IRS Material: Section 179 Deduction

Section 179 Deduction Defined

Section 179 of the Internal Revenue Code allows you to elect to deduct all or part of the cost of certain qualifying property in the year you place it in service. You can do this instead of recovering the cost by taking depreciation deductions over a specified recovery period. There are limits, however, on the amount you can deduct in a tax year. These limits are discussed in Deduction Limits in How To Figure the Deduction, later.

Caution:

Estates and trusts cannot elect the section 179 deduction.

Forms and Publications>

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What Costs Can and Cannot Be Deducted

Words you may need to know (see Glossary):

•Adjusted basis •Basis •Placed in service

You can claim the section 179 deduction based only on the costs of qualifying property acquired for use in your trade or business. You cannot claim the deduction based on the cost of property you hold only for the production of income.

Acquired by Purchase

Only the cost of property you acquired for use in your business qualifies for the section 179 deduction. The cost of property acquired from a related person or group may not qualify. See Nonqualifying Property, later.

Acquired by Trade

If you purchase an asset with cash and a trade-in, part of the basis of the asset you buy is the basis of the trade-in. You cannot claim the section 179 deduction on this part of the basis of the purchased asset. For example, if you buy (for cash and a trade-in) a new truck to use in your business, your cost for the section 179 deduction does not include the adjusted basis of the truck you trade for the new vehicle. See Adjusted Basis in Publication 551.

Example. Silver Leaf, a retail bakery, traded two ovens having a total adjusted basis of $680 for a new oven costing $1,320. The bakery also traded a used van with an adjusted basis of $4,500 for a new van costing $9,000. Silver Leaf placed the new items in service this year. Silver Leaf was given an $800 trade-in for the old ovens and paid $520 cash for the new oven. The bakery was given a $4,800 trade-in on the used van and paid $4,200 cash for the new van.

Silver Leaf's basis in the new property includes both the adjusted basis of the property traded and the cash paid. However, only the portion of the new property's basis paid by cash qualifies for the section 179 deduction. The portion of the adjusted basis of the property traded that carries over to the basis of the new property is not treated as business cost for purposes of section 179. Silver Leaf has business costs that qualify for a section 179 deduction of $4,720 ($520 + $4,200), the part of the cost of the new property not determined by the property traded.

Qualifying Property

Words you may need to know (see Glossary):

•Adjusted basis •Basis •Fungible commodities •Placed in service •Structural components

Property qualifying for the section 179 deduction is depreciable property and includes:

1.Tangible personal property, 2.Other tangible property (except most buildings and their structural components) used as:

a.An integral part of manufacturing, production, or extraction, or of furnishing transportation, communications, electricity, gas, water, or sewage disposal services, b.A research facility used in connection with any of the activities in (a) above, or c.A facility used in connection with any of the activities in (a) for the bulk storage of fungible commodities.

3.Single purpose agricultural (livestock) or horticultural structures, and 4.Storage facilities (except buildings and their structural components) used in connection with distributing petroleum or any primary product of petroleum.

Leased property. Generally, you cannot claim a section 179 deduction based on the cost of property you lease to someone else. (This rule does not apply to corporations.) However, you can claim a section 179 deduction based on the cost of:

1.Property you lease to others that you manufactured, or 2.Property you lease to others if:

a.The term of the lease is less than half of the property's class life, and b.For the first 12 months after the property is transferred to the lessee, the total of the business deductions that you are allowed on the property (except rent and reimbursed amounts) are more than 15% of the rental income from the property.

Tangible Personal Property

Tangible personal property is any tangible property that is not real property. Machinery and equipment are examples of tangible personal property.

Land and land improvements, such as buildings and other permanent structures and their components, are real property. Swimming pools, paved parking areas, wharves, docks, bridges, and fences are examples of land improvements. They are not tangible personal property.

Business property. All business property, other than structural components, that is contained in or attached to a building is tangible personal property. Under certain local laws, some tangible personal property cannot be tangible personal property for purposes of section 179. Under certain local laws, some real property, such as fixtures, can be tangible personal property for section 179 purposes. Property such as refrigerators, grocery store counters, transportation and office equipment, printing presses, testing equipment, and signs are tangible personal property.

Gasoline storage tanks and pumps. Gasoline storage tanks and pumps at retail service stations are tangible personal property.

Livestock. Livestock is qualifying property. For this purpose, livestock includes horses, cattle, hogs, sheep, goats, and mink and other furbearing animals.

Single Purpose Agricultural (Livestock) or Horticultural Structures

For purposes of determining whether a structure is a single purpose agricultural structure, poultry is considered to be livestock.

Agricultural structure. A single purpose agricultural (livestock) structure is any building or enclosure specifically designed, constructed, and used to:

1.House, raise, and feed a particular type of livestock and its produce, and 2.House the equipment, including any replacements, needed to house, raise, or feed the livestock.

Because the full range of livestock breeding is included, special purpose structures are qualifying property if used to breed chickens or hogs, produce milk from dairy cattle, or produce feeder cattle or pigs, broiler chickens, or eggs. The facility must include, as an integral part of the structure or enclosure, equipment necessary to house, raise, and feed the livestock.

Horticultural structure. A single purpose horticultural structure is:

1.A greenhouse specifically designed, constructed, and used for the commercial production of plants, or 2.A structure specifically designed, constructed, and used for the commercial production of mushrooms.

Use of structure. A structure must be used only for the purpose which qualified it. For example, a hog pen will not be qualifying property if you use it to house poultry. Similarly, using part of your greenhouse to sell plants will make the greenhouse nonqualifying property.

If a structure includes work space, that structure is not a single purpose agricultural or horticultural structure unless the work space is used only for:

1.Stocking, caring for, or collecting livestock or plants or their produce, 2.Maintaining the enclosure or structure, and 3.Maintaining or replacing the equipment or stock enclosed or housed in the structure.

Business and Nonbusiness Use

When you use property for both business and nonbusiness purposes, you can elect the section 179 deduction only if more than 50% of the property's use in the tax year you place it in service is for trade or business. You must figure the part of the cost of the property that reflects only its business use. You do this by multiplying the cost of your property by the percentage of business use. This is your business cost. Use it to figure your section 179 deduction.

Example 1. May Oak bought and placed in service an item of section 179 property. She paid $11,000 for it. She used the property 80% for her business and 20% for personal purposes. The business part of the cost of her property is $8,800 (80% × $11,000).

