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What Is 1040x

What is 1040x Publication 969 - Introductory Material Table of Contents What's New Reminders IntroductionOrdering forms and publications. What is 1040x Tax questions. What is 1040x What's New Federal tax benefits for same-sex married couples. What is 1040x   For federal tax purposes, individuals of the same sex are considered married if they were lawfully married in a state (or foreign country) whose laws authorize the marriage of two individuals of the same sex, even if the state (or foreign country) in which they now live does not recognize same-sex marriage. What is 1040x For more information, see Publication 501. What is 1040x Health flexible spending arrangements (FSAs). What is 1040x  The following rules apply to health FSAs for plan years beginning after December 31, 2012. What is 1040x Salary reduction contributions to your health FSA cannot be more than $2,500 a year (indexed for inflation). What is 1040x Your employer may choose to change your cafeteria plan to allow you to carry over up to $500 of unused amounts remaining at the end of the plan year in a health FSA to be paid or reimbursed for qualified medical expenses incurred during the following plan year. What is 1040x For more information, see Balance in an FSA under Flexible Spending Arrangements (FSAs), later. What is 1040x Reminders Future Developments. What is 1040x  For the latest information about developments related to Publication 969, such as legislation enacted after it was published, go to www. What is 1040x IRS. What is 1040x gov/pub969. What is 1040x Photographs of missing children. What is 1040x  The Internal Revenue Service is a proud partner with the National Center for Missing and Exploited Children. What is 1040x Photographs of missing children selected by the Center may appear in this publication on pages that would otherwise be blank. What is 1040x You can help bring these children home by looking at the photographs and calling 1-800-THE-LOST (1-800-843-5678) if you recognize a child. What is 1040x Introduction Various programs are designed to give individuals tax advantages to offset health care costs. What is 1040x This publication explains the following programs. What is 1040x Health savings accounts (HSAs). What is 1040x Medical savings accounts (Archer MSAs and Medicare Advantage MSAs). What is 1040x Health flexible spending arrangements (FSAs). What is 1040x Health reimbursement arrangements (HRAs). What is 1040x An HSA may receive contributions from an eligible individual or any other person, including an employer or a family member, on behalf of an eligible individual. What is 1040x Contributions, other than employer contributions, are deductible on the eligible individual's return whether or not the individual itemizes deductions. What is 1040x Employer contributions are not included in income. What is 1040x Distributions from an HSA that are used to pay qualified medical expenses are not taxed. What is 1040x An Archer MSA may receive contributions from an eligible individual and his or her employer, but not both in the same year. What is 1040x Contributions by the individual are deductible whether or not the individual itemizes deductions. What is 1040x Employer contributions are not included in income. What is 1040x Distributions from an Archer MSA that are used to pay qualified medical expenses are not taxed. What is 1040x A Medicare Advantage MSA is an Archer MSA designated by Medicare to be used solely to pay the qualified medical expenses of the account holder who is enrolled in Medicare. What is 1040x Contributions can only be made by Medicare. What is 1040x The contributions are not included in your income. What is 1040x Distributions from a Medicare Advantage MSA that are used to pay qualified medical expenses are not taxed. What is 1040x A health FSA may receive contributions from an eligible individual. What is 1040x Employers may also contribute. What is 1040x Contributions are not includible in income. What is 1040x Reimbursements from an FSA that are used to pay qualified medical expenses are not taxed. What is 1040x An HRA must receive contributions from the employer only. What is 1040x Employees may not contribute. What is 1040x Contributions are not includible in income. What is 1040x Reimbursements from an HRA that are used to pay qualified medical expenses are not taxed. What is 1040x Comments and suggestions. What is 1040x   We welcome your comments about this publication and your suggestions for future editions. What is 1040x   You can write to us at the following address: Internal Revenue Service Tax Forms and Publications Division 1111 Constitution Ave. What is 1040x NW, IR-6526 Washington, DC 20224   We respond to many letters by telephone. What is 1040x Therefore, it would be helpful if you would include your daytime phone number, including the area code, in your correspondence. What is 1040x   You can send your comments from www. What is 1040x irs. What is 1040x gov/formspubs. What is 1040x Click on “More Information” and then on “Comment on Tax Forms and Publications. What is 1040x ”   Although we cannot respond individually to each comment received, we do appreciate your feedback and will consider your comments as we revise our tax products. What is 1040x Ordering forms and publications. What is 1040x   Visit www. What is 1040x irs. What is 1040x gov/formspubs to download forms and publications, call 1-800-TAX-FORM (1-800-829-3676), or write to the address below and receive a response within 10 days after your request is received. What is 1040x Internal Revenue Service 1201 N. What is 1040x Mitsubishi Motorway Bloomington, IL 61705-6613 Tax questions. What is 1040x   If you have a tax question, check the information available on IRS. What is 1040x gov or call 1-800-829-1040. What is 1040x We cannot answer tax questions sent to either of the above addresses. What is 1040x Prev  Up  Next   Home   More Online Publications

