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Turbotax online 5. Turbotax online   Personal Use of Dwelling Unit (Including Vacation Home) Table of Contents Dividing Expenses Dwelling Unit Used as a HomeMain home. Turbotax online Shared equity financing agreement. Turbotax online Donation of use of the property. Turbotax online Examples. Turbotax online Days used for repairs and maintenance. Turbotax online Days used as a main home before or after renting. Turbotax online Reporting Income and DeductionsNot used as a home. Turbotax online Used as a home but rented less than 15 days. Turbotax online Used as a home and rented 15 days or more. Turbotax online If you have any personal use of a dwelling unit (including a vacation home) that you rent, you must divide your expenses between rental use and personal use. Turbotax online In general, your rental expenses will be no more than your total expenses multiplied by a fraction; the denominator of which is the total number of days the dwelling unit is used and the numerator of which is the total number of days actually rented at a fair rental price. Turbotax online Only your rental expenses may deducted on Schedule E (Form 1040). Turbotax online Some of your personal expenses may be deductible if you itemize your deductions on Schedule A (Form 1040). Turbotax online You must also determine if the dwelling unit is considered a home. Turbotax online The amount of rental expenses that you can deduct may be limited if the dwelling unit is considered a home. Turbotax online Whether a dwelling unit is considered a home depends on how many days during the year are considered to be days of personal use. Turbotax online There is a special rule if you used the dwelling unit as a home and you rented it for less than 15 days during the year. Turbotax online Dwelling unit. Turbotax online   A dwelling unit includes a house, apartment, condominium, mobile home, boat, vacation home, or similar property. Turbotax online It also includes all structures or other property belonging to the dwelling unit. Turbotax online A dwelling unit has basic living accommodations, such as sleeping space, a toilet, and cooking facilities. Turbotax online   A dwelling unit does not include property (or part of the property) used solely as a hotel, motel, inn, or similar establishment. Turbotax online Property is used solely as a hotel, motel, inn, or similar establishment if it is regularly available for occupancy by paying customers and is not used by an owner as a home during the year. Turbotax online Example. Turbotax online You rent a room in your home that is always available for short-term occupancy by paying customers. Turbotax online You do not use the room yourself and you allow only paying customers to use the room. Turbotax online This room is used solely as a hotel, motel, inn, or similar establishment and is not a dwelling unit. Turbotax online Dividing Expenses If you use a dwelling unit for both rental and personal purposes, divide your expenses between the rental use and the personal use based on the number of days used for each purpose. Turbotax online When dividing your expenses, follow these rules. Turbotax online Any day that the unit is rented at a fair rental price is a day of rental use even if you used the unit for personal purposes that day. Turbotax online (This rule does not apply when determining whether you used the unit as a home. Turbotax online ) Any day that the unit is available for rent but not actually rented is not a day of rental use. Turbotax online Fair rental price. Turbotax online   A fair rental price for your property generally is the amount of rent that a person who is not related to you would be willing to pay. Turbotax online The rent you charge is not a fair rental price if it is substantially less than the rents charged for other properties that are similar to your property in your area. Turbotax online   Ask yourself the following questions when comparing another property with yours. Turbotax online Is it used for the same purpose? Is it approximately the same size? Is it in approximately the same condition? Does it have similar furnishings? Is it in a similar location? If any of the answers are no, the properties probably are not similar. Turbotax online Example. Turbotax online Your beach cottage was available for rent from June 1 through August 31 (92 days). Turbotax online Except for the first week in August (7 days), when you were unable to find a renter, you rented the cottage at a fair rental price during that time. Turbotax online The person who rented the cottage for July allowed you to use it over the weekend (2 days) without any reduction in or refund of rent. Turbotax online Your family also used the cottage during the last 2 weeks of May (14 days). Turbotax online The cottage was not used at all before May 17 or after August 31. Turbotax online You figure the part of the cottage expenses to treat as rental expenses as follows. Turbotax online The cottage was used for rental a total of 85 days (92 − 7). Turbotax online The days it was available for rent but not rented (7 days) are not days of rental use. Turbotax online The July weekend (2 days) you used it is rental use because you received a fair rental price for the weekend. Turbotax online You used the cottage for personal purposes for 14 days (the last 2 weeks in May). Turbotax online The total use of the cottage was 99 days (14 days personal use + 85 days rental use). Turbotax online Your rental expenses are 85/99 (86%) of the cottage expenses. Turbotax online Note. Turbotax online When determining whether you used the cottage as a home, the July weekend (2 days) you used it is considered personal use even though you received a fair rental price for the weekend. Turbotax online Therefore, you had 16 days of personal use and 83 days of rental use for this purpose. Turbotax online Because you used the cottage for personal purposes more than 14 days and more than 10% of the days of rental use (8 days), you used it as a home. Turbotax online If you have a net loss, you may not be able to deduct all of the rental expenses. Turbotax online See Dwelling Unit Used as a Home, next. Turbotax online Dwelling Unit Used as a Home If you use a dwelling unit for both rental and personal purposes, the tax treatment of the rental expenses you figured earlier under Dividing Expenses and rental income depends on whether you are considered to be using the dwelling unit as a home. Turbotax online You use a dwelling unit as a home during the tax year if you use it for personal purposes more than the greater of: 14 days, or 10% of the total days it is rented to others at a fair rental price. Turbotax online See What is a day of personal use , later. Turbotax online If a dwelling unit is used for personal purposes on a day it is rented at a fair rental price (discussed earlier), do not count that day as a day of rental use in applying (2) above. Turbotax online Instead, count it as a day of personal use in applying both (1) and (2) above. Turbotax online What is a day of personal use?   A day of personal use of a dwelling unit is any day that the unit is used by any of the following persons. Turbotax online You or any other person who owns an interest in it, unless you rent it to another owner as his or her main home under a shared equity financing agreement (defined later). Turbotax online However, see Days used as a main home before or after renting , later. Turbotax online A member of your family or a member of the family of any other person who owns an interest in it, unless the family member uses the dwelling unit as his or her main home and pays a fair rental price. Turbotax online Family includes only your spouse, brothers and sisters, half-brothers and half-sisters, ancestors (parents, grandparents, etc. Turbotax online ), and lineal descendants (children, grandchildren, etc. Turbotax online ). Turbotax online Anyone under an arrangement that lets you use some other dwelling unit. Turbotax online Anyone at less than a fair rental price. Turbotax online Main home. Turbotax online   If the other person or member of the family in (1) or (2) above has more than one home, his or her main home is ordinarily the one he or she lived in most of the time. Turbotax online Shared equity financing agreement. Turbotax online   This is an agreement under which two or more persons acquire undivided interests for more than 50 years in an entire dwelling unit, including the land, and one or more of the co-owners is entitled to occupy the unit as his or her main home upon payment of rent to the other co-owner or owners. Turbotax online Donation of use of the property. Turbotax online   You use a dwelling unit for personal purposes if: You donate the use of the unit to a charitable organization, The organization sells the use of the unit at a fund-raising event, and The “purchaser” uses the unit. Turbotax online Examples. Turbotax online   The following examples show how to determine if you have days of personal use. Turbotax online Example 1. Turbotax online You and your neighbor are co-owners of a condominium at the beach. Turbotax online Last year, you rented the unit to vacationers whenever possible. Turbotax online The unit was not used as a main home by anyone. Turbotax online Your neighbor used the unit for 2 weeks last year; you did not use it at all. Turbotax online Because your neighbor has an interest in the unit, both of you are considered to have used the unit for personal purposes during those 2 weeks. Turbotax online Example 2. Turbotax online You and your neighbors are co-owners of a house under a shared equity financing agreement. Turbotax online Your neighbors live in the house and pay you a fair rental