Reg. § 1.179-1 Election to expense certain depreciable assets.
(a) In general Section allows a taxpayer to elect to expense the cost (as defined in ), or a portion of the cost, of section property (as defined in ) for the taxable year in which the property is placed in service (as defined in ). The election is not available for trusts, estates, and certain noncorporate lessors. See of this section for rules concerning noncorporate lessors. However, section provides certain limitations on the amount that a taxpayer may elect to expense in any one taxable year. See and for rules relating to the dollar and taxable income limitations and the carryover of disallowed deduction rules. For rules describing the time and manner of making an election under section , see . For the effective date, see .
(b) Cost subject to expense The expense deduction under section is allowed for the entire cost or a portion of the cost of one or more items of section property. This expense deduction is subject to the limitations of section and . The taxpayer may select the properties that are subject to the election as well as the portion of each property's cost to expense.
(c) Proration not required
(1) In general The expense deduction under section is determined without any proration based on—
(i) The period of time the section property has been in service during the taxable year; or
(ii) The length of the taxable year in which the property is placed in service.
(2) Example The following example illustrates the provisions of of this section.
Example. On December 1, 1991, X, a calendar-year corporation, purchases and places in service section property costing $20,000. For the taxable year ending December 31, 1991, X may elect to claim a section expense deduction on the property (subject to the limitations imposed under section ) without proration of its cost for the number of days in 1991 during which the property was in service.
(d) Partial business use
(1) In general If a taxpayer uses section property for trade or business as well as other purposes, the portion of the cost of the property attributable to the trade or business use is eligible for expensing under section provided that more than 50 percent of the property's use in the taxable year is for trade or business purposes. The limitations of section179(b) and are applied to the portion of the cost attributable to the trade or business use.
(2) Example The following example illustrates the provisions of of this section.
Example. A purchases section property costing $10,000 in 1991 for which 80 percent of its use will be in A's trade or business. The cost of the property adjusted to reflect the business use of the property is $8,000 (80 percent × $10,000). Thus, A may elect to expense up to $8,000 of the cost of the property (subject to the limitations imposed under section and ).
(3) Additional rules that may apply If a section election is made for “listed property” within the meaning of section and there is personal use of the property, section , which provides rules that coordinate section with the section limitation on the amount of depreciation, may apply. If section property is no longer predominantly used in the taxpayer's trade or business, through of this section, relating to recapture of the section deduction, may apply.
(e) Change in use; recapture
(1) In general If a taxpayer's section property is not used predominantly in a trade or business of the taxpayer at any time before the end of the property's recovery period, the taxpayer must recapture in the taxable year in which the section property is not used predominantly in a trade or business any benefit derived from expensing such property. The benefit derived from expensing the property is equal to the excess of the amount expensed under this section over the total amount that would have been allowable for prior taxable years and the taxable year of recapture as a deduction under section (had section not been elected) for the portion of the cost of the property to which the expensing relates (regardless of whether such excess reduced the taxpayer's tax liability). For purposes of the preceding sentence
(i) the “amount expensed under this section” shall not include any amount that was not allowed as a deduction to a taxpayer because the taxpayer's aggregate amount of allowable section expenses exceeded the section dollar limitation, and
(ii) in the case of an individual who does not elect to itemize deductions under section in the taxable year of recapture, the amount allowable as a deduction under section in the taxable year of recapture shall be determined by treating property used in the production of income other than rents or royalties as being property used for personal purposes. The amount to be recaptured shall be treated as ordinary income for the taxable year in which the property is no longer used predominantly in a trade or business of the taxpayer. For taxable years following the year of recapture, the taxpayer's deductions under section 1688(a) shall be determined as if no section election with respect to the property had been made. However, see section relating to the coordination of section with the limitation on the amount of depreciation for luxury automobiles and where certain property is used for personal purposes. If the recapture rules of both section and this apply to an item of section property, the amount of recapture for such property shall be determined only under the rules of section .
(2) Predominant use Property will be treated as not used predominantly in a trade or business of the taxpayer if 50 percent or more of the use of such property during any taxable year within the recapture period is for a use other than in a trade or business of the taxpayer. If during any taxable year of the recapture period the taxpayer disposes of the property (other than in a disposition to which section applies) or ceases to use the property in a trade or business in a manner that had the taxpayer claimed a credit under section for such property such disposition or cessation in use would cause recapture under section , the property will be treated as not used in a trade or business of the taxpayer. However, for purposes of applying the recapture rules of section pursuant to the preceding sentence, converting the use of the property from use in trade or business to use in the production of income will be treated as a conversion to personal use.
(3) Basis; application with section 1245 The basis of property with respect to which there is recapture under of this section shall be increased immediately before the event resulting in such recapture by the amount recaptured. If section applies to a disposition of property, there is no recapture under of this section.