Publication 15-A (2014), Employer's Supplemental Tax Guide

(Supplement to Publication 15 (Circular E),Employer's Tax Guide)

For use in 2014


Table of Contents


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The What Is 1040x

What is 1040x 2. What is 1040x   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. What is 1040x This is the section 179 deduction. What is 1040x You can elect the section 179 deduction instead of recovering the cost by taking depreciation deductions. What is 1040x Estates and trusts cannot elect the section 179 deduction. What is 1040x 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. What is 1040x It also explains when and how to recapture the deduction. What is 1040x Useful Items - You may want to see: Publication 537 Installment Sales 544 Sales and Other Dispositions of Assets 954 Tax Incentives for Distressed Communities Form (and Instructions) 4562 Depreciation and Amortization 4797 Sales of Business Property See chapter 6 for information about getting publications and forms. What is 1040x What Property Qualifies? To qualify for the section 179 deduction, your property must meet all the following requirements. What is 1040x It must be eligible property. What is 1040x It must be acquired for business use. What is 1040x It must have been acquired by purchase. What is 1040x It must not be property described later under What Property Does Not Qualify . What is 1040x The following discussions provide information about these requirements and exceptions. What is 1040x Eligible Property To qualify for the section 179 deduction, your property must be one of the following types of depreciable property. What is 1040x Tangible personal property. What is 1040x 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. What is 1040x Single purpose agricultural (livestock) or horticultural structures. What is 1040x See chapter 7 of Publication 225 for definitions and information regarding the use requirements that apply to these structures. What is 1040x Storage facilities (except buildings and their structural components) used in connection with distributing petroleum or any primary product of petroleum. What is 1040x Off-the-shelf computer software. What is 1040x Qualified real property (described below). What is 1040x Tangible personal property. What is 1040x   Tangible personal property is any tangible property that is not real property. What is 1040x It includes the following property. What is 1040x Machinery and equipment. What is 1040x 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. What is 1040x Gasoline storage tanks and pumps at retail service stations. What is 1040x Livestock, including horses, cattle, hogs, sheep, goats, and mink and other furbearing animals. What is 1040x   The treatment of property as tangible personal property for the section 179 deduction is not controlled by its treatment under local law. What is 1040x 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. What is 1040x Off-the-shelf computer software. What is 1040x   Off-the-shelf computer software placed in service during the tax year is qualifying property for purposes of the section 179 deduction. What is 1040x 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. What is 1040x It includes any program designed to cause a computer to perform a desired function. What is 1040x 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. What is 1040x Qualified real property. What is 1040x   You can elect to treat certain qualified real property you placed in service as section 179 property for tax years beginning in 2013. What is 1040x 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. What is 1040x 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. What is 1040x For more information, see Special rules for qualified section 179 real property, later. What is 1040x Also, see Election for certain qualified section 179 real property, later, for information on how to make this election. What is 1040x Qualified leasehold improvement property. What is 1040x   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. What is 1040x   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. What is 1040x 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. What is 1040x Examples include the following. What is 1040x A complete liquidation of a subsidiary. What is 1040x A transfer to a corporation controlled by the transferor. What is 1040x An exchange of property by a corporation solely for stock or securities in another corporation in a reorganization. What is 1040x Qualified restaurant property. What is 1040x   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. What is 1040x 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. What is 1040x Qualified retail improvement property. What is 1040x   