IRS Clarifies Rules for Qualified Real Property Expensed Under Section 179; Amended Returns May Be in Order (Parker Tax Publishing: September 28, 2013)

The IRS issued guidance clarifying several issues that have arisen regarding the election to expense qualified real property under Code Sec. 179 and explaining procedures for filing amended returns, if necessary. Notice 2013-59.

For years 2010 through 2013, special rules allow for the expensing of qualified real property. Several issues have arisen as a result of these special rules. Originally, the election was only for tax years beginning in 2010 and 2011. However, the American Taxpayer Relief Act of 2012 (ATRA) retroactively extended the election to 2012 and 2013. In Notice 2013-59, the IRS gives practical guidance on how to prepare a tax return when certain issues relating to this election arise, such as recapture issues, as well as information on filing amended returns to take advantage of the special rules for expensing qualified real property.

If tax returns have already been filed for years 2010, 2011, and 2012, and a taxpayer could have taken advantage of the expensing provision for qualified real property in one of those years, the taxpayer can file an amended federal tax return for that tax year in accordance with procedures similar to those in Reg. Sec. 1.179-5(c)(2) and Rev. Proc. 2008-54, Section 7.

Alternatively, if the taxpayer filed prior returns and expensed amounts under Code Sec. 179(a) for property other than qualified real property, the taxpayer can increase the portion of the cost of such property expensed by filing an amended federal tax return for that tax year. According to Notice 2013-59, any such increase in the amount expensed under Code Sec. 179 is not deemed to be a revocation of the prior election for that tax year.

Under Code Sec. 179(b)(3)(A), a taxpayer's Code Sec. 179 deduction for any tax year is limited to the taxpayer's taxable income for that tax year that is derived from the taxpayer's active conduct of any trade or business during that tax year (i.e., the taxable income limitation). Code Sec. 179(b)(3)(B) provides that the amount of any cost of Section 179 property elected to be expensed in a tax year that is disallowed because of the taxable income limitation may be carried forward for an unlimited number of years and may be deducted under Code Sec. 179(a) in a future tax year, subject to the same limitations.

In Notice 2013-59, the IRS notes that a taxpayer that treated the amount of a 2010 disallowed Code Sec. 179 deduction or a 2011 disallowed Code Sec. 179 deduction as property placed in service on the first day of the taxpayer's last tax year beginning in 2011 may want to carry over that amount to any tax year beginning in 2012 or 2013 in accordance with Code Sec. 179(f)(4). Accordingly, a taxpayer that treated the amount of a 2010 disallowed Code Sec. 179 deduction or a 2011 disallowed Code Sec. 179 deduction as property placed in service on the first day of the taxpayer's last tax year beginning in 2011 may either (1) continue that treatment, or (2) if the statute of limitations is still open, amend its federal tax return for the last tax year beginning in 2011 to carry over the 2010 disallowed Code Sec. 179 deduction or the 2011 disallowed Code Sec. 179 deduction to any tax year beginning in 2012 or 2013. However, if the taxpayer's last tax year beginning in 2011 is open under the statute of limitations and an affected succeeding tax year is closed under the statute of limitations, the taxpayer must continue to treat the amount of a 2010 disallowed Code Sec. 179 deduction or a 2011 disallowed Code Sec. 179 deduction as property placed in service on the first day of the taxpayer's last tax year beginning in 2011.

Practice Tip: The amended federal tax return for the taxpayer's last tax year beginning in 2011 must include any collateral adjustments to taxable income or the tax liability (for example, the amount of depreciation allowed or allowable in the last tax year beginning in 2011 for the amount of the 2010 disallowed Code Sec. 179 deduction or the 2011 disallowed Code Sec. 179 deduction). Such collateral adjustments also must be made on amended federal tax returns for any affected succeeding tax years. The amended returns for the taxpayer's last tax year beginning in 2011 and for any affected succeeding tax years must be filed within the time prescribed by law for filing an amended return for such tax years.

When a taxpayer sells or otherwise disposes of qualified real property in a tax year beginning in 2010, 2011, 2012, or 2013, or a transfer of qualified real property in a tax year beginning in 2010, 2011, 2012, or 2013 in a transaction in which gain or loss is not recognized in whole or in part (including transfers at death), immediately before the disposition or transfer, the adjusted basis of the qualified real property is increased by the amount of any outstanding carryover of disallowed deduction attributable to that property. Thus, the carryover of any disallowed deduction cannot be deducted by the transferor or the transferee of the qualified real property. However, this does not apply to a sale or other disposition of qualified real property, or a transfer of qualified real property in a transaction in which gain or loss is not recognized in whole or in part (including transfers at death), in the taxpayer's last tax year beginning in 2013 or any subsequent tax year.

To the extent the unadjusted basis of the qualified real property is reduced by the Code Sec. 179 deduction after applying these rules, the amount of that reduction is treated as Section 1245 property. The remaining unadjusted basis of the qualified real property is treated as Section 1250 property.

In Notice 2013-59, the IRS provides that a taxpayer may use any reasonable allocation methodology for determining the portion of the gain that is attributable to Section 1245 property upon the sale or other disposition of qualified real property. Notice 2013-59 provides the two reasonable allocation methodologies: (1) the pro rata allocation methodology; and (2) the gain allocation methodology.

For a discussion of the expensing of qualified real property, see Parker Tax ¶94,710.

Parker Tax Publishing Staff Writers

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