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Final Regs on Election To Expense Certain Depreciable Assets

DEC. 24, 1992

T.D. 8455; 57 F.R. 61313-61323

DATED DEC. 24, 1992
DOCUMENT ATTRIBUTES
Citations: T.D. 8455; 57 F.R. 61313-61323

 [4830-01]

 

 DEPARTMENT OF THE TREASURY

 

 Internal Revenue Service

 

 26 CFR Parts 1 and 602

 

 [T.D. 8455]

 

 RIN 1545-AL74

 

 

 AGENCY: Internal Revenue Service, Treasury.

 ACTION: Final regulations.

 SUMMARY: This document contains amendments to final regulations on the election to expense certain depreciable business assets. The final regulations in this document reflect changes to the applicable tax law that were made by the Revenue Reconciliation Act of 1990, the Technical and Miscellaneous Revenue Act of 1988, and the Tax Reform Act of 1986. The regulations provide the public with the guidance needed when making an election to expense certain depreciable business assets.

 EFFECTIVE DATE: The provisions of these regulations are effective January 25, 1993. See "SUPPLEMENTARY INFORMATION" for further details.

 FOR FURTHER INFORMATION CONTACT: Winston H. Douglas, 202-622-3110 (not a toll-free number).

SUPPLEMENTARY INFORMATION:

PAPERWORK REDUCTION ACT

The collection of information requirement contained in this final regulation has been reviewed and approved by the Office of Management and Budget in accordance with the requirements of the Paperwork Reduction Act of 1980 (44 U.S.C. 3504(h)) under control number 1545-1201. The estimated annual burden per respondent/recordkeeper varies from .50 hour to l hour, depending on individual circumstances, with an estimated average of .75 hour.

 These estimates are an approximation of the average time expected to be necessary for a collection of information. They are based on such information as is available to the Internal Revenue Service. Individual respondents/recordkeepers may require greater or less time, depending on their particular circumstances.

 Comments concerning the accuracy of this burden estimate and suggestions for reducing this burden should be directed to the Internal Revenue Service, Attn: IRS Reports Clearance Officer T:FP, Washington, D.C. 20224, and to the Office of Management and Budget, Attn: Desk Officer for the Department of the Treasury, Office of Information and Regulatory Affairs, Washington, D.C. 20503.

BACKGROUND

 This document contains amendments to the Income Tax Regulations (26 CFR part 1) under section 179 of the Internal Revenue Code (Code). These amendments reflect the amendments made by section 11813 of the Revenue Reconciliation Act of 1990, section 1002(b) of the Technical and Miscellaneous Revenue Act of 1988, and section 202 of the Tax Reform Act of 1986. On March 28, 1991, the Internal Revenue Service published in the Federal Register (56 FR 12868) a Notice of Proposed Rulemaking proposing amendments to the Income Tax Regulations under section 179. The preamble to that notice contains an explanation of the proposed amendments. A public hearing was held on August 8, 1991. After considering all comments regarding the proposed amendments, the amendments as proposed are adopted as revised by this Treasury decision.

EXPLANATION OF PROVISIONS

IN GENERAL

 Section 179, as amended by the Tax Reform Act of 1986, the Technical and Miscellaneous Revenue Act of 1988, and the Revenue Reconciliation Act of 1990, retains the election, as enacted by the Economic Recovery Tax Act of 1981, for taxpayers (other than trusts, estates, and certain noncorporate lessors) to treat the cost or a portion of the cost of certain depreciable business assets (section 179 property) as a currently deductible expense. Taxpayers who do not elect under section 179 to expense the cost of section 179 property must capitalize this cost. A section 179 expense election is made for the taxable year in which the section 179 property is placed in service. See section 1.179-4(a) and (e) of the regulations, respectively, for definitions of the terms "section 179 property" and "placed in service." Final regulations under section 179, as amended by the Economic Recovery Tax Act of 1981, were published in the Federal Register on January 6, 1987.

GENERAL DESCRIPTION OF CHANGES MADE TO SECTION 179 BY THE TAX REFORM ACT OF 1986, THE TECHNICAL AND MISCELLANEOUS REVENUE ACT OF 1988, AND THE REVENUE RECONCILIATION ACT OF 1990

 The Tax Reform Act of 1986, as amended by the Technical and Miscellaneous Revenue Act of 1988 and the Revenue Reconciliation Act of 1990, made certain changes to section 179, as amended by the Economic Recovery Tax Act of 1981. Under these changes, the $10,000 limit on the amount that a taxpayer may elect to expense for a taxable year is reduced (but not to less than zero) by one dollar for every dollar of investment in excess of $200,000 in section 179 property placed in service during the taxable year ("amended dollar limitation"). See sections 179(b)(1) and (2) of the Code. In addition, the amount that may be deducted for any taxable year is limited to the taxable income derived from the active conduct of any trade or business during the taxable year ("taxable income limitation") . See section 179(b)(3)(A). Section 179 expense deductions disallowed solely as a result of the taxable income limitation are carried forward to the succeeding taxable year ("carryover of disallowed deduction"). See section 179(b)(3)(B). Further, the definition of section 179 property was amended to require that the property be purchased for use in "the active conduct of" a trade or business. Finally, recapture of the section 179 deductions is required if the section 179 property is converted to a nonbusiness use at any time before the end of its recovery period (instead of during a limited recapture period). See section 179(d) (10). Section 179, as so amended, generally applies to property placed in service after December 31, 1986.

CHANGES TO THE PROPOSED REGULATIONS

 This document adopts the rules in the proposed regulations, with certain amendments. The amendments are discussed below.

 TAXABLE INCOME OF PARTNERSHIPS AND S CORPORATIONS. For purposes of the taxable income limitation of section 179(b)(3) of the Code, proposed section 1.179-2(c)(4) provides that the aggregate amount of taxable income derived from the active conduct by a partnership or an S corporation of any trade or business is computed by aggregating the net income (or loss) from all of the trades or businesses actively conducted by the partnership or S corporation during the taxable year. Commentators noted that proposed section 1.179-2(c)(4) does not specifically address how to compute the net income (or loss) of partnerships and S corporations for purposes of the taxable income limitations and suggested how the Service could amend the proposed regulations to specifically address the computation of the taxable income of partnerships and S corporations. One commentator suggested using the definition of "partnership net income" and "S corporation net income" provided in section 7519(d) of the Code and section 1.7519-1T(b)(5) of the temporary Income Tax Regulations.

 The final regulations adopt the commentator's suggestion by incorporating a modified version of the section 7519 definition of "partnership net income" and "S corporation net income" into the regulations under section 179. Under section 7519, the calculation of a required payment for a partnership or an S corporation electing to have a taxable year other than the required taxable year is based on the entity's net income. Partnership net income is generally defined for this purpose as the aggregate amount of the partnership's items described in section 702(a), other than credits, tax-exempt income, and guaranteed payments under section 707(c). The final section 179 regulations adopt this definition of "partnership net income."

 The section 7519 definition of "S corporation net income" is the aggregate amount of the S corporation's items described in section 1366(a), other than credits and tax-exempt income. The final section 179 regulations adopt this definition with one modification. To avoid inconsistent results between the treatment of the S corporation compensation paid to S corporation shareholder-employees and the treatment of the partnership guaranteed payments to partners under section 707(c), the final regulations provide that the net income of an S corporation is determined without deducting compensation paid to an S corporation's shareholder-employees.