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. What is 1040x 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. What is 1040x The improvement is placed in service more than 3 years after the date the building was first placed in service. What is 1040x 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. What is 1040x 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. What is 1040x 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. What is 1040x Examples include the following. What is 1040x A complete liquidation of a subsidiary. What is 1040x A transfer to a corporation controlled by the transferor. What is 1040x An exchange of property by a corporation solely for stock or securities in another corporation in a reorganization. What is 1040x 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. What is 1040x 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. What is 1040x Partial business use. What is 1040x   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. What is 1040x If you use the property more than 50% for business, multiply the cost of the property by the percentage of business use. What is 1040x Use the resulting business cost to figure your section 179 deduction. What is 1040x Example. What is 1040x May Oak bought and placed in service an item of section 179 property costing $11,000. What is 1040x She used the property 80% for her business and 20% for personal purposes. What is 1040x The business part of the cost of the property is $8,800 (80% × $11,000). What is 1040x Property Acquired by Purchase To qualify for the section 179 deduction, your property must have been acquired by purchase. What is 1040x For example, property acquired by gift or inheritance does not qualify. What is 1040x Property is not considered acquired by purchase in the following situations. What is 1040x It is acquired by one component member of a controlled group from another component member of the same group. What is 1040x 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. What is 1040x It is acquired from a related person. What is 1040x Related persons. What is 1040x   Related persons are described under Related persons earlier. What is 1040x 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. What is 1040x Example. What is 1040x Ken Larch is a tailor. What is 1040x He bought two industrial sewing machines from his father. What is 1040x He placed both machines in service in the same year he bought them. What is 1040x They do not qualify as section 179 property because Ken and his father are related persons. What is 1040x He cannot claim a section 179 deduction for the cost of these machines. What is 1040x What Property Does Not Qualify? Certain property does not qualify for the section 179 deduction. What is 1040x This includes the following. What is 1040x Land and Improvements Land and land improvements do not qualify as section 179 property. What is 1040x Land improvements include swimming pools, paved parking areas, wharves, docks, bridges, and fences. What is 1040x 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. What is 1040x Certain property you lease to others (if you are a noncorporate lessor). What is 1040x Certain property used predominantly to furnish lodging or in connection with the furnishing of lodging. What is 1040x Air conditioning or heating units. What is 1040x Property used predominantly outside the United States, except property described in section 168(g)(4) of the Internal Revenue Code. What is 1040x 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. What is 1040x Property used by governmental units or foreign persons or entities, except property used under a lease with a term of less than 6 months. What is 1040x Leased property. What is 1040x   Generally, you cannot claim a section 179 deduction based on the cost of property you lease to someone else. What is 1040x This rule does not apply to corporations. What is 1040x However, you can claim a section 179 deduction for the cost of the following property. What is 1040x Property you manufacture or produce and lease to others. What is 1040x Property you purchase and lease to others if both the following tests are met. What is 1040x The term of the lease (including options to renew) is less than 50% of the property's class life. What is 1040x 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. What is 1040x Property used for lodging. What is 1040x   Generally, you cannot claim a section 179 deduction for property used predominantly to furnish lodging or in connection with the furnishing of lodging. What is 1040x However, this does not apply to the following types of property. What is 1040x 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. What is 1040x 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. What is 1040x Any certified historic structure to the extent its basis is due to qualified rehabilitation expenditures. What is 1040x Any energy property. What is 1040x Energy property. What is 1040x   Energy property is property that meets the following requirements. What is 1040x It is one of the following types of property. What is 1040x 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. What is 1040x 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. What is 1040x Equipment used to produce, distribute, or use energy derived from a geothermal deposit. What is 1040x For electricity generated by geothermal power, this