price. Turbotax online Even though your neighbors have an interest in the house, the days your neighbors live there are not counted as days of personal use by you. Turbotax online This is because your neighbors rent the house as their main home under a shared equity financing agreement. Turbotax online Example 3. Turbotax online You own a rental property that you rent to your son. Turbotax online Your son does not own any interest in this property. Turbotax online He uses it as his main home and pays you a fair rental price. Turbotax online Your son's use of the property is not personal use by you because your son is using it as his main home, he owns no interest in the property, and he is paying you a fair rental price. Turbotax online Example 4. Turbotax online You rent your beach house to Rosa. Turbotax online Rosa rents her cabin in the mountains to you. Turbotax online You each pay a fair rental price. Turbotax online You are using your beach house for personal purposes on the days that Rosa uses it because your house is used by Rosa under an arrangement that allows you to use her cabin. Turbotax online Example 5. Turbotax online You rent an apartment to your mother at less than a fair rental price. Turbotax online You are using the apartment for personal purposes on the days that your mother rents it because you rent it for less than a fair rental price. Turbotax online Days used for repairs and maintenance. Turbotax online   Any day that you spend working substantially full time repairing and maintaining (not improving) your property is not counted as a day of personal use. Turbotax online Do not count such a day as a day of personal use even if family members use the property for recreational purposes on the same day. Turbotax online Example. Turbotax online Corey owns a cabin in the mountains that he rents for most of the year. Turbotax online He spends a week at the cabin with family members. Turbotax online Corey works on maintenance of the cabin 3 or 4 hours each day during the week and spends the rest of the time fishing, hiking, and relaxing. Turbotax online Corey's family members, however, work substantially full time on the cabin each day during the week. Turbotax online The main purpose of being at the cabin that week is to do maintenance work. Turbotax online Therefore, the use of the cabin during the week by Corey and his family will not be considered personal use by Corey. Turbotax online Days used as a main home before or after renting. Turbotax online   For purposes of determining whether a dwelling unit was used as a home, you may not have to count days you used the property as your main home before or after renting it or offering it for rent as days of personal use. Turbotax online Do not count them as days of personal use if: You rented or tried to rent the property for 12 or more consecutive months. Turbotax online You rented or tried to rent the property for a period of less than 12 consecutive months and the period ended because you sold or exchanged the property. Turbotax online However, this special rule does not apply when dividing expenses between rental and personal use. Turbotax online See Property Changed to Rental Use in chapter 4. Turbotax online Example 1. Turbotax online On February 29, 2012, you moved out of the house you had lived in for 6 years because you accepted a job in another town. Turbotax online You rented your house at a fair rental price from March 15, 2012, to May 14, 2013 (14 months). Turbotax online On June 1, 2013, you moved back into your old house. Turbotax online The days you used the house as your main home from January 1 to February 29, 2012, and from June 1 to December 31, 2013, are not counted as days of personal use. Turbotax online Therefore, you would use the rules in chapter 1 when figuring your rental income and expenses. Turbotax online Example 2. Turbotax online On January 31, you moved out of the condominium where you had lived for 3 years. Turbotax online You offered it for rent at a fair rental price beginning on February 1. Turbotax online You were unable to rent it until April. Turbotax online On September 15, you sold the condominium. Turbotax online The days you used the condominium as your main home from January 1 to January 31 are not counted as days of personal use when determining whether you used it as a home. Turbotax online Examples. Turbotax online   The following examples show how to determine whether you used your rental property as a home. Turbotax online Example 1. Turbotax online You converted the basement of your home into an apartment with a bedroom, a bathroom, and a small kitchen. Turbotax online You rented the basement apartment at a fair rental price to college students during the regular school year. Turbotax online You rented to them on a 9-month lease (273 days). Turbotax online You figured 10% of the total days rented to others at a fair rental price is 27 days. Turbotax online During June (30 days), your brothers stayed with you and lived in the basement apartment rent free. Turbotax online Your basement apartment was used as a home because you used it for personal purposes for 30 days. Turbotax online Rent-free use by your brothers is considered personal use. Turbotax online Your personal use (30 days) is more than the greater of 14 days or 10% of the total days it was rented (27 days). Turbotax online Example 2. Turbotax online You rented the guest bedroom in your home at a fair rental price during the local college's homecoming, commencement, and football weekends (a total of 27 days). Turbotax online Your sister-in-law stayed in the room, rent free, for the last 3 weeks (21 days) in July. Turbotax online You figured 10% of the total days rented to others at a fair rental price is 3 days. Turbotax online The room was used as a home because you used it for personal purposes for 21 days. Turbotax online That is more than the greater of 14 days or 10% of the 27 days it was rented (3 days). Turbotax online Example 3. Turbotax online You own a condominium apartment in a resort area. Turbotax online You rented it at a fair rental price for a total of 170 days during the year. Turbotax online For 12 of these days, the tenant was not able to use the apartment and allowed you to use it even though you did not refund any of the rent. Turbotax online Your family actually used the apartment for 10 of those days. Turbotax online Therefore, the apartment is treated as having been rented for 160 (170 – 10) days. Turbotax online You figured 10% of the total days rented to others at a fair rental price is 16 days. Turbotax online Your family also used the apartment for 7 other days during the year. Turbotax online You used the apartment as a home because you used it for personal purposes for 17 days. Turbotax online That is more than the greater of 14 days or 10% of the 160 days it was rented (16 days). Turbotax online Minimal rental use. Turbotax online   If you use the dwelling unit as a home and you rent it less than 15 days during the year, that period is not treated as rental activity. Turbotax online See Used as a home but rented less than 15 days, later, for more information. Turbotax online Limit on deductions. Turbotax online   Renting a dwelling unit that is considered a home is not a passive activity. Turbotax online Instead, if your rental expenses are more than your rental income, some or all of the excess expenses cannot be used to offset income from other sources. Turbotax online The excess expenses that cannot be used to offset income from other sources are carried forward to the next year and treated as rental expenses for the same property. Turbotax online Any expenses carried forward to the next year will be subject to any limits that apply for that year. Turbotax online This limitation will apply to expenses carried forward to another year even if you do not use the property as your home for that subsequent year. Turbotax online   To figure your deductible rental expenses for this year and any carryover to next year, use Worksheet 5–1. Turbotax online Reporting Income and Deductions Property not used for personal purposes. Turbotax online   If you do not use a dwelling unit for personal purposes, see chapter 3 for how to report your rental income and expenses. Turbotax online Property used for personal purposes. Turbotax online   If you do use a dwelling unit for personal purposes, then how you report your rental income and expenses depends on whether you used the dwelling unit as a home. Turbotax online Not used as a home. Turbotax online   If you use a dwelling unit for personal purposes, but not as a home, report all the rental income in your income. Turbotax online Since you used the dwelling unit for personal purposes, you must divide your expenses between the rental use and the personal use as described earlier in this chapter under Dividing Expenses . Turbotax online The expenses for personal use are not deductible as rental expenses. Turbotax online   Your deductible rental expenses can be more than your gross rental income; however, see Limits on Rental Losses in chapter 3. Turbotax online Used as a home but rented less than 15 days. Turbotax online   If you use a dwelling unit as a home and you rent it less than 15 days during the year, its primary function is not considered to be rental and it should not be reported on Schedule E (Form 1040). Turbotax online You are not required to report the rental income and rental expenses from this activity. Turbotax online The expenses, including qualified mortgage interest, property taxes, and any qualified casualty loss will be reported as normally allowed on Schedule A (Form 1040). Turbotax online See the Instructions for Schedule A (Form 1040) for more information on deducting