Magazine article The CPA Journal

Election to Expense Certain Depreciable Business Assets

Magazine article The CPA Journal

Election to Expense Certain Depreciable Business Assets

Article excerpt

IRC Sec. 179 allows a current deduction, up to $10,000, for the cost of certain depreciable assets placed into service during the taxable year for taxpayers other than trusts, estates, and certain noncorporate lessors. TRA 86 and TAMRA 88 changed Sec. 179 as follows:

* The $10,000 limit on the amount of qualifying property that can be expensed in a taxable year is reduced one dollar for every dollar of investment in qualifying property in excess of $200,000;

* The deduction for a taxable year is limited to the taxable income from the active conduct of a trade or business with disallowed amounts carried forward;

* The definition of Sec. 179 property now requires that the property be purchased for use in the active conduct of a trade or business, and

* The period for recapture of the Sec. 179 deduction is extended from a limited recapture period to the end of the property's recovery period.

On March 28, 1991, the IRS issued amendments to its regulations under Sec. 179 (Prop. Regs. Secs. 1.179-0 to 1.179-6). The IRS proposes that these amended regulations will apply to Sec. 179 property placed into service in taxable years ending after April 29, 1991. For Sec. 179 property placed into service before January 1, 1987, the existing final regulations will apply. For Sec. 179 property placed into service after December 31, 1986, and in taxable years ending on or before April 29, 1991, a taxpayer may apply any reasonable method to apply the TRA 86 and TAMRA 88 changes to the existing regulations.

For partners or S corporation shareholders, the limit applies to the partnership or S corporation as well as to the individual partners or shareholders. When each partner or shareholder calculates his or her excess Sec. 179 property placed into service, the cost of Sec. 179 property placed into service by the partnership or shareholder is not attributed to any partner or shareholder.

Example: During 1991, Scorp, Inc., purchases and places into service $150,000 of qualifying Sec. 179 property. Scorp properly allocates to Mary, a full-year 50% shareholder, $5,000 of Sec. 179 expense. For 1991, Mary must include the $5,000 in applying her dollar limitation. For purposes of determining any excess Sec. 179 property placed into service, Mary will not include any of Scorp's qualifying purchases of $150,000.

Example: Same as above, except that Scorp's qualifying purchases total $204,000. In this case, the maximum available Sec. 179 pass-through is limited to $6,000 (i.e., $10,000-($204,000-$200,000)). Scorp properly allocates to Mary, a full-year 50% shareholder, $3,000 of Sec. 179 expense. For 1991, Mary must include the $3,000 in applying her dollar limitation. For purposes of determining any excess Sec. 179 property placed into service, Mary will again not include any of Scorp's qualifying purchases of $204,000.

MEMBERS OF A CONTROLLED GROUP

In general, component members of a controlled group are treated as one taxpayer for the purposes of applying the Sec. 179 limitations. Taxable income limitation: for any taxable year, the Sec. 179 expense deduction cannot exceed the aggregate amount of tixable income that is derived from the active conduct of a trade or business. This is computed by aggregating the net income (or losses) of all trades and businesses actively conducted by the taxpayer. …

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