includes equipment up to (but not including) the electrical transmission stage. What is 1040x Qualified fuel cell property or qualified microturbine property placed in service after December 31, 2005, and before January 1, 2017. What is 1040x The construction, reconstruction, or erection of the property must be completed by you. What is 1040x For property you acquire, the original use of the property must begin with you. What is 1040x 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. What is 1040x   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). What is 1040x How Much Can You Deduct? Your section 179 deduction is generally the cost of the qualifying property. What is 1040x However, the total amount you can elect to deduct under section 179 is subject to a dollar limit and a business income limit. What is 1040x These limits apply to each taxpayer, not to each business. What is 1040x However, see Married Individuals under Dollar Limits , later. What is 1040x For a passenger automobile, the total section 179 deduction and depreciation deduction are limited. What is 1040x See Do the Passenger Automobile Limits Apply in chapter 5 . What is 1040x 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. What is 1040x Trade-in of other property. What is 1040x   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. What is 1040x Example. What is 1040x Silver Leaf, a retail bakery, traded two ovens having a total adjusted basis of $680 for a new oven costing $1,320. What is 1040x They received an $800 trade-in allowance for the old ovens and paid $520 in cash for the new oven. What is 1040x The bakery also traded a used van with an adjusted basis of $4,500 for a new van costing $9,000. What is 1040x They received a $4,800 trade-in allowance on the used van and paid $4,200 in cash for the new van. What is 1040x Only the portion of the new property's basis paid by cash qualifies for the section 179 deduction. What is 1040x Therefore, Silver Leaf's qualifying costs for the section 179 deduction are $4,720 ($520 + $4,200). What is 1040x 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. What is 1040x 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. What is 1040x You do not have to claim the full $500,000. What is 1040x 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. What is 1040x 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. What is 1040x 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. What is 1040x Example. What is 1040x In 2013, you bought and placed in service $500,000 in machinery and a $25,000 circular saw for your business. What is 1040x You elect to deduct $475,000 for the machinery and the entire $25,000 for the saw, a total of $500,000. What is 1040x This is the maximum amount you can deduct. What is 1040x Your $25,000 deduction for the saw completely recovered its cost. What is 1040x Your basis for depreciation is zero. What is 1040x The basis for depreciation of your machinery is $25,000. What is 1040x You figure this by subtracting your $475,000 section 179 deduction for the machinery from the $500,000 cost of the machinery. What is 1040x Situations affecting dollar limit. What is 1040x   Under certain circumstances, the general dollar limits on the section 179 deduction may be reduced or increased or there may be additional dollar limits. What is 1040x The general dollar limit is affected by any of the following situations. What is 1040x The cost of your section 179 property placed in service exceeds $2,000,000. What is 1040x Your business is an enterprise zone business. What is 1040x You placed in service a sport utility or certain other vehicles. What is 1040x You are married filing a joint or separate return. What is 1040x 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. What is 1040x 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. What is 1040x Example. What is 1040x In 2013, Jane Ash placed in service machinery costing $2,100,000. What is 1040x This cost is $100,000 more than $2,000,000, so she must reduce her dollar limit to $400,000 ($500,000 − $100,000). What is 1040x 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. What is 1040x 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. What is 1040x 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). What is 1040x Note. What is 1040x   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). What is 1040x 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. What is 1040x 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. What is 1040x 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. What is 1040x Married Individuals If you are married, how you figure your section 179 deduction depends on whether you file jointly or separately. What is 1040x 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. What is 1040x 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. What is 1040x You must allocate the dollar limit (after any reduction) between you equally, unless you both elect a different allocation. What is 1040x If the percentages elected by each of you do not total 100%, 50% will be allocated to each of you. What is 1040x Example. What is 1040x Jack Elm is married. What is 1040x He and his wife file separate returns. What is 1040x Jack bought and placed in service $2,000,000 of qualified farm machinery in 2013. What is 1040x His wife has her own business, and she bought and placed in