these expenses. Turbotax online Used as a home and rented 15 days or more. Turbotax online   If you use a dwelling unit as a home and rent it 15 days or more during the year, include all your rental income in your income. Turbotax online Since you used the dwelling unit for personal purposes, you must divide your expenses between the rental use and the personal use as described earlier in this chapter under Dividing Expenses . Turbotax online The expenses for personal use are not deductible as rental expenses. Turbotax online   If you had a net profit from renting the dwelling unit for the year (that is, if your rental income is more than the total of your rental expenses, including depreciation), deduct all of your rental expenses. Turbotax online You do not need to use Worksheet 5-1. Turbotax online   However, if you had a net loss from renting the dwelling unit for the year, your deduction for certain rental expenses is limited. Turbotax online To figure your deductible rental expenses and any carryover to next year, use Worksheet 5–1. Turbotax online Worksheet 5-1. Turbotax online Worksheet for Figuring Rental Deductions for a Dwelling Unit Used as a Home Use this worksheet only if you answer “yes” to all of the following questions. Turbotax online Did you use the dwelling unit as a home this year? (See Dwelling Unit Used as a Home . Turbotax online ) Did you rent the dwelling unit at a fair rental price 15 days or more this year? Is the total of your rental expenses and depreciation more than your rental income? PART I. Turbotax online Rental Use Percentage A. Turbotax online Total days available for rent at fair rental price A. Turbotax online       B. Turbotax online Total days available for rent (line A) but not rented B. Turbotax online       C. Turbotax online Total days of rental use. Turbotax online Subtract line B from line A C. Turbotax online       D. Turbotax online Total days of personal use (including days rented at less than fair rental price) D. Turbotax online       E. Turbotax online Total days of rental and personal use. Turbotax online Add lines C and D E. Turbotax online       F. Turbotax online Percentage of expenses allowed for rental. Turbotax online Divide line C by line E     F. Turbotax online . Turbotax online PART II. Turbotax online Allowable Rental Expenses 1. Turbotax online Enter rents received 1. Turbotax online   2a. Turbotax online Enter the rental portion of deductible home mortgage interest and qualified mortgage insurance premiums (see instructions) 2a. Turbotax online       b. Turbotax online Enter the rental portion of real estate taxes b. Turbotax online       c. Turbotax online Enter the rental portion of deductible casualty and theft losses (see instructions) c. Turbotax online       d. Turbotax online Enter direct rental expenses (see instructions) d. Turbotax online       e. Turbotax online Fully deductible rental expenses. Turbotax online Add lines 2a–2d. Turbotax online Enter here and  on the appropriate lines on Schedule E (see instructions) 2e. Turbotax online   3. Turbotax online Subtract line 2e from line 1. Turbotax online If zero or less, enter -0- 3. Turbotax online   4a. Turbotax online Enter the rental portion of expenses directly related to operating or maintaining  the dwelling unit (such as repairs, insurance, and utilities) 4a. Turbotax online       b. Turbotax online Enter the rental portion of excess mortgage interest and qualified mortgage insurance premiums (see instructions) b. Turbotax online       c. Turbotax online Carryover of operating expenses from 2012 worksheet c. Turbotax online       d. Turbotax online Add lines 4a–4c d. Turbotax online       e. Turbotax online Allowable expenses. Turbotax online Enter the smaller of line 3 or line 4d (see instructions) 4e. Turbotax online   5. Turbotax online Subtract line 4e from line 3. Turbotax online If zero or less, enter -0- 5. Turbotax online   6a. Turbotax online Enter the rental portion of excess casualty and theft losses (see instructions) 6a. Turbotax online       b. Turbotax online Enter the rental portion of depreciation of the dwelling unit b. Turbotax online       c. Turbotax online Carryover of excess casualty losses and depreciation from 2012 worksheet c. Turbotax online       d. Turbotax online Add lines 6a–6c d. Turbotax online       e. Turbotax online Allowable excess casualty and theft losses and depreciation. Turbotax online Enter the smaller of  line 5 or line 6d (see instructions) 6e. Turbotax online   PART III. Turbotax online Carryover of Unallowed Expenses to Next Year 7a. Turbotax online Operating expenses to be carried over to next year. Turbotax online Subtract line 4e from line 4d 7a. Turbotax online   b. Turbotax online Excess casualty and theft losses and depreciation to be carried over to next year. Turbotax online  Subtract line 6e from line 6d b. Turbotax online   Worksheet 5-1 Instructions. Turbotax online Worksheet for Figuring Rental Deductions for a Dwelling Unit Used as a Home Caution. Turbotax online Use the percentage determined in Part I, line F, to figure the rental portions to enter on lines 2a–2c, 4a–4b, and 6a–6b of  Part II. Turbotax online Line 2a. Turbotax online Figure the mortgage interest on the dwelling unit that you could deduct on Schedule A as if you had not rented the unit. Turbotax online Do not include interest on a loan that did not benefit the dwelling unit. Turbotax online For example, do not include interest on a home equity loan used to pay off credit cards or other personal loans, buy a car, or pay college tuition. Turbotax online Include interest on a loan used to buy, build, or improve the dwelling unit, or to refinance such a loan. Turbotax online Include the rental portion of this interest in the total you enter on line 2a of the worksheet. Turbotax online   Figure the qualified mortgage insurance premiums on the dwelling unit that you could deduct on line 13 of Schedule A as if you had not rented the unit. Turbotax online See the Schedule A instructions. Turbotax online However, figure your adjusted gross income (Form 1040, line 38) without your rental income and expenses from the dwelling unit. Turbotax online See Line 4b to deduct the part of the qualified mortgage insurance premiums not allowed because of the adjusted gross income limit. Turbotax online Include the rental portion of the amount from Schedule A, line 13, in the total you enter on line 2a of the worksheet. Turbotax online   Note. Turbotax online Do not file this Schedule A or use it to figure the amount to deduct on line 13 of that schedule. Turbotax online Instead, figure the personal portion on a separate Schedule A. Turbotax online If you have deducted mortgage interest or qualified mortgage insurance premiums on the dwelling unit on other forms, such as Schedule C or F, remember to reduce your Schedule A deduction by that amount. Turbotax online           Line 2c. Turbotax online Figure the casualty and theft losses related to the dwelling unit that you could deduct on Schedule A as if you had not rented the dwelling unit. Turbotax online To do this, complete Section A of Form 4684, Casualties and Thefts, treating the losses as personal losses. Turbotax online If any of the loss is due to a federally declared disaster, see the Instructions for Form 4684. Turbotax online On Form 4684, line 17, enter 10% of your adjusted gross income figured without your rental income and expenses from the dwelling unit. Turbotax online Enter the rental portion of the result from Form 4684, line 18, on line 2c of this worksheet. Turbotax online   Note. Turbotax online Do not file this Form 4684 or use it to figure your personal losses on Schedule A. Turbotax online Instead, figure the personal portion on a separate Form 4684. Turbotax online           Line 2d. Turbotax online Enter the total of your rental expenses that are directly related only to the rental activity. Turbotax online These include interest on loans used for rental activities other than to buy, build, or improve the dwelling unit. Turbotax online Also include rental agency fees, advertising, office supplies, and depreciation on office equipment used in your rental activity. Turbotax online           Line 2e. Turbotax online You can deduct the amounts on lines 2a, 2b, 2c, and 2d as rental expenses on Schedule E even if your rental expenses are more than your rental income. Turbotax online Enter the amounts on lines 2a, 2b, 2c, and 2d on the appropriate lines of Schedule E. Turbotax online           Line 4b. Turbotax online On line 2a, you entered the rental portion of the mortgage interest or qualified mortgage insurance premiums you could deduct on Schedule A if you had not rented the dwelling unit. Turbotax online If you had additional mortgage interest and qualified mortgage insurance premiums that would not be deductible on Schedule A because of limits imposed on them, enter on line 4b of this worksheet the rental portion of those excess amounts. Turbotax online Do not include interest on a loan that did not benefit the dwelling unit  (as explained in the line 2a instructions). Turbotax online           Line 4e. Turbotax online You can deduct the amounts on lines 4a, 4b, and 4c as rental expenses on Schedule E only to the extent they are not more than the amount on line 4e. Turbotax online *           Line 6a. Turbotax online To find the rental portion of excess casualty and theft losses, use the Form 4684 you prepared for line 2c of this worksheet. Turbotax online   A. Turbotax online Enter the amount from Form 4684, line 10       B. Turbotax online Enter the rental portion of line A       C. Turbotax online Enter the amount from line 2c of this worksheet       D. Turbotax online Subtract line C from line B. Turbotax online Enter the result here and on line 6a of this worksheet               Line 6e. Turbotax online You can deduct the amounts on lines 6a, 6b, and 6c as rental expenses on Schedule E only to the extent they are not more than the amount on line 6e. Turbotax online * *Allocating the limited deduction. Turbotax online If you cannot deduct all of the amount on line 4d or 6d this year, you can allocate the allowable deduction in any way you wish among the expenses included on line 4d or 6d. Turbotax online Enter the amount you allocate to each expense on the appropriate line of Schedule E, Part I. Turbotax online Prev  Up  Next   Home   More Online Publications
