IRS Explains Sec. 179 Qualified Real Property Allocations and Procedures for Filing Amended Returns

On Tuesday, the IRS released Notice 2013-59, explaining how the retroactive extension of the Sec. 179 rules under the American Taxpayer Relief Act of 2012 (ATRA), P.L. 112-240, operates when applied to qualified real property and how to allocate the portion of gain attributable to the qualified real property upon disposition or to calculate any carryover.

Sec. 179(a) allows a taxpayer to elect to treat the cost of any Sec. 179 property as an expense for the tax year in which the taxpayer places the property in service, subject to certain limitations, including a taxable income limit. The amount of these limitations was about to be substantially reduced when ATRA increased them retroactively. ATRA also continued the prior law treatment distinguishing between Sec. 179 property generally and Sec. 179 qualified real property. Expenses attributable to Sec. 179 property that are disallowed as a current-year deduction because of the taxable income limit can generally be carried forward indefinitely; however, unused amounts attributable to qualified real property can be carried forward for only a limited period of time. Qualified real property includes certain leasehold improvement property, restaurant property, and retail improvement property (Sec. 179(f)(2)).

The notice states that a taxpayer may elect to apply Sec. 179(f) and elect to expense under Sec. 179(a) the cost (or a portion of the cost) of qualified real property placed in service by the taxpayer during any tax year beginning in 2010, 2011, 2012, or 2013 by filing an original or amended federal tax return. The notice also allows taxpayers whose 2010 through 2013 tax years are open under the Sec. 6501(a) statute of limitation to file amended returns to carry over unused Sec. 179 deductions for qualified real property to 2012 or 2013.

In addition, the notice describes in detail (including examples) how to allocate the amount of a taxpayer’s unused Sec. 179 deduction between the amounts attributable to property that qualifies for the unlimited carryforward period and qualified real property, which cannot be carried forward indefinitely.

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