service $30,000 of qualified business equipment. What is 1040x Their combined dollar limit is $470,000. What is 1040x This is because they must figure the limit as if they were one taxpayer. What is 1040x They reduce the $500,000 dollar limit by the $30,000 excess of their costs over $2,000,000. What is 1040x They elect to allocate the $470,000 dollar limit as follows. What is 1040x $446,500 ($470,000 x 95%) to Mr. What is 1040x Elm's machinery. What is 1040x $23,500 ($470,000 x 5%) to Mrs. What is 1040x Elm's equipment. What is 1040x 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. What is 1040x Joint return after filing separate returns. What is 1040x   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. What is 1040x The dollar limit (after reduction for any cost of section 179 property over $2,000,000). What is 1040x The total cost of section 179 property you and your spouse elected to expense on your separate returns. What is 1040x Example. What is 1040x 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. What is 1040x After the due date of their returns, they file a joint return. What is 1040x Their dollar limit for the section 179 deduction is $32,000. What is 1040x This is the lesser of the following amounts. What is 1040x $470,000—The dollar limit less the cost of section 179 property over $2,000,000. What is 1040x $32,000—The total they elected to expense on their separate returns. What is 1040x 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. What is 1040x 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. What is 1040x Any cost not deductible in one year under section 179 because of this limit can be carried to the next year. What is 1040x Special rules apply to a 2013 deduction of qualified section 179 real property that is disallowed because of the business income limit. What is 1040x See Special rules for qualified section 179 property under Carryover of disallowed deduction, later. What is 1040x Taxable income. What is 1040x   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. What is 1040x Net income or loss from a trade or business includes the following items. What is 1040x Section 1231 gains (or losses). What is 1040x Interest from working capital of your trade or business. What is 1040x Wages, salaries, tips, or other pay earned as an employee. What is 1040x For information about section 1231 gains and losses, see chapter 3 in Publication 544. What is 1040x   In addition, figure taxable income without regard to any of the following. What is 1040x The section 179 deduction. What is 1040x The self-employment tax deduction. What is 1040x Any net operating loss carryback or carryforward. What is 1040x Any unreimbursed employee business expenses. What is 1040x Two different taxable income limits. What is 1040x   In addition to the business income limit for your section 179 deduction, you may have a taxable income limit for some other deduction. What is 1040x You may have to figure the limit for this other deduction taking into account the section 179 deduction. What is 1040x If so, complete the following steps. What is 1040x Step Action 1 Figure taxable income without the section 179 deduction or the other deduction. What is 1040x 2 Figure a hypothetical section 179 deduction using the taxable income figured in Step 1. What is 1040x 3 Subtract the hypothetical section 179 deduction figured in Step 2 from the taxable income figured in Step 1. What is 1040x 4 Figure a hypothetical amount for the other deduction using the amount figured in Step 3 as taxable income. What is 1040x 5 Subtract the hypothetical other deduction figured in Step 4 from the taxable income figured in Step 1. What is 1040x 6 Figure your actual section 179 deduction using the taxable income figured in Step 5. What is 1040x 7 Subtract your actual section 179 deduction figured in Step 6 from the taxable income figured in Step 1. What is 1040x 8 Figure your actual other deduction using the taxable income figured in Step 7. What is 1040x Example. What is 1040x On February 1, 2013, the XYZ corporation purchased and placed in service qualifying section 179 property that cost $500,000. What is 1040x It elects to expense the entire $500,000 cost under section 179. What is 1040x In June, the corporation gave a charitable contribution of $10,000. What is 1040x A corporation's limit on charitable contributions is figured after subtracting any section 179 deduction. What is 1040x The business income limit for the section 179 deduction is figured after subtracting any allowable charitable contributions. What is 1040x XYZ's taxable income figured without the section 179 deduction or the deduction for charitable contributions is $520,000. What is 1040x XYZ figures its section 179 deduction and its deduction for charitable contributions as follows. What is 1040x Step 1– Taxable income figured without either deduction is $520,000. What is 1040x Step 2– Using $520,000 as taxable income, XYZ's hypothetical section 179 deduction is $500,000. What is 1040x Step 3– $20,000 ($520,000 − $500,000). What is 1040x 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. What is 1040x Step 5– $518,000 ($520,000 − $2,000). What is 1040x Step 6– Using $518,000 (from Step 5) as taxable income, XYZ figures the actual section 179 deduction. What is 1040x Because the taxable income is at least $500,000, XYZ can take a $500,000 section 179 deduction. What