Example 2. June Pine bought and placed in service computer equipment. She paid $9,000 and received a $1,000 trade-in allowance for her old computer equipment. She had an adjusted basis of $3,000 in the old computer equipment. June used both the old and new equipment 90% for business and 10% for personal purposes. Her basis in the new computer equipment is $12,000 ($9,000 paid plus the adjusted basis of $3,000 in the old computer equipment). However, her business cost for purposes of section 179 is limited to 90% (business use percentage) of $9,000 (cash paid), or $8,100.

Nonqualifying Property

Words you may need to know (see Glossary):

•Adjusted basis •Basis •Fiduciary •Grantor •Placed in service •Structural components

Generally, the section 179 deduction cannot be claimed on the cost of:

1.Property you hold only for the production of income, 2.Real property, including buildings and their structural components, 3.Property you acquired from certain groups or persons, 4.Air conditioning or heating units, 5.Certain property used predominantly outside the U.S., 6.Property used predominantly to furnish lodging or in connection with the furnishing of lodging, 7.Property used by certain tax-exempt organizations, 8.Property used by governmental units, 9.Property used by foreign persons or entities, and 10.Certain property you leased to others (if you are a noncorporate lessor).

For the kind of property you lease on which you can claim the section 179 deduction, see Qualifying Property, earlier.

Production of Income

Property you hold for the production of income includes investment property, rental property (if renting property is not your trade or business), and property that produces royalties. If you use property in the active conduct of a trade or business, you do not hold it only for the production of income.

Acquired From Certain Groups or Persons

Property does not qualify for the section 179 deduction if:

1.The property is acquired by one member of a controlled group from a member of the same group, or 2.The property's basis is either:

a.Determined in whole or in part by its adjusted basis in the hands of the person from whom it was acquired, or b.Determined under stepped-up basis rules for property acquired from a decedent, or

3.The property is acquired from a related person.

Related persons. For the purpose of determining what property does not qualify for the section 179 deduction, related persons are:

1.An individual and his or her spouse, child, parent, or other ancestor or lineal descendant. 2.A corporation and any individual who owns directly or indirectly more than 50% of the value of the corporation's outstanding stock. 3.Two corporations that are members of the same controlled group. 4.A fiduciary of a trust and a corporation if more than 50% of the value of the outstanding stock of the corporation is owned directly or indirectly by or for the trust or the grantor of the trust. 5.The grantor and fiduciary, and the fiduciary and beneficiary, of any trust. 6.The fiduciaries or the fiduciaries and beneficiaries of two different trusts if the same person is the grantor of both trusts. 7.Certain educational and charitable organizations and any person (including members of the person's family) who directly or indirectly controls the organization. 8.A partnership and a person who owns directly or indirectly an interest of more than 50% of the partnership's capital or profits. 9.Two partnerships if the same persons directly or indirectly own more than 50% of the capital or profits of each. 10.Two S corporations if the same persons own more than 50% in value of the outstanding stock of each corporation. 11.An S corporation and a corporation that is not an S corporation if the same persons own more than 50% in value of the outstanding stock of each corporation. 12.A corporation and a partnership if the same persons own more than 50% in value of the outstanding stock of the corporation and more than 50% of the capital interest, or profits interest, in the partnership.

Example. Ken Larch is a tailor. He bought two industrial sewing machines from his father. He placed both machines in service in the same year he bought them. They do not qualify for section 179 because Ken and his father are related parties. He cannot claim a section 179 deduction for the cost of these machines.

Property Used for Lodging

The following types of property used predominantly in connection with the furnishing of lodging can qualify as section 179 property:

1.Nonlodging commercial facilities which are available to those who are not using the lodging facilities on the same basis as they are available to those using the lodging facilities. 2.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. 3.Property which is a certified historic structure to the extent of that portion of the basis which is attributable to qualified rehabilitation expenditures. 4.Any energy property.

Energy property. This is property that is:

1.Equipment that uses solar energy to generate electricity, to heat or cool (or provide hot water for use in) a structure, or to provide solar process heat, or 2.Equipment used to produce, distribute, or use energy derived from a geothermal deposit, up to (but not including) the electrical transmission stage.

If you did not construct, reconstruct, or erect the equipment, the original use of the property must begin with you. The property must meet the performance and quality standards, if any, that have been prescribed by Income Tax Regulations and that are in effect at the time you get the property.

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).

Forms and Publications

Electing the Deduction

The section 179 deduction is not automatic. If you want to take the deduction, you must elect to do so. See How To Make the Election, later.

Placed-in-Service Rule

For purposes of the section 179 deduction, your property is treated as placed in service in the tax year it is first made ready and available for a specific use. This use can be in a trade or business, the production of income, a tax-exempt activity, or a personal activity. If you place property in service in a use that does not qualify it for the section 179 deduction, it cannot later qualify in another tax year even if you change it to business use.

Example. Last year, you bought a new car and placed it in service for personal purposes. This year, you began to use it for business. That you changed its use to business use does not qualify the cost of your car for a section 179 deduction this year. However, you can claim a depreciation deduction for the business use of the car this year. To figure the depreciation deduction, see chapter 3.

How To Make the Election

You make the election by taking your deduction on Form 4562. You attach and file Form 4562 with:

1.Your original tax return filed for the tax year the property was placed in service (whether or not you file it timely), or 2.An amended return filed by the due date (including extensions) for your return for the tax year the property was placed in service.

You cannot make an election for the section 179 deduction on an amended return filed after the due date (including extensions).

Revoking an Election

Envelope:

Once you elect a section 179 deduction, you can revoke your election only with IRS consent. The IRS will grant you a consent only in extraordinary circumstances. Requests for consent are subject to a user fee. The fee is $500 if your gross income is less than $150,000; the fee is $3,650, if your gross income is $150,000, or more.

You must file your request for consent with the:

Commissioner of Internal Revenue

Washington D.C. 20224

You must include in the request your name, address, and taxpayer identification number. You or your representative must sign the request. You must attach a statement to the request showing the year and property involved, and you must provide the reasons in detail for your request.

Recordkeeping Requirements

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You must keep records that show the specific identification of each piece of qualifying section 179 property. These records must show how you acquired the property, the person you acquired it from, and when you placed it in service. You cannot change the selection of section 179 property for which you claim a deduction when computing your taxable income for the tax year you make the election or for any later tax years.

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How To Figure the Deduction

Words you may need to know (see Glossary):

•Active conduct of a trade/business •Adjusted basis •Basis •Placed in service

The total business cost you can elect to deduct under section 179 for 1997 cannot be more than $18,000. This $18,000 maximum dollar limit applies to each taxpayer, not to each business. You do not have to claim the full $18,000. You can decide how much of the business cost of your qualifying property you want to deduct under section 179. You may be able to depreciate any cost you do not deduct under section 179. For information on how to figure depreciation, see chapter 3.

