February 7, 2011

Treatment of Section 179 Expense Under New Legislation

By Cesar Estrada, Senior Manager, Tax & Business

Related Service Tax & Business

Treatment of Section 179 Expense Under New Legislation Tax & Business

During September 2010, the President signed The 2010 Small Business Jobs Act which increased the Code Section 179 dollar and investment limits to $500,000 and $2 million, respectively, for tax years beginning in 2010 and 2011. The 2010 Tax Relief Act, signed into law during December 2010, reduces the Section 179 expense deduction to $125,000 for the dollar limit and to $500,000 for the investment limit for tax years beginning in 2012.

The 2010 Small Business Jobs Act further expanded Code Section 179 to include certain qualified real property. The maximum amount, with respect to real property that may be expensed, however, is capped at $250,000. Qualified real property is defined as:

  1. qualified leasehold improvement placed in service in a tax year beginning in 2010 or 2011;
  2. qualified restaurant property (i.e., restaurant buildings and improvements to restaurants) placed in service in a tax year beginning in 2010 or 2011; and
  3. qualified retail improvement property as placed in service in a tax year beginning in 2010 or 2011.

Under a special rule for qualified real property, the amount of a carryforward that it attributable to qualified real property may not be carried forward to a tax year that begins after 2011. If a carryforward attributable to qualified real property is disallowed, then the Internal Revenue Code is applied as if the election to expense the qualified real property had not been made with respect to the disallowed amount. If the carryover is attributable to qualified real property placed in service in any tax year other than the taxpayer’s last tax year beginning in 2011, the taxpayer is treated as having placed property in service on the first day of the taxpayer’s last tax year beginning in 2011.

For purposes of applying the special carryforward rules that apply to qualified real property placed in service in 2010 and 2011 and the general rules for determining the amount of a Section 179 expense election that is disallowed and carried forward, the total carryforward for a tax year is allocated pro rata between the qualified real property and all other Section 179 property.