(4) Carryover of disallowed deduction See for rules on applying the recapture provisions of this when a taxpayer has a carryover of disallowed deduction.
(5) Example The following example illustrates the provisions of through of this section.
Example. A, a calendar-year taxpayer, purchases and places in service on January 1, 1991, section property costing $15,000. The property is 5-year property for section purposes and is the only item of depreciable property placed in service by A during 1991. A properly elects to expense $10,000 of the cost and elects under section to depreciate the remaining cost under the straight-line method. On January 1, 1992, A converts the property from use in A's business to use for the production of income, and A uses the property in the latter capacity for the entire year. A elects to itemize deductions for 1992. Because the property was not predominantly used in A's trade or business in 1992, A must recapture any benefit derived from expensing the property under section . Had A not elected to expense the $10,000 in 1991, A would have been entitled to deduct, under section , 10 percent of the $10,000 in 1991, and 20 percent of the $10,000 in 1992. Therefore, A must include $7,000 in ordinary income for the 1992 taxable year, the excess of $10,000 (the section expense amount) over $3,000 (30 percent of $10,000).
(f) Basis
(1) In general A taxpayer who elects to expense under section must reduce the depreciable basis of the section property by the amount of the section expense deduction.
(2) Special rules for partnerships and S corporations Generally, the basis of a partnership or S corporation's section property must be reduced to reflect the amount of section expense elected by the partnership or S corporation. This reduction must be made in the basis of partnership or S corporation property even if the limitations of section and prevent a partner in a partnership or a shareholder in an S corporation from deducting all or a portion of the amount of the section expense allocated by the partnership or S corporation. See for rules on applying the basis provisions of this when a person has a carryover of disallowed deduction.
(3) Special rules with respect to trusts and estates which are partners or S corporation shareholders Since the section election is not available for trusts or estates, a partner or S corporation shareholder that is a trust or estate may not deduct its allocable share of the section expense elected by the partnership or S corporation. The partnership or S corporation's basis in section property shall not be reduced to reflect any portion of the section expense that is allocable to the trust or estate. Accordingly, the partnership or S corporation may claim a depreciation deduction under section or a section credit (if available) with respect to any depreciable basis resulting from the trust or estate's inability to claim its allocable portion of the section expense.
(g) Disallowance of the section 38 credit If a taxpayer elects to expense under section , no section credit is allowable for the portion of the cost expensed. In addition, no section credit shall be allowed under section to a lessee of property for the portion of the cost of the property that the lessor expensed under section .
(h) Partnerships and S corporations
(1) In general In the case of property purchased and placed in service by a partnership or an S corporation, the determination of whether the property is section property is made at the partnership or S corporation level. The election to expense the cost of section property is made by the partnership or the S corporation. See sections , , , , , and 6245.
(2) Example The following example illustrates the provisions of of this section.
Example. A owns certain residential rental property as an investment. A and others form ABC partnership whose function is to rent and manage such property. A and ABC partnership file their income tax returns on a calendar-year basis. In 1991, ABC partnership purchases and places in service office furniture costing $20,000 to be used in the active conduct of ABC's business. Although the office furniture is used with respect to an investment activity of A, the furniture is being used in the active conduct of ABC's trade or business. Therefore, because the determination of whether property is section property is made at the partnership level, the office furniture is section property and ABC may elect to expense a portion of its cost under section .
(i) Leasing of section 179 property
(1) In general A lessor of section property who is treated as the owner of the property for Federal tax purposes will be entitled to the section expense deduction if the requirements of section and the regulations thereunder are met. These requirements will not be met if the lessor merely holds the property for the production of income. For certain leases entered into prior to January 1, 1984, the safe harbor provisions of section apply in determining whether an agreement is treated as a lease for Federal tax purposes.
(2) Noncorporate lessor In determining the class of taxpayers (other than an estate or trust) for which section is applicable, section provides that if a taxpayer is a noncorporate lessor (i.e., a person who is not a corporation and is a lessor), the taxpayer shall not be entitled to claim a section expense for section property purchased and leased by the taxpayer unless the taxpayer has satisfied all of the requirements of section (A) or (B).
(j) Application of sections 263 and 263A Under section , expenditures for which a deduction is allowed under section and this section are excluded from capitalization under section . Under this , amounts allowed as a deduction under section and this section are excluded from the application of the uniform capitalization rules of section .
(k) Cross references See section and the regulations thereunder with respect to installment sales of section property. See section and the regulations thereunder relating to condemnation of outdoor advertising displays. See section and the regulations thereunder with respect to recapture rules for section property.
[T.D. 8121, 52 FR 410, Jan. 6, 1987, as amended by T.D. 8455, 57 FR 61316, Dec. 24, 1992]