in your business, it is property held mainly for sale to customers. Free state taxes file Treatment as ordinary or capital. Free state taxes file   To determine the treatment of section 1231 gains and losses, combine all of your section 1231 gains and losses for the year. Free state taxes file If you have a net section 1231 loss, it is an ordinary loss. Free state taxes file If you have a net section 1231 gain, it is ordinary income up to your nonrecaptured section 1231 losses from previous years, explained next. Free state taxes file The rest, if any, is long-term capital gain. Free state taxes file Nonrecaptured section 1231 losses. Free state taxes file   Your nonrecaptured section 1231 losses are your net section 1231 losses for the previous 5 years that have not been applied against a net section 1231 gain by treating the gain as ordinary income. Free state taxes file These losses are applied against your net section 1231 gain beginning with the earliest loss in the 5-year period. Free state taxes file Example. Free state taxes file In 2013, Ben has a $2,000 net section 1231 gain. Free state taxes file To figure how much he has to report as ordinary income and long-term capital gain, he must first determine his section 1231 gains and losses from the previous 5-year period. Free state taxes file From 2008 through 2012 he had the following section 1231 gains and losses. Free state taxes file Year Amount 2008 -0- 2009 -0- 2010 ($2,500) 2011 -0- 2012 $1,800   Ben uses this information to figure how to report his net section 1231 gain for 2013 as shown below. Free state taxes file 1) Net section 1231 gain (2013) $2,000 2) Net section 1231 loss (2010) ($2,500)   3) Net section 1231 gain (2012) 1,800   4) Remaining net section 1231 loss from prior 5 years ($700)   5) Gain treated as  ordinary income $700 6) Gain treated as long-term  capital gain $1,300 His remaining net section 1231 loss from 2010 is completely recaptured in 2013. Free state taxes file Depreciation Recapture If you dispose of depreciable or amortizable property at a gain, you may have to treat all or part of the gain (even if it is otherwise nontaxable) as ordinary income. Free state taxes file To figure any gain that must be reported as ordinary income, you must keep permanent records of the facts necessary to figure the depreciation or amortization allowed or allowable on your property. Free state taxes file For more information, see chapter 3 of Publication 544. Free state taxes file Section 1245 Property A gain on the disposition of section 1245 property is treated as ordinary income to the extent of depreciation allowed or allowable. Free state taxes file Any recognized gain that is more than the part that is ordinary income is a section 1231 gain. Free state taxes file See Treatment as ordinary or capital under Section 1231 Gains and Losses , earlier. Free state taxes file Section 1245 property includes any property that is or has been subject to an allowance for depreciation or amortization and that is any of the following types of property. Free state taxes file Personal property (either tangible or intangible). Free state taxes file Other tangible property (except buildings and their structural components) used as any of the following. Free state taxes file See Buildings and structural components below. Free state taxes file An integral part of manufacturing, production, or extraction, or of furnishing certain services. Free state taxes file A research facility in any of the activities in (a). Free state taxes file A facility in any of the activities in (a) above, for the bulk storage of fungible commodities (discussed later). Free state taxes file That part of real property (not included in (2)) with an adjusted basis reduced by (but not limited to) the following. Free state taxes file Amortization of certified pollution control facilities. Free state taxes file The section 179 expense deduction. Free state taxes file Deduction for clean-fuel vehicles and certain refueling property. Free state taxes file Expenditures to remove architectural and transportation barriers to the handicapped and elderly. Free state taxes file Certain reforestation expenditures (as described under Reforestation Costs in chapter 7. Free state taxes file Single purpose agricultural (livestock) or horticultural structures. Free state taxes file Storage facilities (except buildings and their structural components) used in distributing petroleum or any primary product of petroleum. Free state taxes file Buildings and structural components. Free state taxes file   Section 1245 property does not include buildings and structural components. Free state taxes file The term building includes a house, barn, warehouse, or garage. Free state taxes file The term structural component includes walls, floors, windows, doors, central air conditioning systems, light fixtures, etc. Free state taxes file   Do not treat a structure that is essentially machinery or equipment as a building or structural component. Free state taxes file Also, do not treat a structure that houses property used as an integral part of an activity as a building or structural component if the structure's