If you acquire and place in service more than one item of qualifying property during the year, you can divide the deduction between the items in any way, as long as the total deduction is not more than the limits. If you have only one item of qualifying property and it does not cost more than $18,000, your deduction is limited to the lesser of:

1.Your taxable income from your trade or business (The taxable income limit is discussed later.), or 2.The cost of the item.

You must figure your section 179 deduction before figuring your depreciation deduction.

You must subtract the amount you elect to deduct under section 179 from the business/investment cost of the qualifying property. This result is called your unadjusted basis and is the amount you use to figure any depreciation deduction.

Example. In 1997, you bought a $20,000 forklift and a $1,500 circular saw for your business. You placed both items in service in 1997. You elect to deduct $16,500 for the forklift and the entire $1,500 for the saw, a total of $18,000. This is the maximum dollar limit you can deduct. Your $1,500 deduction for the saw completely recovered its cost. Your unadjusted basis is zero. The unadjusted basis of your forklift is $3,500. You figure this by subtracting the amount of your section 179 deduction, $16,500, from the cost of the forklift, $20,000.

Deduction Limits

Your section 179 deduction cannot be more than the business cost of the qualifying property. In addition, in figuring your section 179 deduction, you must apply the following limits:

1.Maximum dollar limit, 2.Investment limit, and 3.Taxable income limit.

Maximum Dollar Limit

The total cost of section 179 property that you can elect to deduct for 1997 cannot be more than $18,000. This maximum dollar limit is reduced if you go over the investment limit (discussed later) in any tax year.

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The total cost of section 179 property that you can deduct increases as shown below:

Tax YearMaximum Amount Deductible1998$18,500199919,000200020,0002001 - 200224,000After 200225,000

Joint returns. A husband and wife who file a joint return are treated as one taxpayer in determining any reduction to the maximum dollar limit, regardless of which spouse acquired the property or placed it in service.

Married individuals filing separate returns. A husband and wife filing separate returns for a tax year are treated as one taxpayer for the maximum dollar limit and the $200,000 investment limit. Unless they elect otherwise, 50% of the maximum dollar limit (after applying the investment limit) will be allocated to each spouse. If the percentages elected by each spouse do not total 100%, 50% will be allocated to each spouse.

Example 1. Jack Elm is married. He and his wife file separate returns. Jack bought and placed in service $200,000 of qualified farm machinery in 1997. His wife had her own business and she bought and placed in service $5,000 of qualified business equipment. If Mr. and Mrs. Elm had filed a joint return for 1997, their maximum dollar limit would have been $13,000. This is because their $18,000 maximum dollar limit would have been reduced by $5,000 (the excess over the $200,000 investment limit). They elect to allocate $13,000 as follows: $9,750 (75%) to Mr. Elm's machinery and $3,250 (25%) to Mrs. Elm's equipment. If they did not make an election to allocate their costs, they would be limited to the $13,000 multiplied by 50% or $6,500 each on their separate returns.

Joint return after filing separate returns. If a husband and wife elect to file a joint return after the due date for filing the return, the maximum dollar limit on the joint return is the lesser of:

1.The maximum dollar limit (after applying the investment limit), or 2.The total cost of section 179 property they elected to expense on their separate returns.

Example 2. Assume Jack Elm and his wife in Example 1 had filed separate tax returns. On their separate returns, Jack elected to expense $4,000 of section 179 property and his wife elected to expense $2,000. If they subsequently file a joint return after the due date for that return, their maximum dollar limit for section 179 is $6,000, the lesser of $13,000 (the maximum dollar limit after applying the investment limit), or $6,000 the total amount they elected to expense on their separate returns).

Increased section 179 deduction for enterprise zone businesses. The maximum deduction for section 179 property that is "qualified zone property" is increased to $38,000 for "enterprise zone businesses."

Qualified zone property. Depreciable tangible property (including buildings), is qualified zone property if:

1.It is acquired (but not from a related party) after the zone designation is in effect, 2.Its original use in an empowerment zone begins with the person claiming the deduction, and 3.Substantially all of the property's use is in an empowerment zone and in the active conduct of a qualified trade or business in the zone.

Used property may be qualified zone property if it has not previously been used within an empowerment zone.

If property is substantially renovated by the person claiming the deduction, 1) and 2) above do not apply. Property has been substantially renovated if, during any 24-month period after the designation takes effect, the additions to the basis of the property are more than the greater of:

1.100% of the adjusted basis at the beginning of the 24-month period, or 2.$5,000.

Property used in developable parcels. Beginning August 5, 1997, qualified zone property does not include certain property used in some developable noncontiguous parcels. This rule applies to property to which all of the following apply.

1.Substantially all the use of the property is in a noncontiguous parcel. 2.The parcel is one that:

a.Could be developed for commercial or industrial purposes, and b.Was included in the empowerment zone under an exception for developable noncontiguous parcels that allowed it to be excluded from the poverty rate requirement.

Definition of an enterprise zone business. A corporation, partnership, or sole proprietorship is an enterprise zone business if for the tax year:

1.Every trade or business of a corporation or partnership is the active conduct of a "qualified business" within an empowerment zone. (This rule does not apply to sole proprietorships.) 2.At least 50% (80% for tax years beginning before August 5, 1997) of the total gross income is from the active conduct of a "qualified business" within a zone. 3.A substantial portion of the use of its tangible property is within a zone. (For tax years beginning before August 5, 1997, substantially all of the use of its tangible property must be within a zone.) 4.A substantial portion of its intangible property is used in the active conduct of the business. (For tax years beginning before August 5, 1997, substantially all of its intangible property is used in, and exclusively related to, the active conduct of the business.) 5.A substantial portion of the employee's services are performed within a zone. For tax years beginning before August 5, 1997, substantially all of the employees' services are performed within a zone. 6.At least 35% of the employees are residents of an empowerment zone. 7.Less than 5% of the average total unadjusted bases of the property owned by the business is certain financial property. 8.Less than 5% of the average total unadjusted bases of the property owned by the business is collectibles not held primarily for sale to customers.

For a sole proprietorship, the term "employee" in 5) and 6) includes the proprietor.

Investment Limit

For each dollar of your business cost over $200,000 for section 179 property placed in service in 1997, reduce the maximum dollar limit by one dollar (but not below zero). If your business cost of section 179 property placed in service during a tax year is $218,000 or more, you cannot take a section 179 deduction and you are not allowed to carry over the cost that is more than $218,000.

Example. In 1997, Jane Ash placed in service machinery costing $207,000. Because this cost is $7,000 more than $200,000, she must reduce her maximum dollar limit of $18,000 by $7,000. If her taxable income is at least $11,000 or more, she can claim an $11,000 section 179 deduction for this year.