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Turbotax online 2. Turbotax online   Electing the Section 179 Deduction Table of Contents Introduction Useful Items - You may want to see: What Property Qualifies?Eligible Property Property Acquired for Business Use Property Acquired by Purchase What Property Does Not Qualify?Land and Improvements Excepted Property How Much Can You Deduct?Dollar Limits Business Income Limit Partnerships and Partners S Corporations Other Corporations How Do You Elect the Deduction? When Must You Recapture the Deduction? Introduction You can elect to recover all or part of the cost of certain qualifying property, up to a limit, by deducting it in the year you place the property in service. Turbotax online This is the section 179 deduction. Turbotax online You can elect the section 179 deduction instead of recovering the cost by taking depreciation deductions. Turbotax online Estates and trusts cannot elect the section 179 deduction. Turbotax online This chapter explains what property does and does not qualify for the section 179 deduction, what limits apply to the deduction (including special rules for partnerships and corporations), and how to elect it. Turbotax online It also explains when and how to recapture the deduction. Turbotax online Useful Items - You may want to see: Publication 537 Installment Sales 544 Sales and Other Dispositions of Assets 954 Tax Incentives for Distressed Communities Form (and Instructions) 4562 Depreciation and Amortization 4797 Sales of Business Property See chapter 6 for information about getting publications and forms. Turbotax online What Property Qualifies? To qualify for the section 179 deduction, your property must meet all the following requirements. Turbotax online It must be eligible property. Turbotax online It must be acquired for business use. Turbotax online It must have been acquired by purchase. Turbotax online It must not be property described later under What Property Does Not Qualify . Turbotax online The following discussions provide information about these requirements and exceptions. Turbotax online Eligible Property To qualify for the section 179 deduction, your property must be one of the following types of depreciable property. Turbotax online Tangible personal property. Turbotax online Other tangible property (except buildings and their structural components) used as: An integral part of manufacturing, production, or extraction or of furnishing transportation, communications, electricity, gas, water, or sewage disposal services, A research facility used in connection with any of the activities in (a) above, or A facility used in connection with any of the activities in (a) for the bulk storage of fungible commodities. Turbotax online Single purpose agricultural (livestock) or horticultural structures. Turbotax online See chapter 7 of Publication 225 for definitions and information regarding the use requirements that apply to these structures. Turbotax online Storage facilities (except buildings and their structural components) used in connection with distributing petroleum or any primary product of petroleum. Turbotax online Off-the-shelf computer software. Turbotax online Qualified real property (described below). Turbotax online Tangible personal property. Turbotax online   Tangible personal property is any tangible property that is not real property. Turbotax online It includes the following property. Turbotax online Machinery and equipment. Turbotax online Property contained in or attached to a building (other than structural components), such as refrigerators, grocery store counters, office equipment, printing presses, testing equipment, and signs. Turbotax online Gasoline storage tanks and pumps at retail service stations. Turbotax online Livestock, including horses, cattle, hogs, sheep, goats, and mink and other furbearing animals. Turbotax online   The treatment of property as tangible personal property for the section 179 deduction is not controlled by its treatment under local law. Turbotax online For example, property may not be tangible personal property for the deduction even if treated so under local law, and some property (such as fixtures) may be tangible personal property for the deduction even if treated as real property under local law. Turbotax online Off-the-shelf computer software. Turbotax online   Off-the-shelf computer software placed in service during the tax year is qualifying property for purposes of the section 179 deduction. Turbotax online This is computer software that is readily available for purchase by the general public, is subject to a nonexclusive license, and has not been substantially modified. Turbotax online It includes any program designed to cause a computer to perform a desired function. Turbotax online However, a database or similar item is not considered computer software unless it is in the public domain and is incidental to the operation of otherwise qualifying software. Turbotax online Qualified real property. Turbotax online   You can elect to treat certain qualified real property you placed in service as section 179 property for tax years beginning in 2013. Turbotax online If this election is made, the term “section 179 property” will include any qualified real property that is: Qualified leasehold improvement property, Qualified restaurant property, or Qualified retail improvement property. Turbotax online The maximum section 179 expense deduction that can be elected for qualified section 179 real property is $250,000 of the maximum section 179 deduction of $500,000 in 2013. Turbotax online For more information, see Special rules for qualified section 179 real property, later. Turbotax online Also, see Election for certain qualified section 179 real property, later, for information on how to make this election. Turbotax online Qualified leasehold improvement property. Turbotax online   Generally, this is any improvement to an interior part of a building (placed in service before January 1, 2014) that is nonresidential real property, provided all of the requirements discussed in chapter 3 under Qualified leasehold improvement property are met. Turbotax online   In addition, an improvement made by the lessor does not qualify as qualified leasehold improvement property to any subsequent owner unless it is acquired from the original lessor by reason of the lessor’s death or in any of the following types of transactions. Turbotax online A transaction to which section 381(a) applies, A mere change in the form of conducting the trade or business so long as the property is retained in the trade or business as qualified leasehold improvement property and the taxpayer retains a substantial interest in the trade or business, A like-kind exchange, involuntary conversion, or re-acquisition of real property to the extent that the basis in the property represents the carryover basis, or Certain nonrecognition transactions to the extent that your basis in the property is determined by reference to the transferor’s or distributor’s basis in the property. Turbotax online Examples include the following. Turbotax online A complete liquidation of a subsidiary. Turbotax online A transfer to a corporation controlled by the transferor. Turbotax online An exchange of property by a corporation solely for stock or securities in another corporation in a reorganization. Turbotax online Qualified restaurant property. Turbotax online   Qualified restaurant property is any section 1250 property that is a building or an improvement to a building placed in service after December 31, 2008, and before January 1, 2014. Turbotax online Also, more than 50% of the building’s square footage must be devoted to preparation of meals and seating for on-premise consumption of prepared meals. Turbotax online Qualified retail improvement property. Turbotax online   Generally, this is any improvement (placed in service after December 31, 2008, and before January 1, 2014) to an interior portion of nonresidential real property if it meets the following requirements. Turbotax online The portion is open to the general public and is used in the retail trade or business of selling tangible property to the general public. Turbotax online The improvement is placed in service more than 3 years after the date the building was first placed in service. Turbotax online The expenses are not for the enlargement of the building, any elevator or escalator, any structural components benefiting a common area, or the internal structural framework of the building. Turbotax online In addition, an improvement made by the lessor does not qualify as qualified retail improvement property to any subsequent owner unless it is acquired from the original lessor by reason of the lessor’s death or in any of the following types of transactions. Turbotax online A transaction to which section 381(a) applies, A mere change in the form of conducting the trade or business so long as the property is retained in the trade or business as qualified leasehold improvement property and the taxpayer retains a substantial interest