 TAXABLE INCOME -- DEDUCTIONS AND LOSSES. For purposes of the taxable income limitation of section 179(b)(3) of the Code, proposed section 1.179-2(c)(4) provides that the aggregate amount of taxable income derived from the active conduct by an individual of any trade or business is computed by aggregating the net income (or loss) from all of the trades or businesses actively conducted by the individual during the taxable year. For calculating taxable income under section 179, a commentator requested clarification on whether an individual taxpayer should include the amount of suspended deductions (e.g., a deduction suspended under section 704(d)). The final regulations clarify that, in computing taxable income for section 179 purposes, deductions suspended under any section of the Code are not taken into account until the year in which the deductions are allowed.

 ACTIVE CONDUCT OF A TRADE OR BUSINESS. Proposed section 1.179-2(c)(5) provides that the purpose of the active conduct requirement is to prevent a passive investor in a trade or business from deducting section 179 expenses against taxable income derived from that trade or business. Commentators stated that the section should state more specifically in the regulations that the terms "active" and "passive" do not have the same meaning as in section 469 of the Code and the regulations thereunder. The definition of the active conduct standard under section 179 is a different standard than the material participation standard under section 469; however, it was not deemed necessary to modify the regulations to so state specifically.

 UNREIMBURSED EMPLOYEE BUSINESS EXPENSES. A commentator requested that the final regulations should state how unreimbursed employee business expenses are handled when computing the taxable income limitation. Proposed section 1.179-2(c)(5)(iv) provides that wages, salaries, tips, and other compensation derived by taxpayers in the active conduct of the trade or business of their employment are included in the aggregate amount of taxable income. The final regulations clarify that unreimbursed employee business expenses, incurred by the taxpayer as an employee, are not included in the calculation of taxable income.

 CARRYOVER OF DISALLOWED DEDUCTION -- TRANSFER AT DEATH. A commentator requested that the final regulations specifically address the question of whether the death of a partner or an S corporation shareholder is considered a disposition that would allow the use of a partner's or an S corporation shareholder's outstanding carryover of disallowed deduction by a transferee (e.g., the estate of the taxpayer).

 Under proposed section 1.179-3(f)(1), a taxpayer who transfers section 179 property for which a carryover of disallowed deduction is outstanding must increase the basis of the property by the amount of any carryover for that property immediately before the transfer. A similar rule under proposed section 1.179-3(h)(2) applies to transfers of a partner's interest in a partnership, if a carryover of disallowed deduction of section 179 expenses allocated from the partnership is outstanding. The rules with respect to S corporation shareholders are similar to those applicable to partners. Under the proposed regulations, the carryover of disallowed deduction is not available as a deduction to the transferee of section 179 property.

 In response to this comment, the final regulations clarify that the principles, set forth in proposed sections 1.179-3(f)(1) and 1.179-3(h)(2), apply to transfers at death. Thus, upon the death of a taxpayer, the transferee (e.g., the estate of the taxpayer) is not permitted to succeed to the taxpayer's carryover of disallowed deduction.

 CARRYOVER OF DISALLOWED DEDUCTION -- SECTION 381 TRANSACTION. Proposed section 1.179-3(f)(1) provides that, if property is transferred in a nonrecognition transaction, the transferee of section 179 property is not permitted to succeed to the transferor's carryover of disallowed deduction with respect to the property. A commentator asked how this rule relates to transactions described in section 381 of the Code. Section 381 provides rules allowing for the preservation of certain tax attributes by the acquiring corporation if the assets of the transferor or distributing corporation are acquired by the acquiring corporation in a nonrecognition transaction described in section 381(a). The final regulations retain the rule that, in a nonrecognition transaction, such as one described in section 381(a), the transferee (i.e., the acquiring corporation) is not permitted to succeed to the transferor's carryover of disallowed deduction with respect to the property.

DATES

 Although these regulations are effective January 25, 1993, a taxpayer may apply the provisions of sections 1.179-1 through 1.179-5 to property placed in service after December 31, 1986, in taxable years ending on or before January 25, 1993. Otherwise, for property placed in service after December 31, 1986, in taxable years ending on or before January 25, 1993, the final regulations under section 179 as in effect for the year the property was placed in service apply, except to the extent modified by the changes made to section 179 by the Tax Reform Act of 1986, the Technical and Miscellaneous Revenue Act of 1988, and the Revenue Reconciliation Act of 1990. For that property, a taxpayer may apply any reasonable method that clearly reflects income in applying the changes to section 179, provided the taxpayer consistently applies the method to the property.

SPECIAL ANALYSES

 It has been determined that these rules are not major rules as defined in Executive Order 12291. Therefore, a Regulatory Impact Analysis is not required. It has also been determined that section 553(b) of the Administrative Procedure Act (5 U.S.C. chapter 5) and the Regulatory Flexibility Act (5 U.S.C. chapter 6) do not apply to these regulations, and, therefore, an initial Regulatory Flexibility Analysis is not required. Pursuant to section 7805(f) of the Code, these regulations were submitted to the Chief Counsel for Advocacy of the Small Business Administration for comment on their impact on small businesses.

DRAFTING INFORMATION

 The principal author of these regulations is Winston H. Douglas of the Office of Assistant Chief Counsel (Passthroughs and Special Industries), Internal Revenue Service. However, personnel from other offices of the Internal Revenue Service and Treasury Department participated in developing the regulations, both on matters of substance and style.

LIST OF SUBJECTS

26 CFR 1.161-1 through 1.194-4

 Income taxes, Reporting and recordkeeping requirements.

26 CFR Part 602

 Reporting and recordkeeping requirements.

Treasury Decision 8455

AMENDMENTS TO THE REGULATIONS

Accordingly, title 26, chapter I, parts l and 602 are amended as follows:

Paragraph. 1. The authority citation for part 1 is amended by revising the citation for section 1.179-1 and adding a citation for section 1.179-6 to read as follows:

Authority: 26 U.S.C. 7805 * * * Section 1.179-1 also issued under 26 U.S.C. 179(d)(6) and (10). * * * Section 1.179-6 also issued under 26 U.S.C. 179(c). * * *

Par. 2. Section 1.179-0 is added to read as follows:

SECTION 1.179-0 TABLE OF CONTENTS FOR SECTION 179 EXPENSING RULES.

This section lists captioned paragraphs contained in sections 1.179-1 through 1.179-6.

 SECTION 1.179-1 ELECTION TO EXPENSE CERTAIN DEPRECIABLE ASSETS.

 

 (a) In general.

 

 (b) Cost subject to expense.

 

 (c) Proration not required.

 

  (1) In general.

 

  (2) Example.

 

 (d) Partial business use.

 

  (1) In general.

 

  (2) Example.

 

  (3) Additional rules that may apply.

 

 (e) Change in use; recapture.

 

  (1) In general.

 

  (2) Predominant use.

 

  (3) Basis; application with section 1245.

 

  (4) Carryover of disallowed deduction.

 

  (5) Example.

 

 (f) Basis.

 

  (1) In general.

 

  (2) Special rules for partnerships and S corporations.

 

  (3) Special rules with respect to trusts and estates which are partners or S

 

     corporation shareholders.

 

 (g) Disallowance of the section 38 credit.

 

 (h) Partnerships and S corporations.

 

  (1) In general.

 

  (2) Example.

 

 (i) Leasing of section 179 property.

 

  (1) In general.

 

  (2) Noncorporate lessor.

 

 (j) Application of sections 263 and 263A.

 

 (k) Cross references.

 

 

 SECTION 1.179-2 LIMITATIONS ON AMOUNT SUBJECT TO SECTION 179 ELECTION.

 

 (a) In general.

 

 (b) Dollar limitation.

 

  (1) In general.

 

  (2) Excess section 179 property.

 

  (3) Application to partnerships.

 

   (i) In general.

 

   (ii) Example.

 

   (iii) Partner's share of section 179 expenses.

 

   (iv) Taxable year.

 

   (v) Example.

 

  (4) S corporations.

 

  (5) Joint returns.

 

   (i) In general.