Taxable Income Limit

The total cost that you can deduct each year is limited to the taxable income from the active conduct of any trade or business during the tax year. 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.

Figure taxable income for this purpose by totaling the net income (or loss) from all trades and businesses you actively conducted during the tax year. Items of income derived from a trade or business actively conducted by you include section 1231 gains (or losses) and interest from working capital of your trade or business. Also include in total taxable income any wages, salaries, tips, or other pay earned as an employee. When figuring taxable income, do not take into account any unreimbursed employee business expenses you may have as an employee.

In addition, figure taxable income without regard to:

1.The section 179 deduction, 2.The self-employment tax deduction, and 3.Any net operating loss carryback or carryforward.

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Any cost that is not deductible in one tax year under section 179 because of this limit can be carried to the next tax year.

Section 1231 gains and losses. Any recognized gains or losses from the following types of transactions are section 1231 gains or losses:

1.The sale or exchange of real property or depreciable personal property you used in a trade or business if you held it for more than 1 year, 2.The sale or exchange of cattle or horses you held for draft, breeding, dairy, or sporting purposes if you held them for 2 years or more, 3.The sale or exchange of livestock (other than cattle, horses, and poultry) you held for draft, breeding, dairy, or sporting purposes if you held it for 1 year or more, 4.The sale, exchange, or involuntary conversion of unharvested crops on land you used in farming if you sold, exchanged, or had to involuntarily convert the crop and land at the same time and to the same person and you held the land for more than 1 year, 5.The cutting of timber for sale or for use in your trade or business if you meet both of the following requirements:

a.You elect to treat the cutting as a sale or exchange. b.You either owned the timber for more than 1 year or held a contract right to cut the timber for more than 1 year.

6.The disposal of timber held for more than 1 year under a cutting contract if you treat the disposal as a sale or exchange and you retain an economic interest in the timber. 7.The disposal of coal (including lignite) or iron ore (mined in the United States) you owned for more than 1 year under a contract in which you retain an economic interest in the coal or iron ore.

For more information about section 1231 gains and losses, see chapter 4 in Publication 544.

Two different taxable income limits. The section 179 deduction is subject to a taxable income limit. You also may have to figure another deduction that has a limit based on taxable income. You may have to figure the limit for this other deduction taking into account the section 179 deduction. If so, complete the steps discussed next.

•Step 1- Figure taxable income without either a section 179 deduction or the other deduction. •Step 2- Figure a hypothetical section 179 deduction using the taxable income figured in Step 1. •Step 3- Subtract the hypothetical section 179 deduction figured in Step 2 from the taxable income figured in Step 1. •Step 4- Figure a hypothetical amount for the other deduction using the amount figured in Step 3 as taxable income. •Step 5- Subtract the hypothetical other deduction figured in Step 4 from the taxable income figured in Step 1. •Step 6- Now figure your actual section 179 deduction using the taxable income figured in Step 5. •Step 7- Subtract your actual section 179 deduction figured in Step 6 from the taxable income figured in Step 1. •Step 8- Figure your actual other deduction using the taxable income figured in Step 7.

Example. XYZ is a corporation. During the tax year, the corporation purchased and placed in service qualifying section 179 property that cost $10,000. It elects to expense as much as possible under section 179. The XYZ corporation also gave a charitable contribution of $1,000 during the tax year. A corporation's deduction for charitable contributions cannot be more than 10% of its taxable income, figured after subtracting any section 179 deduction. The taxable income limit for the section 179 deduction is figured after subtracting any allowable charitable contributions. XYZ's taxable income figured without taking into account either any section 179 deduction or any deduction for the charitable contributions is $12,000. XYZ figures its section 179 deduction and its deduction for charitable contributions as follows:

•Step 1- Taxable income figured without either deduction is $12,000. •Step 2- Using $12,000 as taxable income, a hypothetical section 179 deduction of $10,000 would be allowable. •Step 3- $12,000 (from Step 1) minus $10,000 (from Step 2) equals $2,000. •Step 4- Using $2,000 (from Step 3) as taxable income, a hypothetical charitable contribution (limited to 10% of taxable income) of $200 is figured. •Step 5- $12,000 (from Step 1) minus $200 (from Step 5) equals $11,800. •Step 6- Using $11,800 (from Step 5) as taxable income, the actual section 179 deduction is figured. Because the taxable income is at least $10,000, XYZ can take a $10,000 section 179 deduction. •Step 7- $12,000 (from Step 1) minus $10,000 (from Step 6) equals $2,000. •Step 8- Using $2,000 (from Step 7) as taxable income, the actual charitable contribution (limited to 10% of taxable income) of $200 is figured.

Carryover of disallowed deduction. The amount you carry over will be taken into account in determining your section 179 deduction in the next tax year. In the tax year you place property in service, you can select the properties for which costs will be carried forward. You can allocate the portion of the costs to these properties provided your decisions are shown in your books and records.

If you do not make a selection, the total carryover will be allocated equally among the properties you elected to expense for the tax year. If you can deduct all or a portion of your total carryover in a subsequent year, you must deduct the costs being carried from the earliest tax year first.

Basis adjustment. Generally upon a sale or other disposition of section 179 property, or a transfer of section 179 property involving a transaction in which gain or loss is not recognized in whole or in part (including transfers at death), the adjusted basis of the property is increased before the sale or other disposition by the amount of disallowed section 179 deduction.

Neither the old nor the new owner can deduct any of the disallowed amount that is added to the basis of the property.

Partnerships and Partners

The section 179 deduction limits apply to both the partnership and to each partner. The partnership determines its section 179 deduction subject to the limits. It allocates the deduction among its partners.

Each partner adds the amount allocated from the partnership as shown on Schedule K-1 to his or her other nonpartnership business section 179 costs. Next the partner applies the maximum dollar limit to this total. This allows the partner to figure his or her section 179 deduction. To determine if a partner has passed the $200,000 investment limit, the business cost of section 179 property placed in service by the partnership is not attributed to any partner. The total amount of each partner's (partnership and nonpartnership) section 179 deduction is subject to both the taxable income limit and the maximum dollar limit.

Figuring taxable income for a partnership. To figure taxable income (or loss) from the active conduct by a partnership of any trade or business, total the net income (or loss) from all trades or businesses actively conducted by the partnership during the tax year. To determine the total amount of partnership items, treat deductions and losses as negative income. See Publication 541 for information on how to figure partnership net income (or loss).

