Under Code Section 179, a taxpayer (other than a trust or estate) may elect to treat the cost (subject to certain limitations) of Code Section 179 property as a currently deductible business expense.The Code Section 179 deduction is not affected by the point during the taxable year that the property was actually placed in service. Reg. Section 1.179-1(c). However, apportionment is required if Code Section 179 property is used for both business and non-business purposes. Reg.Section 1.179-1(d). This information is provided as a public service, and should not be construed as individual accounting or tax advice. For information on how these general principles apply to your situation, please consult your Cook & Co. Agent.
Code Section 179 property is any tangible property that is Code Section 1245 property and that is acquired by purchase for use in the active conduct of a trade or business. This definition must be met during the year in which the property is first placed in service. Property is "placed in service" when it is placed in a condition or state of readiness and available for a specifically assigned function, in a trade or business, for the production of income, in a tax-exempt activity, or in a personal activity. Reg. Section 1.179-4(e).
In general, Code Section 1245 property is depreciable personal property, such as machinery, equipment, and furniture. Code Section 1245(a)(3)(A). Code Section 1245 property also includes:
(1) depreciable tangible property (other than a building or its structural components) but only if such property (i) was used as an integral part of manufacturing, production, or extraction or of furnishing transportation, communications, electrical energy, gas, water, or sewage disposal services, or (ii) constituted a research or storage facility used in connection with the above activities, or (iii) constituted a facility used in connection with the above activities for the bulk storage of fungible commodities (including commodities in a liquid or gaseous state);
(2) so much of any real property (other than property described in Code Section 1245(a)(3)) that has an adjusted basis in which there are reflected adjustments for amortization under Code Sections 169, 179, 179A, 185, 188 (as in effect before its repeal by the Revenue Reconciliation Act of 1990), 190, 193, or 194 ;
(3) depreciable single purpose agricultural or horticultural structures;
(4) storage facilities (not including a building or its structural components) used in connection with the distribution of petroleum or any primary product of petroleum; or
(5) any railroad grading or tunnel bore (as defined in Code Section 168(e)(4)).
A purchase is any acquisition other than from a related person, from a decedent, or in any transaction in which the taxpayer's basis is determined by reference to the transferor's basis. The term "trade or business" has the same meaning as in Code Section 162. Property held for the production of income or other activity described in Code Section 212 is not eligible for the Code Section 179 election.
EXAMPLE 14: Blanche, a tailor, purchased two industrial sewing machines from her father, who is in the business of selling industrial sewing equipment, and placed these machines in service during the same year. Since Blanche and her father are related persons under Code Section 267, the sewing machines are not Code Section 179 property.
A husband and wife filing a joint return are treated as one taxpayer for purposes of applying the dollar limitation, regardless of which spouse purchased the property or placed it in service. Reg. Section1.179-2(b)(5). A husband and wife filing separate returns are also treated as one taxpayer for purposes of the dollar limitation. Code Section 179(b)(4)(A). In addition, unless they elect otherwise, each spouse is treated as having purchased and placed in service 50 percent of the cost of eligible property. The taxable income limitation is applied separately to each spouse.
In the case of a partnership or S corporation, the determination of whether property constitutes Code Section 179 property is made at the partnership or S corporation level, and the Code Section 179 election is made by the partnership or S corporation. Code Section 179(d)(8). However, the maximum dollar limitation and the taxable income limitation apply to both the partnership or S corporation and the individual partners or shareholders.
The Code Section 179 deduction is a separately stated item as set forth in their respective Schedule K-1s. Each partner or shareholder must add the allocated Code Section 179 deduction to his own Code Section 179 expenses to apply the limitations. However, the partnership's or S corporation's basis in the Code Section 179 property is reduced by the amount of the allowable Code Section 179 deduction, even if a partner or shareholder cannot deduct the full amount of the Code Section 179 deduction allocated to him. Reg. Section 1.179-1(f)(2).
(d) DEPRECIABLE BASIS OF CODE SECTION 179 PROPERTY
The basis of Code Section 179 property is reduced by the amount of the Code Section 179 deduction. Reg. Section 1.179-1(f)(1). The balance constitutes the taxpayer's unrecovered basis for purposes of computing depreciation under Code Section 168. The amount expensed under Code Section 179 is not eligible for depreciation in subsequent years.
(e) RECAPTURE OF CODE SECTION 179 DEDUCTIONS
The Code Section 179 deduction is treated as depreciation for many purposes. It is subject to recapture, as depreciation, under Code Section1245 on the sale, exchange, or involuntary conversion of the property.
The Code Section 179 deduction also is added to Code Section 168 depreciation taken on a passenger automobile for purposes of applying the Code Section 280F deduction limitation and is subject to the other depreciation limits regarding listed property as well.
A taxpayer must make a separate election for each taxable year that a Code Section 179 deduction is claimed with respect to property placed in service during that year. <83> The election to claim a Code Section 179 deduction must be made on the taxpayer's first income tax return for the taxable year to which the election applies (whether or not the return is timely filed) or on an amended return filing within the time period prescribed by law (including extensions) for filing the return for such taxable year. Reg. Section 1.179-5(a).
The Tax Court has rejected an attempt by a taxpayer to claim additional Code Section 179 expenses on an amended return filed after she received a notice of deficiency because the expenses were claimed after the due date of her return. Furthermore, the court pointed out, the original Code Section 179 election was irrevocable and binding in the absence of IRS consent to its revocation. Green v. Commissioner, T.C. Memo. 1998-356.
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