 

   (ii) Joint returns filed after separate returns.

 

   (iii) Example.

 

  (6) Married individuals filing separately.

 

   (i) In general.

 

   (ii) Example.

 

  (7) Component members of a controlled group.

 

   (i) In general.

 

   (ii) Statement to be filed.

 

   (iii) Revocation.

 

 (c) Taxable income limitation.

 

  (1) In general.

 

  (2) Application to partnerships and partners.

 

   (i) In general.

 

   (ii) Taxable year.

 

   (iii) Example.

 

   (iv) Taxable income of a partnership.

 

   (v) Partner's share of partnership taxable income.

 

  (3) S corporations and S corporation shareholders.

 

   (i) In general.

 

   (ii) Taxable income of an S corporation.

 

   (iii) Shareholder's share of S corporation taxable income.

 

  (4) Taxable income of a corporation other than an S corporation.

 

  (5) Ordering rule for certain circular problems.

 

   (i) In general.

 

   (ii) Example.

 

  (6) Active conduct by the taxpayer of a trade or business.

 

   (i) Trade or business.

 

   (ii) Active conduct.

 

   (iii) Example.

 

   (iv) Employees.

 

  (7) Joint returns.

 

   (i) In general.

 

   (ii) Joint returns filed after separate returns.

 

  (8) Married individuals filing separately.

 

 (d) Examples.

 

 

 SECTION 1.179-3 CARRYOVER OF DISALLOWED DEDUCTION.

 

 (a) In general.

 

 (b) Deduction of carryover of disallowed deduction.

 

  (1) In general.

 

  (2) Cross references.

 

 (c) Unused section 179 expense allowance.

 

 (d) Example.

 

 (e) Recordkeeping requirement and ordering rule.

 

 (f) Dispositions and other transfers of section 179 property.

 

  (1) In general.

 

  (2) Recapture under section 179(d)(10).

 

 (g) Special rules for partnerships and S corporations.

 

  (1) In general.

 

  (2) Basis adjustment.

 

  (3) Dispositions and other transfers of section 179 property by a partnership or

 

     an S corporation.

 

  (4) Example.

 

 (h) Special rules for partners and section corporation shareholders.

 

  (1) In general.

 

  (2) Dispositions and other transfers of a partner's interest in a partnership or

 

     a shareholder's interest in an section corporation.

 

  (3) Examples.

 

 

 SECTION 1.179-4 DEFINITIONS.

 

 (a) Section 179 property.

 

 (b) Section 38 property.

 

 (c) Purchase.

 

 (d) Cost.

 

 (e) Placed in service.

 

 (f) Controlled group of corporations and component member of controlled group.

 

 

 SECTION 1.179-5 TIME AND MANNER OF MAKING ELECTION.

 

 (a) Election.

 

 (b) Revocation.

 

 

SECTION 1.179-6 EFFECTIVE DATE.

Par. 3. Section 1.179-1 is amended as follows:

1. Paragraphs (a), (b), (c), and (d) are revised.

2. The first and the last two sentences of paragraph (e)(1) are revised.

3. Paragraph (e)(4) is revised.

4. Paragraph (e)(5) is added.

5. Paragraph (f)(1) is revised.

6. The second sentence of (f)(2) is revised and a third sentence is added.

7. The last sentence of (f)(3) is revised.

8. Paragraph (h) is revised.

9. Paragraph (i)(2) is revised.

10. Paragraph (j) is redesignated as paragraph (k) and the second sentence is removed, and a new paragraph (j) is added.

11. The added and revised provisions read as follows:

SECTION 1.179-1 ELECTION TO EXPENSE CERTAIN DEPRECIABLE ASSETS.

(a) IN GENERAL. Section 179(a) allows a taxpayer to elect to expense the cost (as defined in section 1.179-4(d)), or a portion of the cost, of section 179 property (as defined in section 1.179-4(a)) for the taxable year in which the property is placed in service (as defined in section 1.179-4(e)). The election is not available for trusts, estates, and certain noncorporate lessors. See paragraph (i)(2) of this section for rules concerning noncorporate lessors. However, section 179(b) provides certain limitations on the amount that a taxpayer may elect to expense in any one taxable year. See sections 1.179-2 and 1.179-3 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 179, see section 1.179-5. For the effective date, see section 1.179-6.

(b) COST SUBJECT TO EXPENSE. The expense deduction under section 179 is allowed for the entire cost or a portion of the cost of one or more items of section 179 property. This expense deduction is subject to the limitations of section 179(b) and section 1.179-2. 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 179 is determined without any proration based on --

(i) The period of time the section 179 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 paragraph (c)(1) of this section.

EXAMPLE. On December 1, 1991, X, a calendar-year corporation, purchases and places in service section 179 property costing $20,000. For the taxable year ending December 31, 1991, X may elect to claim a section 179 expense deduction on the property (subject to the limitations imposed under section 179(b)) 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 179 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 179 provided that more than 50 percent of the property's use in the taxable year is for trade or business purposes. The limitations of section 179(b) and section 1.179-2 are applied to the portion of the cost attributable to the trade or business use.

(2) EXAMPLE. The following example illustrates the provisions of paragraph (d)(1) of this section.

EXAMPLE. A purchases section 179 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 x $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 179(b) and section 1.179-2).

(3) ADDITIONAL RULES THAT MAY APPLY. If a section 179 election is made for "listed property" within the meaning of section 280F(d)(4) and there is personal use of the property, section 280F(d)(1), which provides rules that coordinate section 179 with the section 280F limitation on the amount of depreciation, may apply. If section 179 property is no longer predominantly used in the taxpayer's trade or business, paragraphs (e)(1) through (4) of this section, relating to recapture of the section 179 deduction, may apply.

(e) * * *

(1) IN GENERAL. If a taxpayer's section 179 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 179 property is not used predominantly in a trade or business any benefit derived from expensing such property. * * * However, see section 280F(d)(1) relating to the coordination of section 179 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 280F(b)(2) and this paragraph (e)(1) apply to an item of section 179 property, the amount of recapture for such property shall be determined only under the rules of section 280F(b)(2).

* * * * *

(4) CARRYOVER OF DISALLOWED DEDUCTION. See section 1.179-3 for rules on applying the recapture provisions of this paragraph (e) when a taxpayer has a carryover of disallowed deduction.

(5) EXAMPLE. The following example illustrates the provisions of paragraphs (e)(1) through (e)(4) of this section.

EXAMPLE. A, a calendar-year taxpayer, purchases and places in service on January 1, 1991, section 179 property costing $15,000. The property is 5-year property for section 168 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 168(b)(5) 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 179. Had A not elected to expense the $10,000 in 1991, A would have been entitled to deduct, under section 168, 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 179 expense amount) over $3,000 (30 percent of $10,000).

(f) * * *

(1) IN GENERAL. A taxpayer who elects to expense under section 179 must reduce the depreciable basis of the section 179 property by the amount of the section 179 expense deduction.

(2) * * * This reduction must be made in the basis of partnership or section corporation property even if the limitations of section 179(b) and section 1.179-2 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 179 expense allocated by the partnership or S corporation. See section 1.179-3 for rules on applying the basis provisions of this paragraph (f) when a person has a carryover of disallowed deduction.

(3) * * * Accordingly, the partnership or S corporation may claim a depreciation deduction under section 168 or a section 38 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 179 expense.

* * * * *

(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 179 property is made at the partnership or S corporation level. The election to expense the cost of section 179 property is made by the partnership or the S corporation. See sections 703(b), 1363(c), 6221, 6231(a)(3), 6241, and 6245.

(2) EXAMPLE. The following example illustrates the provisions of paragraph (h)(1) 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 179 property is made at the partnership level, the office furniture is section 179 property and ABC may elect to expense a portion of its cost under section 179.