Partner's share of partnership taxable income. For purposes of section 179, if you are a partner engaged in the active conduct of one or more of a partnership's trades or businesses, you include some of the partnership's taxable income as your taxable income from the active conduct of a trade or business. You include your allocable share of taxable income derived from the partnership's active conduct of any trade or business.

For purposes of section 179, if the tax year of you and the partnership differ, the amount of the partnership's taxable income attributable to you for a tax year is determined by the partnership tax year that ends with or within your tax year.

Example. John Oak and James Oak are equal partners in Oak Company. Oak Company uses a tax year ending January 31. John and James both use a tax year ending December 31. For Oak Company's tax year ending January 31, 1997, it has taxable income from the active conduct of its trade or business of $80,000, of which $70,000 was earned during 1996. John and James each include $40,000 of partnership taxable income in computing their taxable income limit.

Basis adjustment. You must reduce the basis of your partnership interest by the total amount of section 179 expenses allocated from the partnership regardless of whether you can currently deduct the full amount of allocated section 179 expense. If you dispose of your interest in a partnership, your basis for determining gain or loss is increased by any outstanding carryover of disallowed deduction of section 179 expenses allocated from the partnership.

The basis of a partnership's section 179 property must be reduced by the section 179 deduction elected by the partnership. 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.

Example. In 1997, Beech Partnership placed in service section 179 property with a total business cost of $204,000. The partnership's taxable income for the year was $30,000. The partnership must reduce its maximum dollar limit ($18,000) by $4,000 ($204,000 - $200,000). The maximum section 179 deduction for the partnership is $14,000. The partnership allocates this $14,000 equally to its two partners, Ann and Dean.

Ann had no other section 179 property placed in service this year. In addition to being a partner in the Beech Partnership, she also operates a business as a sole proprietorship. This business has taxable income of more than $7,000. She can claim the $7,000 allocated to her by Beech as a section 179 deduction.

In addition to being a partner in Beech Partnership, Dean also operates a business as a sole proprietorship. This year he placed $15,500 of qualifying section 179 property in service in his sole proprietorship business. This business had taxable income of $20,000. He is also a partner in the Cedar Partnership, which allocated him a section 179 amount of $7,000. Because he has a total section 179 deduction allocated from the partnerships of $14,000 ($7,000 from Beech and $7,000 from Cedar), he can elect a section 179 deduction of only $4,000 for the property from his sole proprietorship because his maximum section 179 deduction is $18,000.

S Corporations

The rules that apply to a partnership and its partners also apply to an S corporation and its shareholders. The limits apply to an S corporation and to each shareholder. The corporation allocates the deduction to the shareholders who then take their section 179 deduction subject to the limits.

Figuring taxable income for an S corporation. To figure taxable income (or loss) from the active conduct by an S corporation of any trade or business, you add up the net income (or loss) from all trades or businesses actively conducted by the S corporation during the tax year.

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. However, you do not take into account any credits, tax-exempt income, and deductions for compensation paid to shareholder-employees. For purposes of determining the total amount of S corporation items, deductions and losses are treated as negative income. When figuring the amount of each item, disregard any limits that must be taken into account when figuring a shareholder's taxable income.

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:

1.It is figured before deducting any net operating loss deduction, or special deductions (as reported on the corporation's income tax return). 2.It is adjusted for items of income or deduction that were not derived from a trade or business actively conducted by the corporation during the tax year.

Passenger automobiles. For passenger automobiles placed in service in 1997, the total of the section 179 and depreciation deductions cannot be more than $3,160 for 1997. For more information, see Special Rule for Passenger Automobiles, later.

Section 179 Worksheet

We designed the following worksheet to help you figure your section 179 deduction and carryover. It takes into account the limits discussed (except for the limit on passenger automobiles). However, to make the election to expense under section 179, you must complete and attach a Form 4562 to your return.

<Picture: Due Date: >Section 179 Deduction Worksheet Step 1: Maximum dollar limit   $18,000 Step 2: Enter total business cost of all qualifying property placed in service in tax year.$         Note. If Step 2 is $218,000 or more, you cannot elect section 179 for this year. Step 3: Threshold cost of section 179 property.  $200,000 Step 4: Subtract Step 3 from Step 2. If Step 2 is less than Step 3, enter -0-. $         Step 5: Subtract Step 4 from Step 1. This is your reduced maximum dollar limit. If Step 1 is less than Step 4, enter -0-. $         Step 6: Enter amount you elect to expense under section 179. (Do not enter more than Step 2.). $         Step 7: Enter the smaller of Step 5 or Step 6. This is your tentative deduction. $         Step 8: Enter any section 179 carryover from prior years. $         Step 9: Enter the smaller of your 1997 taxable income limit or the Step 5 amount. $         Step 10: Add Step 7 and Step 8. Do not enter more than your Step 9 amount. (No more than $3,160 can be entered on this line for a passenger automobile.) This is your 1997 section 179 deduction. $         Carryover to 1998: Step 11: Add Steps 7 and 8.$         Step 12: Enter Step 10 amount. $         Step 13: Subtract Step 12 from Step 11. This is your carryover to 1998. $         

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Section 179 Recapture

Section 179 recapture occurs when you add back to income the section 179 deduction you took in an earlier year.

When To Recapture the Deduction

If you claim a section 179 deduction for the cost of property and, in a year after you place the property in service, you do not use it predominantly for business, you may have to recapture part of the section 179 deduction. This can occur in any tax year during the recovery period for the property. Recovery periods for property are discussed later in Property Classes and Recovery Periods under How To Figure the Deduction Using Percentage Tables in chapter 3.

If you elect a section 179 deduction, treat the amount deducted as depreciation for purposes of the recapture rules. You may have to treat any gain you realize from a sale, exchange or other disposition of the property as ordinary income up to the section 179 and depreciation deductions you claimed. Ordinary income is income that is entirely taxable.

Report any recapture of the section 179 deduction on Form 4797.

How To Figure the Recapture

To figure the amount to recapture (include in income), subtract the depreciation that would have been allowable on the section 179 amount for prior tax years and the tax year of recapture from the section 179 deduction claimed.

The section 179 amount is the part of the cost deducted under section 179.

Example 1. Shirley Butler, a calendar year taxpayer, bought and placed in service in her business on February 12, 1995, an item of 3-year property costing $5,000. She elected a section 179 deduction of $5,000 for the property. Since she deducted the full cost of the property in 1995, she cannot claim any depreciation for it in 1995. She used the property in her business for all of 1996.