use is so closely related to the property's use that the structure can be expected to be replaced when the property it initially houses is replaced. Free state taxes file   The fact that the structure is specially designed to withstand the stress and other demands of the property and cannot be used economically for other purposes indicates it is closely related to the use of the property it houses. Free state taxes file Structures such as oil and gas storage tanks, grain storage bins, and silos are not treated as buildings, but as section 1245 property. Free state taxes file Facility for bulk storage of fungible commodities. Free state taxes file   This is a facility used mainly for the bulk storage of fungible commodities. Free state taxes file Bulk storage means storage of a commodity in a large mass before it is used. Free state taxes file For example, if a facility is used to store oranges that have been sorted and boxed, it is not used for bulk storage. Free state taxes file To be fungible, a commodity must be such that one part may be used in place of another. Free state taxes file Gain Treated as Ordinary Income The gain treated as ordinary income on the sale, exchange, or involuntary conversion of section 1245 property, including a sale and leaseback transaction, is the lesser of the following amounts. Free state taxes file The depreciation (which includes any section 179 deduction claimed) and amortization allowed or allowable on the property. Free state taxes file The gain realized on the disposition (the amount realized from the disposition minus the adjusted basis of the property). Free state taxes file For any other disposition of section 1245 property, ordinary income is the lesser of (1) above or the amount by which its fair market value (FMV) is more than its adjusted basis. Free state taxes file For details, see chapter 3 of Publication 544. Free state taxes file Use Part III of Form 4797 to figure the ordinary income part of the gain. Free state taxes file Depreciation claimed on other property or claimed by other taxpayers. Free state taxes file   Depreciation and amortization include the amounts you claimed on the section 1245 property as well as the following depreciation and amortization amounts. Free state taxes file Amounts you claimed on property you exchanged for, or converted to, your section 1245 property in a like-kind exchange or involuntary conversion. Free state taxes file For details on exchanges of property that are not taxable, see Like-Kind Exchanges in chapter 8. Free state taxes file Amounts a previous owner of the section 1245 property claimed if your basis is determined with reference to that person's adjusted basis (for example, the donor's depreciation deductions on property you received as a gift and part of the transfer is a sale or exchange). Free state taxes file Example. Free state taxes file Jeff Free paid $120,000 for a tractor in 2012. Free state taxes file On February 23, 2013, he traded it for a chopper and paid an additional $30,000. Free state taxes file To figure his depreciation deduction on the chopper for the current year, Jeff continues to use the basis of the tractor as he would have before the trade. Free state taxes file Jeff can also depreciate the additional $30,000 for the chopper. Free state taxes file Depreciation and amortization. Free state taxes file   Depreciation and amortization deductions that must be recaptured as ordinary income include (but are not limited to) the following items. Free state taxes file See Depreciation Recapture in chapter 3 of Publication 544 for more details. Free state taxes file Ordinary depreciation deductions. Free state taxes file Section 179 deduction (see chapter 7). Free state taxes file Any special depreciation allowance. Free state taxes file Amortization deductions for all the following costs. Free state taxes file Acquiring a lease. Free state taxes file Lessee improvements. Free state taxes file Pollution control facilities. Free state taxes file Reforestation expenses. Free state taxes file Section 197 intangibles. Free state taxes file Qualified disaster expenses. Free state taxes file Franchises, trademarks, and trade names acquired before August 11, 1993. Free state taxes file Example. Free state taxes file You file your returns on a calendar year basis. Free state taxes file In February 2011, you bought and placed in service for 100% use in your farming business a light-duty truck (5-year property) that cost $10,000. Free state taxes file You used the half-year convention and your MACRS deductions for the truck were $1,500 in 2011 and $2,550 in 2012. Free state taxes file You did not claim the section 179 expense deduction for the truck. Free state taxes file You sold it in May 2013 for $7,000. Free state taxes file The MACRS deduction in 2013, the year of sale, is $893 (½ of $1,785). Free state taxes file Figure the gain treated as ordinary income as follows. Free state taxes file 1) Amount realized $7,000 2) Cost (February 2011) $10,000   3) Depreciation allowed or allowable (MACRS deductions: $1,500 + $2,550 + $893) 4,943   4) Adjusted basis (subtract line 3 from line 2) $5,057 5) Gain realized (subtract line 4 from line 1) 1,943 6) Gain treated as ordinary income (lesser of line 3 or line 5) $1,943 Depreciation allowed or allowable. Free state taxes file   You generally use the greater of the depreciation allowed or allowable when figuring the part of gain to report as ordinary income. Free state taxes file If, in prior years, you have consistently taken proper deductions under one method, the amount allowed for your prior years will not be increased even though a greater amount would have been allowed under another proper method. Free state taxes file If you did not take any deduction at all for depreciation, your adjustments to basis for depreciation allowable are figured by using the straight line method. Free state taxes file This treatment applies only when figuring what part of the gain is treated as ordinary income under the rules for section 1245 depreciation recapture. Free state taxes file Disposition of plants and animals. Free state taxes file   If you elect not to use the uniform capitalization rules (see chapter 6), you must treat any plant you produce as section 1245 property. Free state taxes file If you have a gain on the property's disposition, you must recapture the pre-productive expenses you would have capitalized if you had not made the election by treating the gain, up to the amount of these expenses, as ordinary income. Free state taxes file For section 1231 transactions, show these expenses as depreciation on Form 4797, Part III, line 22. Free state taxes file For plant sales that are reported on Schedule F (1040), Profit or Loss From Farming, this recapture rule does not change the reporting of income because the gain is already ordinary income. Free state taxes file You can use the farm-price method or the unit-livestock-price method discussed in  chapter 2 to figure these expenses. Free state taxes file Example. Free state taxes file Janet Maple sold her apple orchard in 2013 for $80,000. Free state taxes file Her adjusted basis at the time of sale was $60,000. Free state taxes file She bought the orchard in 2006, but the trees did not produce a crop until 2009. Free state taxes file Her pre-productive expenses were $6,000. Free state taxes file She elected not to use the uniform capitalization rules. Free state taxes file Janet must treat $6,000 of the gain as ordinary income. Free state taxes file Section 1250 Property Section 1250 property includes all real property subject to an allowance for depreciation that is not and never has been section 1245 property. Free state taxes file It includes buildings and structural components that are not section 1245 property (discussed earlier). Free state taxes file It includes a leasehold of land or section 1250 property subject to an allowance for depreciation. Free state taxes file A fee simple interest in land is not section 1250 property because, like land, it is not depreciable. Free state taxes file Gain on the disposition of section 1250 property is treated as ordinary income to the extent of additional depreciation allowed or allowable. Free state taxes file To determine the additional depreciation on section 1250 property, see Depreciation Recapture in chapter 3 of Publication 544. Free state taxes file You will not have additional depreciation if any of the following apply to the property disposed of. Free state taxes file You figured depreciation for the property using the straight line method or any other method that does not result in depreciation that is more than the amount figured by the straight line method and you have held the property longer than 1 year. Free state taxes file You chose the alternate ACRS (straight line) method for the property, which was a type of 15-, 18-, or 19-year real property covered by the section 1250 rules. Free state taxes file The property was nonresidential real property placed in service after 1986 (or after July 31, 1986, if the choice to use MACRS was made) and you held it longer than 1 year. Free state taxes file These properties are depreciated using the straight line method. Free state taxes file Installment Sale If you report the sale of property under the installment method, any depreciation recapture under section 1245 or 1250 is taxable as ordinary income in the year of sale. Free state taxes file This applies even if no payments are received in that year. Free state taxes file If the gain is more than the depreciation recapture income, report the rest of the gain using the rules of the installment method. Free state taxes file For this purpose, include the recapture income in your installment sale basis to determine your gross profit on the installment sale. Free state taxes file If you dispose of more than one asset in a single transaction, you must separately figure the gain on each asset so that it may be properly reported. Free state taxes file To do this, allocate the selling price and the payments you receive in the year of sale to each asset. Free state taxes file Report any depreciation recapture income in the year of sale before using the installment method for any remaining gain. Free state taxes file For more information on installment sales, see chapter 10. Free