in the trade or business, A like-kind exchange, involuntary conversion, or re-acquisition of real property to the extent that the basis in the property represents the carryover basis, or Certain nonrecognition transactions to the extent that your basis in the property is determined by reference to the transferor’s or distributor’s basis in the property. Turbotax online Examples include the following. Turbotax online A complete liquidation of a subsidiary. Turbotax online A transfer to a corporation controlled by the transferor. Turbotax online An exchange of property by a corporation solely for stock or securities in another corporation in a reorganization. Turbotax online Property Acquired for Business Use To qualify for the section 179 deduction, your property must have been acquired for use in your trade or business. Turbotax online Property you acquire only for the production of income, such as investment property, rental property (if renting property is not your trade or business), and property that produces royalties, does not qualify. Turbotax online Partial business use. Turbotax online   When you use property for both business and nonbusiness purposes, you can elect the section 179 deduction only if you use the property more than 50% for business in the year you place it in service. Turbotax online If you use the property more than 50% for business, multiply the cost of the property by the percentage of business use. Turbotax online Use the resulting business cost to figure your section 179 deduction. Turbotax online Example. Turbotax online May Oak bought and placed in service an item of section 179 property costing $11,000. Turbotax online She used the property 80% for her business and 20% for personal purposes. Turbotax online The business part of the cost of the property is $8,800 (80% × $11,000). Turbotax online Property Acquired by Purchase To qualify for the section 179 deduction, your property must have been acquired by purchase. Turbotax online For example, property acquired by gift or inheritance does not qualify. Turbotax online Property is not considered acquired by purchase in the following situations. Turbotax online It is acquired by one component member of a controlled group from another component member of the same group. Turbotax online Its basis is determined either— In whole or in part by its adjusted basis in the hands of the person from whom it was acquired, or Under the stepped-up basis rules for property acquired from a decedent. Turbotax online It is acquired from a related person. Turbotax online Related persons. Turbotax online   Related persons are described under Related persons earlier. Turbotax online However, to determine whether property qualifies for the section 179 deduction, treat as an individual's family only his or her spouse, ancestors, and lineal descendants and substitute "50%" for "10%" each place it appears. Turbotax online Example. Turbotax online Ken Larch is a tailor. Turbotax online He bought two industrial sewing machines from his father. Turbotax online He placed both machines in service in the same year he bought them. Turbotax online They do not qualify as section 179 property because Ken and his father are related persons. Turbotax online He cannot claim a section 179 deduction for the cost of these machines. Turbotax online What Property Does Not Qualify? Certain property does not qualify for the section 179 deduction. Turbotax online This includes the following. Turbotax online Land and Improvements Land and land improvements do not qualify as section 179 property. Turbotax online Land improvements include swimming pools, paved parking areas, wharves, docks, bridges, and fences. Turbotax online Excepted Property Even if the requirements explained earlier under What Property Qualifies are met, you cannot elect the section 179 deduction for the following property. Turbotax online Certain property you lease to others (if you are a noncorporate lessor). Turbotax online Certain property used predominantly to furnish lodging or in connection with the furnishing of lodging. Turbotax online Air conditioning or heating units. Turbotax online Property used predominantly outside the United States, except property described in section 168(g)(4) of the Internal Revenue Code. Turbotax online Property used by certain tax-exempt organizations, except property used in connection with the production of income subject to the tax on unrelated trade or business income. Turbotax online Property used by governmental units or foreign persons or entities, except property used under a lease with a term of less than 6 months. Turbotax online Leased property. Turbotax online   Generally, you cannot claim a section 179 deduction based on the cost of property you lease to someone else. Turbotax online This rule does not apply to corporations. Turbotax online However, you can claim a section 179 deduction for the cost of the following property. Turbotax online Property you manufacture or produce and lease to others. Turbotax online Property you purchase and lease to others if both the following tests are met. Turbotax online The term of the lease (including options to renew) is less than 50% of the property's class life. Turbotax online For the first 12 months after the property is transferred to the lessee, the total business deductions you are allowed on the property (other than rents and reimbursed amounts) are more than 15% of the rental income from the property. Turbotax online Property used for lodging. Turbotax online   Generally, you cannot claim a section 179 deduction for property used predominantly to furnish lodging or in connection with the furnishing of lodging. Turbotax online However, this does not apply to the following types of property. Turbotax online Nonlodging commercial facilities that are available to those not using the lodging facilities on the same basis as they are available to those using the lodging facilities. Turbotax online Property used by a hotel or motel in connection with the trade or business of furnishing lodging where the predominant portion of the accommodations is used by transients. Turbotax online Any certified historic structure to the extent its basis is due to qualified rehabilitation expenditures. Turbotax online Any energy property. Turbotax online Energy property. Turbotax online   Energy property is property that meets the following requirements. Turbotax online It is one of the following types of property. Turbotax online Equipment that uses solar energy to generate electricity, to heat or cool a structure, to provide hot water for use in a structure, or to provide solar process heat, except for equipment used to generate energy to heat a swimming pool. Turbotax online Equipment placed in service after December 31, 2005, and before January 1, 2017, that uses solar energy to illuminate the inside of a structure using fiber-optic distributed sunlight. Turbotax online Equipment used to produce, distribute, or use energy derived from a geothermal deposit. Turbotax online For electricity generated by geothermal power, this includes equipment up to (but not including) the electrical transmission stage. Turbotax online Qualified fuel cell property or qualified microturbine property placed in service after December 31, 2005, and before January 1, 2017. Turbotax online The construction, reconstruction, or erection of the property must be completed by you. Turbotax online For property you acquire, the original use of the property must begin with you. Turbotax online The property must meet the performance and quality standards, if any, prescribed by Income Tax Regulations in effect at the time you get the property. Turbotax online   For periods before February 14, 2008, energy property does not include any property that is public utility property as defined by section 46(f)(5) of the Internal Revenue Code (as in effect on November 4, 1990). Turbotax online How Much Can You Deduct? Your section 179 deduction is generally the cost of the qualifying property. Turbotax online However, the total amount you can elect to deduct under section 179 is subject to a dollar limit and a business income limit. Turbotax online These limits apply to each taxpayer, not to each business. Turbotax online However, see Married Individuals under Dollar Limits , later. Turbotax online For a passenger automobile, the total section 179 deduction and depreciation deduction are limited. Turbotax online See Do the Passenger Automobile Limits Apply in chapter 5 . Turbotax online If you deduct only part of the cost of qualifying property as a section 179 deduction, you can generally depreciate the cost you do not deduct. Turbotax online Trade-in of other property. Turbotax online   If you buy qualifying property with cash and a trade-in, its cost for purposes of the section 179 deduction includes only the cash you paid. Turbotax online Example. Turbotax online Silver Leaf, a retail bakery, traded two ovens having a total adjusted basis of $680 for a new oven costing $1,320. Turbotax online They received an $800 trade-in allowance for the old ovens and paid $520 in cash for the new oven. Turbotax online The bakery also traded a used van with an adjusted basis of $4,500 for a new van costing $9,000. Turbotax online They received a $4,800 trade-in allowance on the used van and paid $4,200 in cash for the new van. Turbotax online Only the portion of the new property's basis paid by cash qualifies for the section 179 deduction. Turbotax online Therefore, Silver Leaf's qualifying costs for the section 179 deduction are $4,720 ($520 + $4,200). Turbotax online Dollar Limits The total amount you can elect to deduct under section 179 for most property placed in service in 2013 generally cannot