For all of 1997, Shirley used the property only for personal use. Because of the change from business to personal use, she must recapture the benefit she got from the section 179 deduction claimed in 1995. Shirley figures her recapture amount as follows:

Section 179 deduction claimed (1995) $5,000.00 Allowable depreciation (instead of Section 179): 1995 -- $5,000 × 33.33%* $1,666.50 1996 -- $5,000 × 44.45%*  2,222.50  3,889.00 1997 -- Recapture amount $1,111.00 *Rates from Table A-1 (3-Year Property)

She must include $1,111 in income for the 1997 tax year. This is $5,000 (the amount claimed in 1995 as a section 179 deduction) minus $3,889 (the depreciation that would have been allowable in 1995 and 1996). Because she did not use the property for business or investment purposes in 1997, she cannot claim any depreciation for 1997.

Example 2. Paul Lamb, a calendar year taxpayer, bought and placed in service on August 1, 1995, an item of 3-year property costing $10,000. The property is not listed property. He used the property only for business in 1995 and 1996. He elected a section 179 deduction of $5,000 for it. During 1997, he used the property 40% for business and 60% for personal use. He figures his recapture amount as follows:

Section 179 deduction claimed (1995) $5,000.00 Allowable depreciation (instead of section 179): 1995 -- $5,000 × 33.33%* $1,666.50 1996 -- $5,000 × 44.45%* 2,222.50 1997 -- $5,000 × 14.81%* × 40% (business)    296.20  4,185.20 1997 -- Recapture amount  $ 814.80 *Rates from Table A-1 (3-Year Property)

Paul must include $814.80 in income for 1997. This is $5,000 - $4,185.20 ($1,666.50 + $2,222.50 + $296.20).

Dispositions. If you elect the section 179 deduction, you must treat the amount deducted as depreciation for purposes of the depreciation recapture rules. You must treat any gain you realize on a disposition of your property as ordinary income up to the total of the section 179 and depreciation deductions taken. See Section 1245 Property in Publication 544.

Installment sales. If you sell qualifying property under the installment method, you must generally include as ordinary income in the year of sale any depreciation recapture up to the amount of gain even if you receive no payments in the year of sale. See Publication 537.

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Section 197 Intangibles

You must amortize over 15 years the capitalized costs of "section 197 intangibles" you acquired after August 10, 1993. These costs are defined later. You must amortize these costs if you hold the section 197 intangibles in connection with your trade or business or in an activity engaged in for the production of income. Your deduction each year is the part of the adjusted basis (for purposes of determining gain) of the intangible amortized ratably over a 15-year period, beginning with the month acquired. You are not allowed any other depreciation or amortization deduction for a section 197 intangible.

Section 197 Intangibles Defined

The following assets are section 197 intangibles:

1.Goodwill, 2.Going concern value, 3.Workforce in place, including its composition and terms and conditions (contractual or otherwise) of its employment, 4.Business books and records, operating systems, or any other information base including lists or other information concerning current or prospective customers, 5.A patent, copyright, formula, process, design, pattern, know-how, format, or similar item, 6.A customer-based intangible, 7.A supplier-based intangible, 8.Any item similar to items 3 through 7, 9.A license, permit, or other right granted by a governmental unit or agency (including renewals), 10.A covenant not to compete entered into in connection with the acquisition of an interest in a trade or business, and 11.A franchise, trademark, or trade name (including renewals).

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You cannot amortize any of the intangibles listed in items 1) through 8) that you created, unless you created them in connection with the acquisition of assets constituting a trade or business or a substantial part of a trade or business.

Goodwill. Goodwill is the value of a trade or business based on expected continued customer patronage due to the name or the reputation of a trade or business or any other factor.

Going concern value. Going concern value is the additional value of a trade or business attached to property because it is an integral part of a going concern. It includes value based on the ability of a business to continue to function and generate income even though there is a change in ownership.

Workforce in place, etc. This includes the composition of a workforce (for example, its experience, education, or training). It also includes the terms and conditions of employment, whether contractual or otherwise, and any other value placed on employees or any of their attributes.

For example, you must amortize the part of a purchase price of a trade or business based on the existence of a highly skilled workforce. You must also amortize the cost of acquiring an existing employment contract or relationship with employees or consultants as part of the acquisition of a trade or business.

Business books and records, etc. This includes the cost of technical manuals, training manuals or programs, data files, and accounting or inventory control systems. It also includes the cost of customer lists, subscription lists, insurance expirations, patient or client files, and lists of newspaper, magazine, radio, or television advertisers.

Patents, copyrights, etc. This category includes package designs, computer software, and any interest in a film, sound recording, videotape, book, or other similar property, except as discussed later under Other Intangibles.

Customer-based intangible. A customer-based intangible is the composition of market, market share, and any other value resulting from the future provision of goods or services because of relationships with customers in the ordinary course of business. You must amortize part of the purchase price of a trade or business for a:

1.Customer base, 2.Circulation base, 3.Undeveloped market or market growth, 4.Insurance in force, 5.Mortgage servicing contract, 6.Investment management contract, or 7.Relationship with customers that involves the future provision of goods or services.

Accounts receivable or other similar rights to income for goods or services provided to customers before the acquisition of that trade or business are not section 197 intangibles.

Supplier-based intangible. A supplier-based intangible is the value resulting from the future acquisition of goods or services because of relationships in the ordinary course of business with suppliers of goods or services. These goods and services must be used or sold by the business.

For example, you must amortize the part of the purchase price of a trade or business that is based on the existence of a favorable:

1.Relationship with distributors (such as favorable shelf or display space at a retail outlet), 2.Credit rating, or 3.Supply contract.

Government-granted license, permit, etc. Any license, permit, or other right granted by a governmental unit or an agency or instrumentality of a governmental unit is a section 197 intangible. For example, you must amortize the capitalized costs of acquiring (including issuing or renewing) a liquor license, a taxicab medallion or license, or a television or radio broadcasting license.

Covenant not to compete. A covenant not to compete (or similar arrangement) entered into in connection with the acquisition of an interest in a trade or business interest is a section 197 intangible. An interest in a trade or business includes an interest in a partnership or stock in a corporation engaged in a trade or business.

If you pay or incur an amount under a covenant not to compete (or similar arrangement) after the year in which you entered into the covenant (or similar arrangement), you must amortize that amount over the months remaining in the 15-year amortization period.

You cannot amortize amounts paid under a covenant not to compete (or similar arrangement) that represent additional consideration for the purchase of stock in a corporation. You must add them to the basis of the acquired stock.

Franchise, trademark, or trade name. A franchise, trademark, or trade name is a section 197 intangible. You can deduct amounts paid or incurred on the transfer of a franchise, trademark, or trade name if all of the following apply to the payments:

1.Contingent on the productivity, use, or disposition of the franchise, trademark, or trade name, 2.Part of a series of payments payable at least annually throughout the term of the transfer agreement, and 3.Substantially equal in amount or payable under a fixed formula.