(i) * * *

(2) NONCORPORATE LESSOR. In determining the class of taxpayers (other than an estate or trust) for which section 179 is applicable, section 179(d)(5) 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 179 expense for section 179 property purchased and leased by the taxpayer unless the taxpayer has satisfied all of the requirements of section 179(d)(5)(A) or (B)

(j) APPLICATION OF SECTIONS 263 AND 263A. Under section 263(a)(1)(G), expenditures for which a deduction is allowed under section 179 and this section are excluded from capitalization under section 263(a). Under this paragraph (j), amounts allowed as a deduction under section 179 and this section are excluded from the application of the uniform capitalization rules of section 263A.

* * * * *

Par. 4. Section 1.179-2 is revised to read as follows:

SECTION 1.179-2 LIMITATIONS ON AMOUNT SUBJECT TO SECTION 179 ELECTION.

(a) IN GENERAL. Sections 179(b)(1) and (2) limit the aggregate cost of section 179 property that a taxpayer may elect to expense under section 179 for any one taxable year (dollar limitation). See paragraph (b) of this section. Section 179(b)(3)(A) limits the aggregate cost of section 179 property that a taxpayer may deduct in any taxable year (taxable income limitation). See paragraph (c) of this section. Any cost that is elected to be expensed but that is not currently deductible because of the taxable income limitation may be carried forward to the next taxable year (carryover of disallowed deduction). See section 1.179-3 for rules relating to carryovers of disallowed deductions. See also sections 280F(a), (b), and (d)(1) relating to the coordination of section 179 with the limitations on the amount of depreciation for luxury automobiles and other listed property. The dollar and taxable income limitations apply to each taxpayer and not to each trade or business in which the taxpayer has an interest.

(b) DOLLAR LIMITATION -- (1) IN GENERAL. The aggregate cost of section 179 property that a taxpayer may elect to expense under section 179 for any taxable year is $10,000, reduced (but not below zero) by the amount of any excess section 179 property (described in paragraph (b)(2) of this section) placed in service during the taxable year.

(2) EXCESS SECTION 179 PROPERTY. The amount of any excess section 179 property for a taxable year equals the excess (if any) of --

(i) The cost of section 179 property placed in service by the taxpayer in the taxable year; over

(ii) $200,000.

(3) APPLICATION TO PARTNERSHIPS -- (i) IN GENERAL. The dollar limitation of this paragraph (b) applies to the partnership as well as to each partner. In applying the dollar limitation to a taxpayer that is a partner in one or more partnerships, the partner's share of section 179 expenses allocated to the partner from each partnership is aggregated with any nonpartnership section 179 expenses of the taxpayer for the taxable year. However, in determining the excess section 179 property placed in service by a partner in a taxable year, the cost of section 179 property placed in service by the partnership is not attributed to any partner.

(ii) EXAMPLE. The following example illustrates the provisions of paragraph (b)(3)(i) of this section.

EXAMPLE. During 1991, CD, a calendar-year partnership, purchases and places in service section 179 property costing $150,000 and elects under section 179(c) and section 1.179-5 to expense $10,000 of the cost of that property. CD properly allocates to C, a calendar-year taxpayer and a partner in CD, $5,000 of section 179 expenses (C's distributive share of CD's section 179 expenses for 1991). In applying the dollar limitation to C for 1991, C must include the $5,000 of section 179 expenses allocated from CD. However, in determining the amount of any excess section 179 property C placed in service during 1991, C does not include any of the cost of section 179 property placed in service by CD, including the $5,000 of cost represented by the $5,000 of section 179 expenses allocated to C by the partnership.

(iii) PARTNER'S SHARE OF SECTION 179 EXPENSES. Section 704 and the regulations thereunder govern the determination of a partner's share of a partnership's section 179 expenses for any taxable year. However, no allocation among partners of the section 179 expenses may be modified after the due date of the partnership return (without regard to extensions of time) for the taxable year for which the election under section 179 is made.

(iv) TAXABLE YEAR. If the taxable years of a partner and the partnership do not coincide, then for purposes of section 179, the amount of the partnership's section 179 expenses attributable to a partner for a taxable year is determined under section 706 and the regulations thereunder (generally the partner's distributive share of partnership section 179 expenses for the partnership year that ends with or within the partner's taxable year).

(v) EXAMPLE. The following example illustrates the provisions of paragraph (b)(3)(iv) of this section.

EXAMPLE. AB partnership has a taxable year ending January 31. A, a partner of AB, has a taxable year ending December 31. AB purchases and places in service section 179 property on March 10, 1991, and elects to expense a portion of the cost of that property under section 179. Under section 706 and section 1.706-1(a)(1), A will be unable to claim A's distributive share of any of AB's section 179 expenses attributable to the property placed in service on March 10, 1991, until A's taxable year ending December 31, 1992.

(4) S CORPORATIONS. Rules similar to those contained in paragraph (b)(3) of this section apply in the case of S corporations (as defined in section 1361(a)) and their shareholders. Each shareholder's share of the section 179 expenses of an S corporation is determined under section 1366.

(5) JOINT RETURNS -- (i) IN GENERAL. A husband and wife who file a joint income tax return under section 6013(a) are treated as one taxpayer in determining the amount of the dollar limitation under paragraph (b)(1) of this section, regardless of which spouse purchased the property or placed it in service.

(ii) JOINT RETURNS FILED AFTER SEPARATE RETURNS. In the case of a husband and wife who elect under section 6013(b) to file a joint income tax return for a taxable year after the time prescribed by law for filing the return for such taxable year has expired, the dollar limitation under paragraph (b)(1) of this section is the lesser of --

(A) The dollar limitation (as determined under paragraph (b)(5)(i) of this section); or

(B) The aggregate cost of section 179 property elected to be expensed by the husband and wife on their separate returns.

(iii) EXAMPLE. The following example illustrates the provisions of paragraph (b)(5)(ii) of this section.

EXAMPLE. During 1991, Mr. and Mrs. B, both calendar-year taxpayers, purchase and place in service section 179 property costing $100,000. On their separate returns for 1991, Mr. B elects to expense $3,000 of section 179 property as an expense and Mrs. B elects to expense $4,000. After the due date of the return they elect under section 6013(b) to file a joint income tax return for 1991. The dollar limitation for their joint income tax return is $7,000, the lesser of the dollar limitation ($10,000) or the aggregate cost elected to be expensed under section 179 on their separate returns ($3,000 elected by Mr. B plus $4,000 elected by Mrs. B, or $7,000).

(6) MARRIED INDIVIDUALS FILING SEPARATELY -- (i) * * * IN GENERAL. In the case of an individual who is married but files a separate income tax return for a taxable year, the dollar limitation of this paragraph (b) for such taxable year is the amount that would be determined under paragraph (b)(5)(i) of this section if the individual filed a joint income tax return under section 6013(a) multiplied by either the percentage elected by the individual under this paragraph (b)(6) or 50 percent. The election in the preceding sentence is made in accordance with the requirements of section 179(c) and section 1.179-5. However, the amount determined under paragraph (b)(5)(i) of this section must be multiplied by 50 percent if either the individual or the individual's spouse does not elect a percentage under this paragraph (b)(6) or the sum of the percentages elected by the individual and the individual's spouse does not equal 100 percent. For purposes of this paragraph (b)(6), marital status is determined under section 7703 and the regulations thereunder.

(ii) EXAMPLE. The following example illustrates the provisions of paragraph (b)(6)(i) of this section.