is 1040x Step 7– $20,000 ($520,000 − $500,000). What is 1040x 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. What is 1040x Carryover of disallowed deduction. What is 1040x   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. What is 1040x This disallowed deduction amount is shown on line 13 of Form 4562. What is 1040x You use the amount you carry over to determine your section 179 deduction in the next year. What is 1040x Enter that amount on line 10 of your Form 4562 for the next year. What is 1040x   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. What is 1040x Your selections must be shown in your books and records. What is 1040x For this purpose, treat section 179 costs allocated from a partnership or an S corporation as one item of section 179 property. What is 1040x If you do not make a selection, the total carryover will be allocated equally among the properties you elected to expense for the year. What is 1040x   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. What is 1040x Special rules for qualified section 179 real property. What is 1040x   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. What is 1040x 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. What is 1040x 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). What is 1040x See section 179(f) of the Internal Revenue Code and Notice 2013-59 for more information. What is 1040x 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. What is 1040x Instead, you must add it back to the property's basis. What is 1040x Partnerships and Partners The section 179 deduction limits apply both to the partnership and to each partner. What is 1040x The partnership determines its section 179 deduction subject to the limits. What is 1040x It then allocates the deduction among its partners. What is 1040x Each partner adds the amount allocated from partnerships (shown on Schedule K-1 (Form 1065), Partner's Share of Income, Deductions, Credits, etc. What is 1040x ) to his or her nonpartnership section 179 costs and then applies the dollar limit to this total. What is 1040x 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. What is 1040x 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. What is 1040x Partnership's taxable income. What is 1040x   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. What is 1040x See the Instructions for Form 1065 for information on how to figure partnership net income (or loss). What is 1040x 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. What is 1040x Partner's share of partnership's taxable income. What is 1040x   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. What is 1040x Example. What is 1040x In 2013, Beech Partnership placed in service section 179 property with a total cost of $2,025,000. What is 1040x The partnership must reduce its dollar limit by $25,000 ($2,025,000 − $2,000,000). What is 1040x Its maximum section 179 deduction is $475,000 ($500,000 − $25,000), and it elects to expense that amount. What is 1040x 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. What is 1040x It allocates $40,000 of its section 179 deduction and $50,000 of its taxable income to Dean, one of its partners. What is 1040x 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. What is 1040x 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. What is 1040x He had a net loss of $5,000 from that business for the year. What is 1040x 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. What is 1040x His maximum section 179 deduction is $500,000. What is 1040x 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. What is 1040x 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). What is 1040x He carries over $45,000 ($125,000 − $80,000) of the elected section 179 costs to 2014. What is 1040x 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. What is 1040x Different tax years. What is 1040x   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. What is 1040x Example. What is 1040x John and James Oak are equal partners in Oak Partnership. What is 1040x Oak Partnership uses a tax year ending January 31. What is 1040x John and James both use a tax year ending December 31. What is 1040x 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. What is 1040x 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. What is 1040x Adjustment of partner's basis in partnership. What is 1040x   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. What is 1040x 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. What is 1040x Adjustment of partnership's basis in section 179 property. What is 1040x   The basis of a partnership's section 179 property must be reduced by the section 179 deduction elected by the partnership. What is 1040x 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. What is 1040x S Corporations Generally, the rules that apply to a partnership and its partners also apply to an S corporation and its shareholders. What is 1040x The deduction limits apply to an S corporation and to each shareholder. What is 1040x The S corporation allocates its deduction to the shareholders who then take their section 179 deduction subject to the limits. What is 1040x Figuring taxable income for an S corporation. What is 1040x   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. What is 1040x   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. What is 1040x However, you do