be more than $500,000. Turbotax online If you acquire and place in service more than one item of qualifying property during the year, you can allocate the section 179 deduction among the items in any way, as long as the total deduction is not more than $500,000. Turbotax online You do not have to claim the full $500,000. Turbotax online Qualified real property (described earlier) that you elected to treat as section 179 real property is limited to $250,000 of the maximum deduction of $500,000 for 2013. Turbotax online The amount you can elect to deduct is not affected if you place qualifying property in service in a short tax year or if you place qualifying property in service for only a part of a 12-month tax year. Turbotax online After you apply the dollar limit to determine a tentative deduction, you must apply the business income limit (described later) to determine your actual section 179 deduction. Turbotax online Example. Turbotax online In 2013, you bought and placed in service $500,000 in machinery and a $25,000 circular saw for your business. Turbotax online You elect to deduct $475,000 for the machinery and the entire $25,000 for the saw, a total of $500,000. Turbotax online This is the maximum amount you can deduct. Turbotax online Your $25,000 deduction for the saw completely recovered its cost. Turbotax online Your basis for depreciation is zero. Turbotax online The basis for depreciation of your machinery is $25,000. Turbotax online You figure this by subtracting your $475,000 section 179 deduction for the machinery from the $500,000 cost of the machinery. Turbotax online Situations affecting dollar limit. Turbotax online   Under certain circumstances, the general dollar limits on the section 179 deduction may be reduced or increased or there may be additional dollar limits. Turbotax online The general dollar limit is affected by any of the following situations. Turbotax online The cost of your section 179 property placed in service exceeds $2,000,000. Turbotax online Your business is an enterprise zone business. Turbotax online You placed in service a sport utility or certain other vehicles. Turbotax online You are married filing a joint or separate return. Turbotax online Costs exceeding $2,000,000 If the cost of your qualifying section 179 property placed in service in a year is more than $2,000,000, you generally must reduce the dollar limit (but not below zero) by the amount of cost over $2,000,000. Turbotax online If the cost of your section 179 property placed in service during 2013 is $2,500,000 or more, you cannot take a section 179 deduction. Turbotax online Example. Turbotax online In 2013, Jane Ash placed in service machinery costing $2,100,000. Turbotax online This cost is $100,000 more than $2,000,000, so she must reduce her dollar limit to $400,000 ($500,000 − $100,000). Turbotax online Enterprise Zone Businesses An increased section 179 deduction is available to enterprise zone businesses for qualified zone property placed in service during the tax year, in an empowerment zone. Turbotax online For more information including the definitions of “enterprise zone business” and “qualified zone property,” see sections 1397A, 1397C, and 1397D of the Internal Revenue Code. Turbotax online The dollar limit on the section 179 deduction is increased by the smaller of: $35,000, or The cost of section 179 property that is also qualified zone property placed in service before January 1, 2014 (including such property placed in service by your spouse, even if you are filing a separate return). Turbotax online Note. Turbotax online   You take into account only 50% (instead of 100%) of the cost of qualified zone property placed in service in a year when figuring the reduced dollar limit for costs exceeding $2,000,000 (explained earlier). Turbotax online Sport Utility and Certain Other Vehicles You cannot elect to expense more than $25,000 of the cost of any heavy sport utility vehicle (SUV) and certain other vehicles placed in service during the tax year. Turbotax online This rule applies to any 4-wheeled vehicle primarily designed or used to carry passengers over public streets, roads, or highways, that is rated at more than 6,000 pounds gross vehicle weight and not more than 14,000 pounds gross vehicle weight. Turbotax online However, the $25,000 limit does not apply to any vehicle: Designed to seat more than nine passengers behind the driver's seat, Equipped with a cargo area (either open or enclosed by a cap) of at least six feet in interior length that is not readily accessible from the passenger compartment, or That has an integral enclosure fully enclosing the driver compartment and load carrying device, does not have seating rearward of the driver's seat, and has no body section protruding more than 30 inches ahead of the leading edge of the windshield. Turbotax online Married Individuals If you are married, how you figure your section 179 deduction depends on whether you file jointly or separately. Turbotax online If you file a joint return, you and your spouse are treated as one taxpayer in determining any reduction to the dollar limit, regardless of which of you purchased the property or placed it in service. Turbotax online If you and your spouse file separate returns, you are treated as one taxpayer for the dollar limit, including the reduction for costs over $2,000,000. Turbotax online You must allocate the dollar limit (after any reduction) between you equally, unless you both elect a different allocation. Turbotax online If the percentages elected by each of you do not total 100%, 50% will be allocated to each of you. Turbotax online Example. Turbotax online Jack Elm is married. Turbotax online He and his wife file separate returns. Turbotax online Jack bought and placed in service $2,000,000 of qualified farm machinery in 2013. Turbotax online His wife has her own business, and she bought and placed in service $30,000 of qualified business equipment. Turbotax online Their combined dollar limit is $470,000. Turbotax online This is because they must figure the limit as if they were one taxpayer. Turbotax online They reduce the $500,000 dollar limit by the $30,000 excess of their costs over $2,000,000. Turbotax online They elect to allocate the $470,000 dollar limit as follows. Turbotax online $446,500 ($470,000 x 95%) to Mr. Turbotax online Elm's machinery. Turbotax online $23,500 ($470,000 x 5%) to Mrs. Turbotax online Elm's equipment. Turbotax online If they did not make an election to allocate their costs in this way, they would have to allocate $235,000 ($470,000 × 50%) to each of them. Turbotax online Joint return after filing separate returns. Turbotax online   If you and your spouse elect to amend your separate returns by filing a joint return after the due date for filing your return, the dollar limit on the joint return is the lesser of the following amounts. Turbotax online The dollar limit (after reduction for any cost of section 179 property over $2,000,000). Turbotax online The total cost of section 179 property you and your spouse elected to expense on your separate returns. Turbotax online Example. Turbotax online The facts are the same as in the previous example except that Jack elected to deduct $30,000 of the cost of section 179 property on his separate return and his wife elected to deduct $2,000. Turbotax online After the due date of their returns, they file a joint return. Turbotax online Their dollar limit for the section 179 deduction is $32,000. Turbotax online This is the lesser of the following amounts. Turbotax online $470,000—The dollar limit less the cost of section 179 property over $2,000,000. Turbotax online $32,000—The total they elected to expense on their separate returns. Turbotax online Business Income Limit The total cost you can deduct each year after you apply the dollar limit is limited to the taxable income from the active conduct of any trade or business during the year. Turbotax online Generally, you are considered to actively conduct a trade or business if you meaningfully participate in the management or operations of the trade or business. Turbotax online Any cost not deductible in one year under section 179 because of this limit can be carried to the next year. Turbotax online Special rules apply to a 2013 deduction of qualified section 179 real property that is disallowed because of the business income limit. Turbotax online See Special rules for qualified section 179 property under Carryover of disallowed deduction, later. Turbotax online Taxable income. Turbotax online   In general, figure taxable income for this purpose by totaling the net income and losses from all trades and businesses you actively conducted during the year. Turbotax online Net income or loss from a trade or business includes the following items. Turbotax online Section 1231 gains (or losses). Turbotax online Interest from working capital of your trade or business. Turbotax online Wages, salaries, tips, or other pay earned as an employee. Turbotax online For information about section 1231 gains and losses, see chapter 3 in Publication 544. Turbotax online   In addition, figure taxable income without regard to any of the following. Turbotax online The section 179 deduction. Turbotax online The self-employment tax deduction. Turbotax online Any net operating loss carryback or carryforward. Turbotax online Any unreimbursed employee business expenses. Turbotax online Two different taxable income limits. Turbotax online   In addition to the business income limit for your section 179 deduction, you may have a taxable income limit for some other deduction. Turbotax online You may have to figure the limit for this other deduction taking into account the section 179 deduction. Turbotax online