EXAMPLE. Mr. and Mrs. D, both calendar-year taxpayers, file separate income tax returns for 1991. During 1991, Mr. D places $195,000 of section 179 property in service and Mrs. D places $9,000 of section 179 property in service. Neither of them elects a percentage under paragraph (b)(6)(i) of this section. The 1991 dollar limitation for both Mr. D and Mrs. D is determined by multiplying by 50 percent the dollar limitation that would apply had they filed a joint income tax return. Had Mr. and Mrs. D filed a joint return for 1991, the dollar limitation would have been $6,000, $10,000 reduced by the excess section 179 property they placed in service during 1991 ($195,000 placed in service by Mr. D plus $9,000 placed in service by Mrs. D less $200,000, or $4,000). Thus, the 1991 dollar limitation for Mr. and Mrs. D is $3,000 each ($6,000 multiplied by 50 percent).

(7) COMPONENT MEMBERS OF A CONTROLLED GROUP -- (i) IN GENERAL. Component members of a controlled group (as defined in section 1.179-4(f)) on a December 31 are treated as one taxpayer in applying the dollar limitation of sections 179(b)(1) and (2) and this paragraph (b). The expense deduction may be taken by any one component member or allocated (for the taxable year of each member that includes that December 31) among the several members in any manner. Any allocation of the expense deduction must be pursuant to an allocation by the common parent corporation if a consolidated return is filed for all component members of the group, or in accordance with an agreement entered into by the members of the group if separate returns are filed. If a consolidated return is filed by some component members of the group and separate returns are filed by other component members, the common parent of the group filing the consolidated return must enter into an agreement with those members that do not join in filing the consolidated return allocating the amount between the group filing the consolidated return and the other component members of the controlled group that do not join in filing the consolidated return. The amount of the expense allocated to any component member, however, may not exceed the cost of section 179 property actually purchased and placed in service by the member in the taxable year. If the component members have different taxable years, the term "taxable year" in sections 179(b)(1) and (2) means the taxable year of the member whose taxable year begins on the earliest date.

(ii) STATEMENT TO BE FILED. If a consolidated return is filed, the common parent corporation must file a separate statement attached to the income tax return on which the election is made to claim an expense deduction under section 179. See section 1.179-5. If separate returns are filed by some or all component members of the group, each component member not included in a consolidated return must file a separate statement attached to the income tax return on which an election is made to claim a deduction under section 179. The statement must include the name, address, employer identification number, and the taxable year of each component member of the controlled group, a copy of the allocation agreement signed by persons duly authorized to act on behalf of the component members, and a description of the manner in which the deduction under section 179 has been divided among the component members.

(iii) REVOCATION. If a consolidated return is filed for all component members of the group, an allocation among such members of the expense deduction under section 179 may not be revoked after the due date of the return (including extensions of time) of the common parent corporation for the taxable year for which an election to take an expense deduction is made. If some or all of the component members of the controlled group file separate returns for taxable years including a particular December 31 for which an election to take the expense deduction is made, the allocation as to all members of the group may not be revoked after the due date of the return (including extensions of time) of the component member of the controlled group whose taxable year that includes such December 3l ends on the latest date.

(c) TAXABLE INCOME LIMITATION -- (1) IN GENERAL. The aggregate cost of section 179 property elected to be expensed under section 179 that may be deducted for any taxable year may not exceed the aggregate amount of taxable income of the taxpayer for such taxable year that is derived from the active conduct by the taxpayer of any trade or business during the taxable year. For purposes of section 179(b)(3) and this paragraph (c), the aggregate amount of taxable income derived from the active conduct by an individual, a partnership, or an S corporation of any trade or business is computed by aggregating the net income (or loss) from all of the trades or businesses actively conducted by the individual, partnership, or S corporation during the taxable year. Items of income that are derived from the active conduct of a trade or business include section 1231 gains (or losses) from the trade or business and interest from working capital of the trade or business. Taxable income derived from the active conduct of a trade or business is computed without regard to the deduction allowable under section 179, any section 164(f) deduction, any net operating loss carryback or carryforward, and deductions suspended under any section of the Code. See paragraph (c)(6) of this section for rules on determining whether a taxpayer is engaged in the active conduct of a trade or business for this purpose.

(2) APPLICATION TO PARTNERSHIPS AND PARTNERS -- (i) IN GENERAL. The taxable income limitation of this paragraph (c) applies to the partnership as well as to each partner. Thus, the partnership may not allocate to its partners as a section 179 expense deduction for any taxable year more than the partnership's taxable income limitation for that taxable year, and a partner may not deduct as a section 179 expense deduction for any taxable year more than the partner's taxable income limitation for that taxable year.

(ii) TAXABLE YEAR. If the taxable year of a partner and the partnership do not coincide, then for purposes of section 179, the amount of the partnership's taxable income attributable to a partner for a taxable year is determined under section 706 and the regulations thereunder (generally the partner's distributive share of partnership taxable income for the partnership year that ends with or within the partner's taxable year).

(iii) EXAMPLE. The following example illustrates the provisions of paragraph (c)(2)(ii) of this section.

EXAMPLE. AB partnership has a taxable year ending January 31. A, a partner of AB, has a taxable year ending December 31. For AB's taxable year ending January 31, 1992, AB has taxable income from the active conduct of its trade or business of $100,000, $90,000 of which was earned during 1991. Under section 706 and section 1.706-1(a)(1), A includes A's entire share of partnership taxable income in computing A's taxable income limitation for A's taxable year ending December 31, 1992.

(iv) TAXABLE INCOME OF A PARTNERSHIP. The taxable income (or loss) derived from the active conduct by a partnership of any trade or business is computed by aggregating the net income (or loss) from all of the trades or businesses actively conducted by the partnership during the taxable year. The net income (or loss) from a trade or business actively conducted by the partnership is determined by taking into account the aggregate amount of the partnership's items described in section 702(a) (other than credits, tax-exempt income, and guaranteed payments under section 707(c)) derived from that trade or business. For purposes of determining the aggregate amount of partnership items, deductions and losses are treated as negative income. Any limitation on the amount of a partnership item described in section 702(a) which may be taken into account for purposes of computing the taxable income of a partner shall be disregarded in computing the taxable income of the partnership.

(v) PARTNER'S SHARE OF PARTNERSHIP TAXABLE INCOME. A taxpayer who is a partner in a partnership and is engaged in the active conduct of at least one of the partnership's trades or businesses includes as taxable income derived from the active conduct of a trade or business the amount of the taxpayer's allocable share of taxable income derived from the active conduct by the partnership of any trade or business (as determined under paragraph (c)(2)(iv) of this section).

(3) S CORPORATIONS AND S CORPORATION SHAREHOLDERS -- (i) IN GENERAL. Rules similar to those contained in paragraphs (c)(2)(i) and (ii) of this section apply in the case of S corporations (as defined in section 1361(a)) and their shareholders. Each shareholder's share of the taxable income of an S corporation is determined under section 1366.

(ii) TAXABLE INCOME OF AN S CORPORATION. The taxable income (or loss) derived from the active conduct by an S corporation of any trade or business is computed by aggregating the net income (or loss) from all of the trades or businesses actively conducted by the S corporation during the taxable year. The net income (or loss) from a trade or business actively conducted by an S corporation is determined by taking into account the aggregate amount of the S corporation's items described in section 1366(a) (other than credits, tax-exempt income, and deductions for compensation paid to an S corporation's shareholder-employees) derived from that trade or business. For purposes of determining the aggregate amount of S corporation items, deductions and losses are treated as negative income. Any limitation on the amount of an S corporation item described in section 1366(a) which may be taken into account for purposes of computing the taxable income of a shareholder shall be disregarded in computing the taxable income of the S corporation.

(iii) SHAREHOLDER'S SHARE OF S CORPORATION TAXABLE INCOME. Rules similar to those contained in paragraph (c)(2)(v) and (c)(6)(ii) of this section apply to a taxpayer who is a shareholder in an S corporation and is engaged in the active conduct of the S corporation's trades or businesses.