state taxes file Other Dispositions Chapter 3 of Publication 544 discusses the tax treatment of the following transfers of depreciable property. Free state taxes file By gift. Free state taxes file At death. Free state taxes file In like-kind exchanges. Free state taxes file In involuntary conversions. Free state taxes file Publication 544 also explains how to handle a single transaction involving multiple properties. Free state taxes file Other Gains This section discusses gain on the disposition of farmland for which you were allowed either of the following. Free state taxes file Deductions for soil and water conservation expenditures (section 1252 property). Free state taxes file Exclusions from income for certain cost sharing payments (section 1255 property). Free state taxes file Section 1252 property. Free state taxes file   If you disposed of farmland you held more than 1 year and less than 10 years at a gain and you were allowed deductions for soil and water conservation expenses for the land, as discussed in chapter 5, you must treat part of the gain as ordinary income and treat the balance as section 1231 gain. Free state taxes file Exceptions. Free state taxes file   Do not treat gain on the following transactions as gain on section 1252 property. Free state taxes file Disposition of farmland by gift. Free state taxes file Transfer of farm property at death (except for income in respect of a decedent). Free state taxes file For more information, see Regulations section 1. Free state taxes file 1252-2. Free state taxes file Amount to report as ordinary income. Free state taxes file   You report as ordinary income the lesser of the following amounts. Free state taxes file Your gain (determined by subtracting the adjusted basis from the amount realized from a sale, exchange, or involuntary conversion, or the FMV for all other dispositions). Free state taxes file The total deductions allowed for soil and water conservation expenses multiplied by the applicable percentage, discussed next. Free state taxes file Applicable percentage. Free state taxes file   The applicable percentage is based on the length of time you held the land. Free state taxes file If you dispose of your farmland within 5 years after the date you acquired it, the percentage is 100%. Free state taxes file If you dispose of the land within the 6th through 9th year after you acquired it, the applicable percentage is reduced by 20% a year for each year or part of a year you hold the land after the 5th year. Free state taxes file If you dispose of the land 10 or more years after you acquired it, the percentage is 0%, and the entire gain is a section 1231 gain. Free state taxes file Example. Free state taxes file You acquired farmland on January 19, 2005. Free state taxes file On October 3, 2013, you sold the land at a $30,000 gain. Free state taxes file Between January 1 and October 3, 2013, you incur soil and water conservation expenditures of $15,000 for the land that are fully deductible in 2013. Free state taxes file The applicable percentage is 40% since you sold the land within the 8th year after you acquired it. Free state taxes file You treat $6,000 (40% of $15,000) of the $30,000 gain as ordinary income and the $24,000 balance as a section 1231 gain. Free state taxes file Section 1255 property. Free state taxes file   If you receive certain cost-sharing payments on property and you exclude those payments from income (as discussed in chapter 3), you may have to treat part of any gain as ordinary income and treat the balance as a section 1231 gain. Free state taxes file If you chose not to exclude these payments, you will not have to recognize ordinary income under this provision. Free state taxes file Amount to report as ordinary income. Free state taxes file   You report as ordinary income the lesser of the following amounts. Free state taxes file The applicable percentage of the total excluded cost-sharing payments. Free state taxes file The gain on the disposition of the property. Free state taxes file You do not report ordinary income under this rule to the extent the gain is recognized as ordinary income under sections 1231 through 1254, 1256, and 1257. Free state taxes file However, if applicable, gain reported under this rule must be reported regardless of any contrary provisions (including nonrecognition provisions) under any other section. Free state taxes file Applicable percentage. Free state taxes file   The applicable percentage of the excluded cost-sharing payments to be reported as ordinary income is based on the length of time you hold the property after receiving the payments. Free state taxes file If the property is held less than 10 years after you receive the payments, the percentage is 100%. Free state taxes file After 10 years, the percentage is reduced by 10% a year, or part of a year, until the rate is 0%. Free state taxes file Form 4797, Part III. Free state taxes file   Use Form 4797, Part III, to figure the ordinary income part of a gain from the sale, exchange, or involuntary conversion of section 1252 property and section 1255 property. Free state taxes file Prev  Up  Next   Home   More Online Publications