You must amortize any other amount, whether fixed or contingent that you paid or incurred because of the transfer of a franchise, trademark, or trade name.

Other Intangibles

The following assets are not section 197 intangibles:

1.Any interest in a corporation, partnership, trust or estate, 2.Any interest under an existing futures contract, foreign currency contract, notional principal contract, or similar financial contract, 3.Any interest in land, 4.Most computer software (see Computer software defined, later), 5.Any of the following not acquired in connection with the acquisition of a trade or business or a substantial part of a trade or business:

a.An interest in a film, sound recording, videotape, book, or similar property, b.A right to receive tangible property or services under a contract or granted by a governmental agency, c.An interest in a patent or copyright, d.A right under a contract (or a right granted by a governmental agency) if the right:

1.Has a fixed life of less than 15 years, or 2.Is of a fixed amount that, except for the section 197 intangible provisions, would be recoverable under a method similar to the unit-of-production method of cost recovery.

6.An interest under:

a.An existing lease or sublease of tangible property, b.A debt that was in existence when the interest was acquired,

7.A sports franchise, 8.A right to service residential mortgages unless the right is acquired in the acquisition of a trade or business or a substantial part of a trade or business, and 9.Certain transaction costs under a corporate organization or reorganization in which any part of a gain or loss is not recognized.

Computer software. Section 197 intangibles do not include computer software that is:

1.Readily available for purchase by the general public, 2.Subject to a nonexclusive license, 3.Not substantially changed, and 4.Not acquired in the acquisition of a substantial part of a business.

If you are allowed to depreciate any computer software that is not a section 197 intangible, use the straight line method with a useful life of 36 months.

For more information on depreciation of computer software, see Publication 946.

Computer software defined. Computer software includes all programs designed to cause a computer to perform a desired function. It also includes any database or similar item in the public domain and incidental to the operation of qualifying software.

Costs associated with nonsection 197 intangibles. Amounts you take into account in determining the cost of non-section 197 property are not considered section 197 intangibles. These amounts are added to the basis of the real property. For example, none of the costs of acquiring real property held for the production of rental income are considered goodwill, going concern value, or any other section 197 intangible.

Disposition of Section 197 Intangibles

A section 197 intangible is treated as depreciable property used in your trade or business. If you dispose of property held for more than one year, any gain on the disposition, up to the amount of allowable amortization, is ordinary income (section 1245 gain). Any remaining gain, or loss, is a section 1231 gain or loss. If you held the property one year or less, any gain or loss on its disposition is an ordinary gain or loss. For more information on ordinary or capital gain or loss, see chapter 2 in Publication 544, Sales and Other Dispositions of Assets.

If you acquire more than one section 197 intangible in a transaction (or series of related transactions) and later dispose of one of them or if one of them becomes worthless, you cannot recognize any loss on the intangible. Instead increase the adjusted basis of each remaining amortizable section 197 intangible by part of the loss not recognized. Figure the increase by multiplying the loss not recognized on the disposition by a fraction:

•The numerator is the adjusted basis of that remaining intangible as of the date of its disposition, and •The denominator is the total adjusted basis of all retained amortizable section 197 intangibles as of the date of the disposition.

Covenant not to compete. A covenant not to compete or similar arrangement is not considered disposed of or worthless before you dispose of your entire interest in the trade or business for which you entered into the covenant.

Nonrecognition transfers. If you dispose of one section 197 intangible and acquire another section 197 intangible in a nonrecognition transfer, treat the part of the adjusted basis of the acquired intangible that is not more than the adjusted basis of the transferred intangible as the transferred section 197 intangible. This includes your continuing to amortize the part of the adjusted basis treated as the transferred section 197 intangible over its remaining amortization period. Nonrecognition transfers include transfers to a corporation, partnership contributions and distributions, like-kind exchanges, and involuntary conversions.

Example. You own a section 197 intangible you have amortized for 4 full years. It has a remaining unamortized basis of $30,000. You exchange the asset plus $10,000 for a like-kind section 197 intangible. The nonrecognition provisions of like-kind exchanges apply. You amortize $30,000 of the basis of the acquired section 197 intangible over the 11 years remaining in the original 15-year amortization period for the transferred asset and the other $10,000 of adjusted basis over 15 years.

Anti-Churning Rules

You cannot amortize certain section 197 intangibles over 15 years. Special rules prevent you from converting section 197 intangibles from property that does not qualify for amortization to property that would qualify for amortization.

You cannot use 15-year amortization for goodwill, going concern value, or any intangible for which you cannot claim a depreciation deduction and for which an amortization deduction is only allowable under section 197 if:

1.You acquired the goodwill, going concern value, or other intangible after August 10, 1993, and 2.Any of the following conditions apply:

a.You or a related person (defined later) held or used the intangible at any time from July 25, 1991, through August 10, 1993, b.You acquired the intangible from a person who held the intangible at any time from July 25, 1991, through August 10, 1993, and as part of the transaction, the user does not change, or c.You grant the right to use the intangible to a person (or a person related to that person) who held or used the intangible at any time from July 25, 1991, through August 10, 1993.

Exception. The anti-churning rules do not apply to an intangible acquired from a decedent if the property's basis is stepped up to fair market value.

Related person. For purposes of the anti-churning rules related persons are:

1.Members of a family, including only brothers, sisters, half-brothers, half-sisters, spouse, ancestors (parents, grandparents, etc.), and lineal descendants (children, grandchildren, etc.). 2.An individual and a corporation when the individual owns, directly or indirectly, more than 20% in value of the corporation's outstanding stock. 3.Two corporations that are members of the same controlled group as defined in section 1563(a) of the Internal Revenue Code, except that "more than 20% " is substituted for "at least 80%" in that definition and the determination is made without regard to subsection (a)(4) and (e)(3)(C) of section 1563. 4.A trust fiduciary and a corporation when the trust or grantor of the trust owns, directly or indirectly, more than 20% in value of the corporation's outstanding stock. 5.A grantor and fiduciary, and the fiduciary and beneficiary, of any trust. 6.Fiduciaries of two different trusts, and the fiduciary and beneficiary of two different trusts, if the same person is the grantor of both trusts. 7.A tax-exempt educational or charitable organization and a person who, directly or indirectly, controls the organization, or a member of that person's family. 8.A corporation and a partnership if the same persons own more than 20% in value of the outstanding stock of the corporation and more than 20% of the capital or profits interest in the partnership. 9.Two S corporations if the same persons own more than 20% in value of the outstanding stock of each corporation. 10.Two corporations, one of which is an S corporation, if the same persons own more than 20% in value of the outstanding stock of each corporation. 11.Two partnerships if the same persons own, directly or indirectly, more than 20% of the capital or the profits interests in both partnerships. 12.A person and a partnership when the person owns, directly or indirectly, more than 20% of the capital or profits interests in the partnership.