(4) TAXABLE INCOME OF A CORPORATION OTHER THAN AN S CORPORATION. The aggregate amount of taxable income derived from the active conduct by a corporation other than an S corporation of any trade or business is the amount of the corporation's taxable income before deducting its net operating loss deduction and special deductions (as reported on the corporation's income tax return), adjusted to reflect those items of income or deduction included in that amount that were not derived by the corporation from a trade or business actively conducted by the corporation during the taxable year.

(5) ORDERING RULE FOR CERTAIN CIRCULAR PROBLEMS -- (i) IN GENERAL. A taxpayer who elects to expense the cost of section 179 property (the deduction of which is subject to the taxable income limitation) also may have to apply another Internal Revenue Code section that has a limitation based on the taxpayer's taxable income. Except as provided in paragraph (c)(1) of this section, this section provides rules for applying the taxable income limitation under section 179 in such a case. First, taxable income is computed for the other section of the Internal Revenue Code. In computing the taxable income of the taxpayer for the other section of the Internal Revenue Code, the taxpayer's section 179 deduction is computed by assuming that the taxpayer's taxable income is determined without regard to the deduction under the other Internal Revenue Code section. Next, after reducing taxable income by the amount of the section 179 deduction so computed, a hypothetical amount of deduction is determined for the other section of the Internal Revenue Code. The taxable income limitation of the taxpayer under section 179(b)(3) and this paragraph (c) then is computed by including that hypothetical amount in determining taxable income.

(ii) EXAMPLE. The following example illustrates the ordering rule described in paragraph (c)(5)(i) of this section.

EXAMPLE. X, a calendar-year corporation, elects to expense $10,000 of the cost of section 179 property purchased and placed in service during 1991. Assume X's dollar limitation is $10,000. X also gives a charitable contribution of $5,000 during the taxable year. X's taxable income for purposes of both sections 179 and 170(b)(2), but without regard to any deduction allowable under either section 179 or section 170, is $11,000. In determining X's taxable income limitation under section 179(b) (3) and this paragraph (c), X must first compute its section 170 deduction. However, section 170(b)(2) limits X's charitable contribution to 10 percent of its taxable income determined by taking into account its section 179 deduction. Paragraph (c)(5) (i) of this section provides that in determining X's section 179 deduction for 1991, X first computes a hypothetical section 170 deduction by assuming that its section 179 deduction is not affected by the section 170 deduction. Thus, in computing X's hypothetical section 170 deduction, X's taxable income limitation under section 179 is $11,000 and its section 179 deduction is $10,000. X's hypothetical section 170 deduction is $100 (10 percent of $1,000 ($11,000 less $10,000 section 179 deduction)). X's taxable income limitation for section 179 purposes is then computed by deducting the hypothetical charitable contribution of $100 for 1991. Thus, X's section 179 taxable income limitation is $10,900 ($11,000 less hypothetical $100 section 170 deduction), and its section 179 deduction for 1991 is $10,000. X's section 179 deduction so calculated applies for all purposes of the Code, including the computation of its actual section 170 deduction.

(6) ACTIVE CONDUCT BY THE TAXPAYER OF A TRADE OR BUSINESS -- (i) TRADE OR BUSINESS. For purposes of this section and section 1.179-4(a), the term "trade or business" has the same meaning as in section 162 and the regulations thereunder. Thus, property held merely for the production of income or used in an activity not engaged in for profit (as described in section 183) does not qualify as section 179 property and taxable income derived from property held for the production of income or from an activity not engaged in for profit is not taken into account in determining the taxable income limitation.

(ii) ACTIVE CONDUCT. For purposes of this section, the determination of whether a trade or business is actively conducted by the taxpayer is to be made from all the facts and circumstances and is to be applied in light of the purpose of the active conduct requirement of section 179(b)(3)(A). In the context of section 179, the purpose of the active conduct requirement is to prevent a passive investor in a trade or business from deducting section 179 expenses against taxable income derived from that trade or business. Consistent with this purpose, a taxpayer generally is considered to actively conduct a trade or business if the taxpayer meaningfully participates in the management or operations of the trade or business. Generally, a partner is considered to actively conduct a trade or business of the partnership if the partner meaningfully participates in the management or operations of the trade or business. A mere passive investor in a trade or business does not actively conduct the trade or business.

(iii) EXAMPLE. The following example illustrates the provisions of paragraph (c)(6)(ii) of this section.

EXAMPLE. A owns a salon as a sole proprietorship and employs B to operate it. A periodically meets with B to review developments relating to the business. A also approves the salon's annual budget that is prepared by B. B performs all the necessary operating functions, including hiring beauticians, acquiring the necessary beauty supplies, and writing the checks to pay all bills and the beauticians' salaries. In 1991, B purchased, as provided for in the salon's annual budget, equipment costing $9,500 for use in the active conduct of the salon. There were no other purchases of section 179 property during 1991. A's net income from the salon, before any section 179 deduction, totaled $8,000. A also is a partner in PRS, a calendar-year partnership, which owns a grocery store. C, a partner in PRS, runs the grocery store for the partnership, making all the management and operating decisions. PRS did not purchase any section 179 property during 1991. A's allocable share of partnership net income was $6,000. Based on the facts and circumstances, A meaningfully participates in the management of the salon. However, A does not meaningfully participate in the management or operations of the trade or business of PRS. Under section 179(b)(3)(A) and this paragraph (c), A's aggregate taxable income derived from the active conduct by A of any trade or business is $8,000, the net income from the salon.

(iv) EMPLOYEES. For purposes of this section, employees are considered to be engaged in the active conduct of the trade or business of their employment. Thus, wages, salaries, tips, and other compensation (not reduced by unreimbursed employee business expenses) derived by a taxpayer as an employee are included in the aggregate amount of taxable income of the taxpayer under paragraph (c)(1) of this section.

(7) JOINT RETURNS -- (i) IN GENERAL. The taxable income limitation of this paragraph (c) is applied to a husband and wife who file a joint income tax return under section 6013(a) by aggregating the taxable income of each spouse (as determined under paragraph (c)(1) of this section).

(ii) JOINT RETURNS FILED AFTER SEPARATE RETURNS. In the case of a husband and wife who elect under section 6013(b) to file a joint income tax return for a taxable year after the time prescribed by law for filing the return for such taxable year, the taxable income limitation of this paragraph (c) for the taxable year for which the joint return is filed is determined under paragraph (c)(7)(i) of this section.

(8) MARRIED INDIVIDUALS FILING SEPARATELY. In the case of an individual who is married but files a separate tax return for a taxable year, the taxable income limitation for that individual is determined under paragraph (c)(1) of this section by treating the husband and wife as separate taxpayers.

(d) EXAMPLES. The following examples illustrate the provisions of paragraphs (b) and (c) of this section.

EXAMPLE 1. (i) During 1991, PRS, a calendar-year partnership, purchases and places in service $50,000 of section 179 property. The taxable income of PRS derived from the active conduct of all its trades or businesses (as determined under paragraph (c)(1) of this section) is $8,000.

(ii) Under the dollar limitation of paragraph (b) of this section, PRS may elect to expense $10,000 of the cost of section 179 property purchased in 1991. Assume PRS elects under section 179(c) and section 1.179-5 to expense $10,000 of the cost of section 179 property purchased in 1991.

(iii) Under the taxable income limitation of paragraph (c) of this section, PRS may allocate to its partners as a deduction only $8,000 of the cost of section 179 property in 1991. Under section 179(b)(3)(B) and section 1.179-3(a), PRS may carry forward the remaining $2,000 it elected to expense, which would have been deductible under section 179(a) for 1991 absent the taxable income limitation.

