Recapture of sec. 179 expense deduction for passthrough entities.

• Author: Aldrin, Clifford A.

The new extended dollar limitation under Sec. 179 allows a taxpayer to elect to expense up to $250,000 of the cost of qualifying property placed in service during a tax year. Practicing CPAs who prepare tax returns are relatively knowledgeable about how to report the Sec. 179 expense deduction. There is one area of Sec. 179, however, that can be tricky and is not well understood: how to report the recapture of Sec. 179 expense for passthrough entities at both the entity and owner levels. This item addresses how S corporations and partnerships that have a Sec. 179 recapture event should report the event to their owners and how a tax return preparer of an individual who receives a Schedule K-1 with supplemental Sec. 179 recapture information should report the recapture on Form 1040, U.S. Individual Income Tax Return.

For passthrough entities, recapture of the Sec. 179 expense deduction information is required when the entity disposes of an asset for which the entity passed through Sec. 179 expense to its owners on a Schedule K-1 (Sec. 1245(a); Regs. Sec. 1.179-1(e) (3)). Recapture of Sec. 179 expense deduction information is also required when there is a decline in business use that triggers recapture. If property for which a Sec. 179 expense deduction was claimed ceases to be used more than 50% in business at any time before the end of the property's recovery period, partial recapture of the deduction is required (Secs. 179(d)(10) and 280F(b)(2); Regs. Sec. 1.179-1(e)).

Entity Reporting for an Asset Disposition

When preparing Form 1120S, U.S. Income Tax Return for an S Corporation, or Form 1065, U.S. Return of Partnership Income, if a passthrough entity disposed of Sec. 179 property during the tax year, the amount of the Sec. 179 expense previously passed through to its owners on a Schedule K-1 is treated as depreciation and must be recaptured under Sec. 1245 to the extent of any gain realized on the disposition at the owner level. The tax gain or loss on disposition of Sec. 179 assets will not be reported on page i of Form 1120S or Form 1065, will not be reported on Schedule K, and will not be included on the Form 4797, Sales of Business Property, prepared by the passthrough entity. The entity will eliminate net book gain or loss on Sec. 179 assets from taxable income and present it on the entity tax return as a Schedule M-1 adjustment. The information necessary to calculate the tax gain or loss at the owner level will be reported on a Form 1120S, Schedule K-l, in box 17, Other Information, and designated as code K, "dispositions of property with section 179 deductions." For a...