not take into account any credits, tax-exempt income, the section 179 deduction, and deductions for compensation paid to shareholder-employees. What is 1040x For purposes of determining the total amount of S corporation items, treat deductions and losses as negative income. What is 1040x 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. What is 1040x 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. What is 1040x 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). What is 1040x 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. What is 1040x How Do You Elect the Deduction? You elect to take the section 179 deduction by completing Part I of Form 4562. What is 1040x If you elect the deduction for listed property (described in chapter 5), complete Part V of Form 4562 before completing Part I. What is 1040x For property placed in service in 2013, file Form 4562 with either of the following. What is 1040x Your original 2013 tax return, whether or not you file it timely. What is 1040x An amended return for 2013 filed within the time prescribed by law. What is 1040x 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. What is 1040x The amended return must also include any resulting adjustments to taxable income. What is 1040x You must keep records that show the specific identification of each piece of qualifying section 179 property. What is 1040x These records must show how you acquired the property, the person you acquired it from, and when you placed it in service. What is 1040x Election for certain qualified section 179 real property. What is 1040x   You can elect to expense certain qualified real property that you placed in service as section 179 property for tax years beginning in 2013. What is 1040x 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. What is 1040x   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. What is 1040x Your original 2013 tax return, whether or not you file it timely. What is 1040x An amended return for 2013 filed within the time prescribed by law. What is 1040x The amended return must also include any adjustments to taxable income. What is 1040x   The statement should indicate your election to expense certain qualified real property under section 179(f) on your return. What is 1040x 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. What is 1040x Also, report this on line 6 of Form 4562. What is 1040x    The maximum section 179 expense deduction that can be taken for qualified section 179 real property is limited to $250,000. What is 1040x Revoking an election. What is 1040x   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. What is 1040x The amended return must be filed within the time prescribed by law. What is 1040x The amended return must also include any resulting adjustments to taxable income. What is 1040x Once made, the revocation is irrevocable. What is 1040x 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. What is 1040x 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. What is 1040x You also increase the basis of the property by the recapture amount. What is 1040x Recovery periods for property are discussed under Which Recovery Period Applies in chapter 4 . What is 1040x If you sell, exchange, or otherwise dispose of the property, do not figure the recapture amount under the rules explained in this discussion. What is 1040x Instead, use the rules for recapturing depreciation explained in chapter 3 of Publication 544 under Section 1245 Property. What is 1040x 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. What is 1040x 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. What is 1040x Instead, use the rules for recapturing excess depreciation in chapter 5 under What Is the Business-Use Requirement. What is 1040x Figuring the recapture amount. What is 1040x   To figure the amount to recapture, take the following steps. What is 1040x Figure the depreciation that would have been allowable on the section 179 deduction you claimed. What is 1040x Begin with the year you placed the property in service and include the year of recapture. What is 1040x Subtract the depreciation figured in (1) from the section 179 deduction you claimed. What is 1040x The result is the amount you must recapture. What is 1040x Example. What is 1040x In January 2011, Paul Lamb, a calendar year taxpayer, bought and placed in service section 179 property costing $10,000. What is 1040x The property is not listed property. What is 1040x The property is 3-year property. What is 1040x He elected a $5,000 section 179 deduction for the property and also elected not to claim a special depreciation allowance. What is 1040x He used the property only for business in 2011 and 2012. What is 1040x In 2013, he used the property 40% for business and 60% for personal use. What is 1040x He figures his recapture amount as follows. What is 1040x Section 179 deduction claimed (2011) $5,000. What is 1040x 00 Minus: Allowable depreciation using Table A-1 (instead of section 179 deduction):   2011 $1,666. What is 1040x 50   2012 2,222. What is 1040x 50   2013 ($740. What is 1040x 50 × 40% (business)) 296. What is 1040x 20 4,185. What is 1040x 20 2013 — Recapture amount $ 814. What is 1040x 80 Paul must include $814. What is 1040x 80 in income for 2013. What is 1040x 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. What is 1040x Prev  Up  Next   Home   More Online Publications