Treat these persons as related to you if the relationship exists immediately before or immediately after you acquire the intangible.

Ownership of stock. In determining whether an individual owns, directly or indirectly, any of the outstanding stock of a corporation, the following rules apply.

Rule 1. Stock owned, directly or indirectly, by or for a corporation, partnership, estate, or trust is considered owned proportionately by or for its shareholders, partners, or beneficiaries.

Rule 2. An individual is considered as owning the stock owned, directly or indirectly, by or for his or her family. Family includes only brothers and sisters, half-brothers and half-sisters, spouse, ancestors, and lineal descendants.

Rule 3. An individual owning (other than by applying rule 2) any stock in a corporation is considered to own the stock owned, directly or indirectly, by or for his or her partner.

Rule 4. For purposes of applying rule 1, 2, or 3, treat stock constructively owned by a person under rule 1 as actually owned by that person. Do not treat stock constructively owned by an individual under rules 2 or 3 as owned by the individual for reapplying rule 2 or 3 to make another person the constructive owner of the stock.

Exception. An exception to the anti-churning rules applies if you acquire an intangible from a person related to you by more than 20%, but not more than 50%, under the following conditions:

1.The seller recognizes gain on the disposition of the intangible, and 2.The tax the seller pays on the gain plus any other federal income tax imposed on the gain equals tax on the gain at the highest tax rate.

If this exception applies, the anti-churning rules apply only to the amount of your adjusted basis in the intangible that is more than the gain recognized by the seller.

Note. The seller reports any additional tax under this exception on line 39 of the seller's Form 1040. On the dotted line next to line 39, the seller should also write "197."

Anti-abuse rule. You cannot amortize any section 197 intangible acquired in a transaction in which one of the principal purposes was to:

1.Avoid the requirement that the intangible be acquired after August 10, 1993, or 2.Avoid any of the anti-churning rules.

Incorrect Amount of Amortization Deducted

If you did not deduct the correct amount of amortization for a section 197 intangible in any year, you may be able to make a correction for that year by filing an amended return. See Amended Return, later. If you are not allowed to make the correction on an amended return, you can change your accounting method to claim the correct amount of amortization. See Changing Your Accounting Method, later.

Basis adjustment. Even if you do not claim amortization you are entitled to deduct, you must reduce the basis of the section 197 intangible by the full amount of amortization you were entitled to deduct. If you deduct more amortization than you should, you must decrease your basis by any amount deducted from which you received a tax benefit.

Amended Return

If you did not deduct the correct amount of amortization, you can file an amended return to make any of the following three corrections.

1.To correct a mathematical error made in any year. 2.To correct a posting error made in any year. 3.To correct the amount of amortization for section 197 intangibles for which you have not adopted a method of accounting. See Changing Your Accounting Method, later.

If you did not deduct the correct amount of amortization for the section 197 intangible on two or more consecutively filed tax returns, you have adopted a method of accounting for that property. If you have adopted a method of accounting, you cannot change the method by filing amended returns.

If an amended return is allowed, you must file it by the later of:

1.3 years from the date you filed your original return for the year in which you did not deduct the correct amount, or 2.2 years from the time you paid your tax for that year.

A return filed early is considered filed on the due date.

Changing Your Accounting Method

If you did not deduct the correct amount of amortization for the section 197 intangible on any two or more consecutively filed tax returns, you have adopted a method of accounting for that property. You can change your method of accounting for amortization to claim the correct amount of amortization. You will then be able to take into account any unclaimed or excess amortization from years before the year of change.

Consent required. You must have the consent of the Commissioner of Internal Revenue to change your method of accounting. You can get the Commissioner's consent by following the instructions in Revenue Procedure 97-27 which is in Internal Revenue Bulletin (IRB) 1997-21. Internal Revenue Bulletins are available at many libraries and IRS offices. To get the consent, you must file Form 3115 requesting a change to a permissible method of accounting for amortization. You cannot use Revenue Procedure 97-27 to correct any mathematical or posting error. See Amended Return, earlier.

In some instances, you can receive automatic consent from the Commissioner to change your method of accounting. See Automatic consent, next.

Automatic consent. You may be able to obtain automatic consent from the Commissioner if you deducted less than the allowable amount of amortization for the section 197 intangible in at least two years immediately preceding the year of change. Instead of following the instructions in Revenue Procedure 97-27, you can receive an automatic consent by following the instructions in Revenue Procedure 97-37 and section 2.01 of the Appendix of Revenue Procedure 97-37, which are in Internal Revenue Bulletin (IRB) 1997-33. This will enable you to change your accounting method to take into account previously unclaimed allowable amortization. To get the consent, you must file Form 3115 requesting a change to a permissible method of accounting for amortization.

You generally can use this procedure for property that meets all of the following three conditions.

1.It is property for which you compute amortization under section 197 of the Internal Revenue Code. 2.It is property for which, under your present accounting method, you claimed less than the amount of amortization allowable in at least the two years immediately preceding the year of change. (The year of change is the year you designate on the Form 3115 and for which you have timely filed the Form 3115.) 3.It is property you owned at the beginning of the year of change.

Exceptions. You generally cannot use the automatic consent procedure if any of the exceptions listed in section 2.01(2)(b) of the Appendix of Revenue Procedure 97-37 apply.

Other restrictions. You generally cannot use the automatic consent procedure under any of the following situations.

1.You are under examination. 2.You are before a federal court or an appeals office for any income tax issue and the method of accounting for amortization to be changed is an issue under consideration by the federal court or appeals office. 3.You are correcting a mathematical or posting error. See Amended Return, discussed earlier. 4.During the four years before the year of change, you changed the same method of accounting for amortization (with or without obtaining the consent of the Commissioner). 5.During the four years before the year of change, you filed a Form 3115 to change the same method of accounting for amortization but did not make the change because the Form 3115 was withdrawn, not perfected, denied, or not granted.

More information. For more information on how to get this automatic consent to change your method of accounting in order to claim previously unclaimed allowable amortization and when you cannot use it, see Revenue Procedure 97-37 and section 2.01 of the Appendix of Revenue Procedure 97-37, Internal Revenue Bulletin 1997-33.

Recapture of Amortization

Amortization you claim on section 197 property is subject to the recapture rules of section 1245 of the Internal Revenue Code. For more information on these rules, see chapter 4 in Publication 544.