EXAMPLE 2. (i) The facts are the same as in Example 1, except that on December 31, 1991, PRS allocates to A, a calendar-year taxpayer and a partner in PRS, $7,000 of section 179 expenses and $2,000 of taxable income. A was engaged in the active conduct of a trade or business of PRS during 1991.

(ii) In addition to being a partner in PRS, A conducts a business as a sole proprietor. During 1991, A purchases and places in service $201,000 of section 179 property in connection with the sole proprietorship. A's 1991 taxable income derived from the active conduct of this business is $6,000.

(iii) Under the dollar limitation, A may elect to expense only $9,000 of the cost of section 179 property purchased in 1991, the $10,000 limit reduced by $1,000 (the amount by which the cost of section 179 property placed in service during 1991 ($201,000) exceeds $200,000). Under paragraph (b)(3)(i) of this section, the $7,000 of section 179 expenses allocated from PRS is subject to the $9,000 limit. Assume that A elects to expense $2,000 of the cost of section 179 property purchased by A's sole proprietorship in 1991. Thus, A has elected to expense under section 179 an amount equal to the dollar limitation for 1991 ($2,000 elected to be expensed by A's sole proprietorship plus $7,000, the amount of PRS's section 179 expenses allocated to A in 1991).

(iv) Under the taxable income limitation, A may only deduct $8,000 of the cost of section 179 property elected to be expensed in 1991, the aggregate taxable income derived from the active conduct of A's trades or businesses in 1991 ($2,000 from PRS and $6,000 from A's sole proprietorship). The entire $2,000 of taxable income allocated from PRS is included by A as taxable income derived from the active conduct by A of a trade or business because it was derived from the active conduct of a trade or business by PRS and A was engaged in the active conduct of a trade or business of PRS during 1991. Under section 179(b)(3)(B) and section 1.179-3(a), A may carry forward the remaining $1,000 A elected to expense, which would have been deductible under section 179(a) for 1991 absent the taxable income limitation.

Par. 5. Sections 1.179-3, 1.179-4, and 1.179-5 are redesignated as sections 1.179-4, 1.179-5, and 1.179-6, respectively, and new section 1.179-3 is added to read as follows:

SECTION 1.179-3 CARRYOVER OF DISALLOWED DEDUCTION.

(a) IN GENERAL. Under section 179(b)(3)(B), a taxpayer may carry forward for an unlimited number of years the amount of any cost of section 179 property elected to be expensed in a taxable year but disallowed as a deduction in that taxable year because of the taxable income limitation of section 179(b)(3)(A) and section 1.179-2(c) ("carryover of disallowed deduction"). This carryover of disallowed deduction may be deducted under section 179(a) and section 1.179-1(a) in a future taxable year as provided in paragraph (b) of this section.

(b) DEDUCTION OF CARRYOVER OF DISALLOWED DEDUCTION -- (1) IN GENERAL. The amount allowable as a deduction under section 179(a) and section 1.179-1(a) for any taxable year is increased by the lesser of --

(i) The aggregate amount disallowed under section 179(b)(3)(A) and section 1.179-2(c) for all prior taxable years (to the extent not previously allowed as a deduction by reason of this section); or

(ii) The amount of any unused section 179 expense allowance for the taxable year (as described in paragraph (c) of this section).

(2) CROSS REFERENCES. See paragraph (f) of this section for rules that apply when a taxpayer disposes of or otherwise transfers section 179 property for which a carryover of disallowed deduction is outstanding. See paragraph (g) of this section for special rules that apply to partnerships and S corporations and paragraph (h) of this section for special rules that apply to partners and S corporation shareholders.

(c) UNUSED SECTION 179 EXPENSE ALLOWANCE. The amount of any unused section 179 expense allowance for a taxable year equals the excess (if any) of --

(1) The maximum cost of section 179 property that the taxpayer may deduct under section 179 and section 1.179-1 for the taxable year after applying the limitations of section 179(b) and section 1.179-2; over

(2) The amount of section 179 property that the taxpayer actually elected to expense under section 179 and section 1.179-1(a) for the taxable year.

(d) EXAMPLE. The following example illustrates the provisions of paragraphs (b) and (c) of this section.

EXAMPLE. A, a calendar-year taxpayer, has a $3,000 carryover of disallowed deduction for an item of section 179 property purchased and placed in service in 1991. In 1992, A purchases and places in service an item of section 179 property costing $25,000. A's 1992 taxable income from the active conduct of all A's trades or businesses is $100,000. A elects, under section 179(c) and section 1.179-5, to expense $8,000 of the cost of the item of section 179 property purchased in 1992. Under paragraph (b) of this section, A may deduct $2,000 of A's carryover of disallowed deduction from 1991 (the lesser of A's total outstanding carryover of disallowed deductions ($3,000), or the amount of any unused section 179 expense allowance for 1992 ($10,000 limit less $8,000 elected to be expensed, or $2,000)). For 1993, A has a $1,000 carryover of disallowed deduction for the item of section 179 property purchased and placed in service in 1991.

(e) RECORDKEEPING REQUIREMENT AND ORDERING RULE. The properties and the apportionment of cost that will be subject to a carryover of disallowed deduction are selected by the taxpayer in the year the properties are placed in service. This selection must be evidenced on the taxpayer's books and records and be applied consistently in subsequent years. If no selection is made, the total carryover of disallowed deduction is apportioned equally over the items of section 179 property elected to be expensed for the taxable year. For this purpose, the taxpayer treats any section 179 expense amount allocated from a partnership (or an corporation) for a taxable year as one item of section 179 property. If the taxpayer is allowed to deduct a portion of the total carryover of disallowed deduction under paragraph (b) of this section, the taxpayer must deduct the cost of section 179 property carried forward from the earliest taxable year.

(f) DISPOSITIONS AND OTHER TRANSFERS OF SECTION 179 PROPERTY -- (1) IN GENERAL. Upon a sale or other disposition of section 179 property, or a transfer of section 179 property in a transaction in which gain or loss is not recognized in whole or in part (including transfers at death), immediately before the transfer the adjusted basis of the section 179 property is increased by the amount of any outstanding carryover of disallowed deduction with respect to the property. This carryover of disallowed deduction is not available as a deduction to the transferor or the transferee of the section 179 property.

(2) RECAPTURE UNDER SECTION 179(d)(10). Under section 1.179-1(e), if a taxpayer's section 179 property is subject to recapture under section 179(d)(10), the taxpayer must recapture the benefit derived from expensing the property. Upon recapture, any outstanding carryover of disallowed deduction with respect to the property is no longer available for expensing. In determining the amount subject to recapture under section 179(d)(10) and section 1.179-1(e), any outstanding carryover of disallowed deduction with respect to that property is not treated as an amount expensed under section 179.

(g) SPECIAL RULES FOR PARTNERSHIPS AND S CORPORATIONS -- (1) IN GENERAL. Under section 179(d)(8) and section 1.179-2(c), the taxable income limitation applies at the partnership level as well as at the partner level. Therefore, a partnership may have a carryover of disallowed deduction with respect to the cost of its section 179 property. Similar rules apply to section corporations. This paragraph (g) provides special rules that apply when a partnership or an S corporation has a carryover of disallowed deduction.

(2) BASIS ADJUSTMENT. Under section 1.179-1(f)(2), the basis of a partnership's section 179 property must be reduced to reflect the amount of section 179 expense elected by the partnership. This reduction must be made for the taxable year for which the election is made even if the section 179 expense amount, or a portion thereof, must be carried forward by the partnership. Similar rules apply to S corporations.