If so, complete the following steps. Turbotax online Step Action 1 Figure taxable income without the section 179 deduction or the other deduction. Turbotax online 2 Figure a hypothetical section 179 deduction using the taxable income figured in Step 1. Turbotax online 3 Subtract the hypothetical section 179 deduction figured in Step 2 from the taxable income figured in Step 1. Turbotax online 4 Figure a hypothetical amount for the other deduction using the amount figured in Step 3 as taxable income. Turbotax online 5 Subtract the hypothetical other deduction figured in Step 4 from the taxable income figured in Step 1. Turbotax online 6 Figure your actual section 179 deduction using the taxable income figured in Step 5. Turbotax online 7 Subtract your actual section 179 deduction figured in Step 6 from the taxable income figured in Step 1. Turbotax online 8 Figure your actual other deduction using the taxable income figured in Step 7. Turbotax online Example. Turbotax online On February 1, 2013, the XYZ corporation purchased and placed in service qualifying section 179 property that cost $500,000. Turbotax online It elects to expense the entire $500,000 cost under section 179. Turbotax online In June, the corporation gave a charitable contribution of $10,000. Turbotax online A corporation's limit on charitable contributions is figured after subtracting any section 179 deduction. Turbotax online The business income limit for the section 179 deduction is figured after subtracting any allowable charitable contributions. Turbotax online XYZ's taxable income figured without the section 179 deduction or the deduction for charitable contributions is $520,000. Turbotax online XYZ figures its section 179 deduction and its deduction for charitable contributions as follows. Turbotax online Step 1– Taxable income figured without either deduction is $520,000. Turbotax online Step 2– Using $520,000 as taxable income, XYZ's hypothetical section 179 deduction is $500,000. Turbotax online Step 3– $20,000 ($520,000 − $500,000). Turbotax online Step 4– Using $20,000 (from Step 3) as taxable income, XYZ's hypothetical charitable contribution (limited to 10% of taxable income) is $2,000. Turbotax online Step 5– $518,000 ($520,000 − $2,000). Turbotax online Step 6– Using $518,000 (from Step 5) as taxable income, XYZ figures the actual section 179 deduction. Turbotax online Because the taxable income is at least $500,000, XYZ can take a $500,000 section 179 deduction. Turbotax online Step 7– $20,000 ($520,000 − $500,000). Turbotax online Step 8– Using $20,000 (from Step 7) as taxable income, XYZ's actual charitable contribution (limited to 10% of taxable income) is $2,000. Turbotax online Carryover of disallowed deduction. Turbotax online   You can carry over for an unlimited number of years the cost of any section 179 property you elected to expense but were unable to because of the business income limit. Turbotax online This disallowed deduction amount is shown on line 13 of Form 4562. Turbotax online You use the amount you carry over to determine your section 179 deduction in the next year. Turbotax online Enter that amount on line 10 of your Form 4562 for the next year. Turbotax online   If you place more than one property in service in a year, you can select the properties for which all or a part of the costs will be carried forward. Turbotax online Your selections must be shown in your books and records. Turbotax online For this purpose, treat section 179 costs allocated from a partnership or an S corporation as one item of section 179 property. Turbotax online If you do not make a selection, the total carryover will be allocated equally among the properties you elected to expense for the year. Turbotax online   If costs from more than one year are carried forward to a subsequent year in which only part of the total carryover can be deducted, you must deduct the costs being carried forward from the earliest year first. Turbotax online Special rules for qualified section 179 real property. Turbotax online   You can carry over to 2013 a 2012 deduction attributable to qualified section 179 real property that you elected to expense but were unable to take because of the business income limitation. Turbotax online Any such 2012 carryover amounts that are not deducted in 2013, plus any 2013 disallowed section 179 expense deductions attributable to qualified real property, are not carried over to 2014. Turbotax online Instead these amounts are treated as property placed in service on the first day of 2013 for purposes of computing depreciation (including the special depreciation allowance, if applicable). Turbotax online See section 179(f) of the Internal Revenue Code and Notice 2013-59 for more information. Turbotax online If there is a sale or other disposition of your property (including a transfer at death) before you can use the full amount of any outstanding carryover of your disallowed section 179 deduction, neither you nor the new owner can deduct any of the unused amount. Turbotax online Instead, you must add it back to the property's basis. Turbotax online Partnerships and Partners The section 179 deduction limits apply both to the partnership and to each partner. Turbotax online The partnership determines its section 179 deduction subject to the limits. Turbotax online It then allocates the deduction among its partners. Turbotax online Each partner adds the amount allocated from partnerships (shown on Schedule K-1 (Form 1065), Partner's Share of Income, Deductions, Credits, etc. Turbotax online ) to his or her nonpartnership section 179 costs and then applies the dollar limit to this total. Turbotax online To determine any reduction in the dollar limit for costs over $2,000,000, the partner does not include any of the cost of section 179 property placed in service by the partnership. Turbotax online After the dollar limit (reduced for any nonpartnership section 179 costs over $2,000,000) is applied, any remaining cost of the partnership and nonpartnership section 179 property is subject to the business income limit. Turbotax online Partnership's taxable income. Turbotax online   For purposes of the business income limit, figure the partnership's taxable income by adding together the net income and losses from all trades or businesses actively conducted by the partnership during the year. Turbotax online See the Instructions for Form 1065 for information on how to figure partnership net income (or loss). Turbotax online However, figure taxable income without regard to credits, tax-exempt income, the section 179 deduction, and guaranteed payments under section 707(c) of the Internal Revenue Code. Turbotax online Partner's share of partnership's taxable income. Turbotax online   For purposes of the business income limit, the taxable income of a partner engaged in the active conduct of one or more of a partnership's trades or businesses includes his or her allocable share of taxable income derived from the partnership's active conduct of any trade or business. Turbotax online Example. Turbotax online In 2013, Beech Partnership placed in service section 179 property with a total cost of $2,025,000. Turbotax online The partnership must reduce its dollar limit by $25,000 ($2,025,000 − $2,000,000). Turbotax online Its maximum section 179 deduction is $475,000 ($500,000 − $25,000), and it elects to expense that amount. Turbotax online The partnership's taxable income from the active conduct of all its trades or businesses for the year was $600,000, so it can deduct the full $475,000. Turbotax online It allocates $40,000 of its section 179 deduction and $50,000 of its taxable income to Dean, one of its partners. Turbotax online In addition to being a partner in Beech Partnership, Dean is also a partner in the Cedar Partnership, which allocated to him a $30,000 section 179 deduction and $35,000 of its taxable income from the active conduct of its business. Turbotax online He also conducts a business as a sole proprietor and, in 2013, placed in service in that business qualifying section 179 property costing $55,000. Turbotax online He had a net loss of $5,000 from that business for the year. Turbotax online Dean does not have to include section 179 partnership costs to figure any reduction in his dollar limit, so his total section 179 costs for the year are not more than $2,000,000 and his dollar limit is not reduced. Turbotax online His maximum section 179 deduction is $500,000. Turbotax online He elects to expense all of the $70,000 in section 179 deductions allocated from the partnerships ($40,000 from Beech Partnership plus $30,000 from Cedar Partnership), plus $55,000 of his sole proprietorship's section 179 costs, and notes that information in his books and records. Turbotax online However, his deduction is limited to his business taxable income of $80,000 ($50,000 from Beech Partnership, plus $35,000 from Cedar Partnership minus $5,000 loss from his sole proprietorship). Turbotax online He carries over $45,000 ($125,000 − $80,000) of the elected section 179 costs to 2014. Turbotax online He allocates the carryover amount to the cost of section 179 property placed in service in his sole proprietorship, and notes that allocation in his books and records. Turbotax online Different tax years. Turbotax online   For purposes of the business income limit, if the partner's tax year and that of the partnership differ, the partner's share of the partnership's taxable income for a tax year is generally the partner's distributive share for the partnership tax year that ends with or within the partner's tax year. Turbotax online Example. Turbotax online John and James Oak are equal partners in Oak Partnership. Turbotax online Oak Partnership uses a tax year ending January 31. Turbotax online John and James both use a tax year ending December 31. Turbotax online For its tax year ending January 31, 2013, Oak Partnership's taxable income from the active conduct of its business is $80,000, of which $70,000 was earned during 2012. Turbotax online John and James each include $40,000 (each partner's entire share) of partnership taxable income in computing their business income limit for the 2013 tax year. Turbotax online Adjustment of partner's basis in partnership. Turbotax online   A partner must reduce the basis of his or her partnership interest by the total amount of section 179 expenses allocated from the partnership even if the partner cannot currently deduct the total amount. Turbotax online If the partner disposes of his or her partnership interest, the partner's basis for determining gain or loss is increased by any outstanding carryover of disallowed section 179 expenses allocated from the partnership. Turbotax online Adjustment of partnership's basis in section 179 property. Turbotax online   The basis of a partnership's section 179 property must be reduced by the section 179 deduction elected by the partnership. Turbotax online This reduction of basis must be made even if a partner cannot deduct all or part of the section 179 deduction allocated to that partner by the partnership because of the limits. Turbotax online S Corporations Generally, the rules that apply to a partnership and its partners also apply to an S corporation and its shareholders. Turbotax online The deduction limits apply to an S corporation and to each shareholder. Turbotax online The S corporation allocates its deduction to the shareholders who then take their section 179 deduction subject to the limits. Turbotax online Figuring taxable income for an S corporation. Turbotax online   To figure taxable income (or loss) from the active conduct by an S corporation of any trade or business, you total the net income and losses from all trades or businesses actively conducted by the S corporation during the year. Turbotax online   To figure the net income (or loss) from a trade or business actively conducted by an S corporation, you take into account the items from that trade or business that are passed through to the shareholders and used in determining each shareholder's tax liability. Turbotax online However, you do not take into account any credits, tax-exempt income, the section 179 deduction, and deductions for compensation paid to shareholder-employees. Turbotax online For purposes of determining the total amount of S corporation items, treat deductions and losses as negative income. Turbotax online In figuring the taxable income of an S corporation, disregard any limits on the amount of an S corporation item that must be taken into account when figuring a shareholder's taxable income. Turbotax online Other Corporations A corporation's taxable income from its active conduct of any trade or business is its taxable income figured with the following changes. Turbotax online It is figured before deducting the section 179 deduction, any net operating loss deduction, and special deductions (as reported on the corporation's income tax return). Turbotax online It is adjusted for items of income or deduction included in the amount figured in 1, above, not derived from a trade or business actively conducted by the corporation during the tax year. Turbotax online How Do You Elect the Deduction? You elect to take the section 179 deduction by completing Part I of Form 4562. Turbotax online If you elect the deduction for listed property (described in chapter 5), complete Part V of Form 4562 before completing Part I. Turbotax online For property placed in service in 2013, file Form 4562 with either of the following. Turbotax online Your original 2013 tax return, whether or not you file it timely. Turbotax online An amended return for 2013 filed within the time prescribed by law. Turbotax online An election made on an amended return must specify the item of section 179 property to which the election applies and the part of the cost of each such item to be taken into account. Turbotax online The amended return must also include any resulting adjustments to taxable income. Turbotax online You must keep records that show the specific identification of each piece of qualifying section 179 property. Turbotax online These records must show how you acquired the property, the person you acquired it from, and when you placed it in service. Turbotax online Election for certain qualified section 179 real property. Turbotax online   You can elect to expense certain qualified real property that you placed in service as section 179 property for tax years beginning in 2013. Turbotax online If you elect to treat this property as section 179 property, you must elect the application of the special rules for qualified real property described in section 179(f) of the Internal Revenue Code. Turbotax online   To make the election, attach a statement indicating you are “electing the application of section 179(f) of the Internal Revenue Code” with either of the following. Turbotax online Your original 2013 tax return, whether or not you file it timely. Turbotax online An amended return for 2013 filed within the time prescribed by law. Turbotax online The amended return must also include any adjustments to taxable income. Turbotax online   The statement should indicate your election to expense certain qualified real property under section 179(f) on your return. Turbotax online It must specify one or more of the three types of qualified property (described under Qualified real property ) to which the election applies, the cost of each such type, and the portion of the cost of each such property to be taken into account. Turbotax online Also, report this on line 6 of Form 4562. Turbotax online    The maximum section 179 expense deduction that can be taken for qualified section 179 real property is limited to $250,000. Turbotax online Revoking an election. Turbotax online   An election (or any specification made in the election) to take a section 179 deduction for 2013 can be revoked without IRS approval by filing an amended return. Turbotax online The amended return must be filed within the time prescribed by law. Turbotax online The amended return must also include any resulting adjustments to taxable income. Turbotax online Once made, the revocation is irrevocable. Turbotax online When Must You Recapture the Deduction? You may have to recapture the section 179 deduction if, in any year during the property's recovery period, the percentage of business use drops to 50% or less. Turbotax online In the year the business use drops to 50% or less, you include the recapture amount as ordinary income in Part IV of Form 4797. Turbotax online You also increase the basis of the property by the recapture amount. Turbotax online Recovery periods for property are discussed under Which Recovery Period Applies in chapter 4 . Turbotax online If you sell, exchange, or otherwise dispose of the property, do not figure the recapture amount under the rules explained in this discussion. Turbotax online Instead, use the rules for recapturing depreciation explained in chapter 3 of Publication 544 under Section 1245 Property. Turbotax online For qualified real property (described earlier), see Notice 2013-59 for determining the portion of the gain that is attributable to section 1245 property upon the sale or other disposition of qualified real property. Turbotax online If the property is listed property (described in chapter 5 ), do not figure the recapture amount under the rules explained in this discussion when the percentage of business use drops to 50% or less. Turbotax online Instead, use the rules for recapturing excess depreciation in chapter 5 under What Is the Business-Use Requirement. Turbotax online Figuring the recapture amount. Turbotax online   To figure the amount to recapture, take the following steps. Turbotax online Figure the depreciation that would have been allowable on the section 179 deduction you claimed. Turbotax online Begin with the year you placed the property in service and include the year of recapture. Turbotax online Subtract the depreciation figured in (1) from the section 179 deduction you claimed. Turbotax online The result is the amount you must recapture. Turbotax online Example. Turbotax online In January 2011, Paul Lamb, a calendar year taxpayer, bought and placed in service section 179 property costing $10,000. Turbotax online The property is not listed property. Turbotax online The property is 3-year property. Turbotax online He elected a $5,000 section 179 deduction for the property and also elected not to claim a special depreciation allowance. Turbotax online He used the property only for business in 2011 and 2012. Turbotax online In 2013, he used the property 40% for business and 60% for personal use. Turbotax online He figures his recapture amount as follows. Turbotax online Section 179 deduction claimed (2011) $5,000. Turbotax online 00 Minus: Allowable depreciation using Table A-1 (instead of section 179 deduction):   2011 $1,666. Turbotax online 50   2012 2,222. Turbotax online 50   2013 ($740. Turbotax online 50 × 40% (business)) 296. Turbotax online 20 4,185. Turbotax online 20 2013 — Recapture amount $ 814. Turbotax online 80 Paul must include $814. Turbotax online 80 in income for 2013. Turbotax online If any qualified zone property placed in service during the year ceases to be used in an empowerment zone by an enterprise zone business in a later year, the benefit of the increased section 179 deduction must be reported as other income on your return. Turbotax online Prev  Up  Next   Home   More Online Publications