(3) DISPOSITIONS AND OTHER TRANSFERS OF SECTION 179 PROPERTY BY A PARTNERSHIP OR AN S CORPORATION. The provisions of paragraph (f) of this section apply in determining the treatment of any outstanding carryover of disallowed deduction with respect to section 179 property disposed of, or transferred in a nonrecognition transaction, by a partnership or an section corporation.

(4) EXAMPLE. The following example illustrates the provisions of this paragraph (g).

EXAMPLE. ABC, a calendar-year partnership, owns and operates a restaurant business. During 1992, ABC purchases and places in service two items of section 179 property -- a cash register costing $4,000 and office furniture costing $6,000. ABC elects to expense under section 179(c) the full cost of the cash register and the office furniture. For 1992, ABC has $6,000 of taxable income derived from the active conduct of its restaurant business. Therefore, ABC may deduct only $6,000 of section 179 expenses and must carry forward the remaining $4,000 of section 179 expenses at the partnership level. ABC must reduce the adjusted basis of the section 179 property by the full amount elected to be expensed. However, ABC may not allocate to its partners any portion of the carryover of disallowed deduction until ABC is able to deduct it under paragraph (b) of this section.

(h) SPECIAL RULES FOR PARTNERS AND S CORPORATION SHAREHOLDERS -- (1) IN GENERAL. Under section 179(d)(8) and section 1.179-2(c), a partner may have a carryover of disallowed deduction with respect to the cost of section 179 property elected to be expensed by the partnership and allocated to the partner. A partner who is allocated section 179 expenses from a partnership must reduce the basis of his or her partnership interest by the full amount allocated regardless of whether the partner may deduct for the taxable year the allocated section 179 expenses or is required to carry forward all or a portion of the expenses. Similar rules apply to section corporation shareholders.

(2) DISPOSITIONS AND OTHER TRANSFERS OF A PARTNER'S INTEREST IN A PARTNERSHIP OR A SHAREHOLDER'S INTEREST IN AN S CORPORATION. A partner who disposes of a partnership interest, or transfers a partnership interest in a transaction in which gain or loss is not recognized in whole or in part (including transfers of a partnership interest at death), may have an outstanding carryover of disallowed deduction of section 179 expenses allocated from the partnership. In such a case, immediately before the transfer the partner's basis in the partnership interest is increased by the amount of the partner's outstanding carryover of disallowed deduction with respect to the partnership interest. This carryover of disallowed deduction is not available as a deduction to the transferor or transferee partner of the section 179 property. Similar rules apply to section corporation shareholders.

(3) EXAMPLES. The following examples illustrate the provisions of this paragraph (h).

EXAMPLE 1. (i) G is a general partner in GD, a calendar- year partnership, and is engaged in the active conduct of GD's business. During 1991, GD purchases and places section 179 property in service and elects to expense a portion of the cost of the property under section 179. GD allocates $2,500 of section 179 expenses and $15,000 of taxable income (determined without regard to the section 179 deduction) to G. The income was derived from the active conduct by GD of a trade or business.

(ii) In addition to being a partner in GD, G conducts a business as a sole proprietor. During 1991, G purchases and places in service office equipment costing $25,000 and a computer costing $10,000 in connection with the sole proprietorship. G elects under section 179(c) and section 1.179-5 to expense $7,500 of the cost of the office equipment. G has a taxable loss (determined without regard to the section 179 deduction) derived from the active conduct of this business of $12,500.

(iii) G has no other taxable income (or loss) derived from the active conduct of a trade or business during 1991. G's taxable income limitation for 1991 is $2,500 ($15,000 taxable income allocated from GD less $12,500 taxable loss from the sole proprietorship). Therefore, G may deduct during 1991 only $2,500 of the $10,000 of section 179 expenses. G notes on the appropriate books and records that G expenses the $2,500 of section 179 expenses allocated from GD and carries forward the $7,500 of section 179 expenses with respect to the office equipment purchased by G's sole proprietorship.

(iv) On January 1, 1992, G sells the office equipment G's sole proprietorship purchased and placed in service in 1991. Under paragraph (f) of this section, immediately before the sale G increases the adjusted basis of the office equipment by $7,500, the amount of the outstanding carryover of disallowed deduction with respect to the office equipment.

EXAMPLE 2. (i) Assume the same facts as in Example 1, except that G notes on the appropriate books and records that G expenses $2,500 of section 179 expenses relating to G's sole proprietorship and carries forward the remaining $5,000 of section 179 expenses relating to G's sole proprietorship and $2,500 of section 179 expenses allocated from GD.

(ii) On January 1, 1992, G sells G's partnership interest to A. Under paragraph (h)(2) of this section, immediately before the sale G increases the adjusted basis of G's partnership interest by $2,500, the amount of the outstanding carryover of disallowed deduction with respect to the partnership interest.

Par. 6. Newly designated section 1.179-4 is amended as follows:

1. The introductory text and paragraph (a) are revised.

2. Paragraph (b) is removed and paragraphs (c) through (g) are redesignated as paragraphs (b) through (f), respectively.

3. The revised provision reads as follows:

SECTION 1.179-4 DEFINITIONS.

The following definitions apply for purposes of section 179 and sections 1.179-1 through 1.179-6:

(a) SECTION 179 PROPERTY. The term "section 179 property" means any tangible property described in section 179(d)(1) that is acquired by purchase for use in the active conduct of the taxpayer's trade or business (as described in section 1.179-2(c)(6)). For purposes of this paragraph (a), the term "trade or business" has the same meaning as in section 162 and the regulations thereunder.

* * * * *

Par. 7. Newly designated section 1.179-5 is amended by adding a sentence immediately after the first sentence of paragraph (a) concluding text to read as follows:

SECTION 1.179-5 TIME AND MANNER OF MAKING ELECTION.

(a) * * *

* * * * *

* * * However, for this purpose a partner (or an S corporation shareholder) treats partnership (or S corporation) section 179 property for which section 179 expenses are allocated from a partnership (or an S corporation) as one item of section 179 property. * * *

* * * * *

Par. 8. Newly designated section 1.179-6 is revised to read as follows:

SECTION 1.179-6 EFFECTIVE DATE.

The provisions of sections 1.179-1 through 1.179-5 are effective for property placed in service in taxable years ending after January 25, 1993. However, a taxpayer may apply the provisions of sections 1.179-1 through 1.179-5 to property placed in service after December 31, 1986, in taxable years ending on or before January 25, 1993. Otherwise, for property placed in service after December 31, 1986, in taxable years ending on or before January 25, 1993, the final regulations under section 179 as in effect for the year the property was placed in service apply, except to the extent modified by the changes made to section 179 by the Tax Reform Act of 1986, the Technical and Miscellaneous Revenue Act of 1988, and the Revenue Reconciliation Act of 1990. For that property, a taxpayer may apply any reasonable method that clearly reflects income in applying the changes to section 179, provided the taxpayer consistently applies the method to the property.

PART 602 -- OMB CONTROL NUMBERS UNDER THE PAPERWORK REDUCTION ACT

Par. 9. The authority citation for part 602 continues to read as follows:

Authority: 26 U.S.C. 7805.

Par. 10. Section 602.101(c) is amended by removing the entries for "section 1.179-2" and "section 1.179-4" in the table and by adding the following entries to the table:

SECTION 602.101 OMB CONTROL NUMBERS.

* * * * *

(c) * * *

 CFR part or section where identified                  Current

 

 and described                                         OMB control number

 

 ____________________________________________________________________

 

 * * * * *

 

 1.179-2                                                1545-1201

 

 1.179-3                                                1545-1201

 

 1.179-5                                                1545-0172

 

 * * * * *

 

Shirley D. Peterson

 

Commissioner of Internal Revenue

 

Approved: November 20, 1992

 

Alan J. Wilensky

 

Deputy Assistant Secretary of the Treasury
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