You can elect to recover all or part of the cost of certain qualifying property, up to a limit, by deducting it in the year you place the property in service. This is the section 179 deduction. You can elect the section 179 deduction instead of recovering the cost by taking depreciation deductions.

This chapter explains what property does and does not qualify for the section 179 deduction, what limits apply to the deduction (including special rules for partnerships and corporations), and how to elect it. It also explains when and how to recapture the deduction.

See chapter 6 for information about getting publications and forms.

To qualify for the section 179 deduction, your property must meet all the following requirements.

• It must be eligible property.
• It must be acquired for business use.
• It must have been acquired by purchase.
• It must not be property described later under What Property Does Not Qualify.

The following discussions provide information about these requirements and exceptions.

To qualify for the section 179 deduction, your property must be one of the following types of depreciable property.

1. Tangible personal property.
2. Other tangible property (except buildings and their structural components) used as:
   1. An integral part of manufacturing, production, or extraction or of furnishing transportation, communications, electricity, gas, water, or sewage disposal services,
   2. A research facility used in connection with any of the activities in (a) above, or
   3. 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. See chapter 7 of Publication 225 for definitions and information regarding the use requirements that apply to these structures.
4. Storage facilities (except buildings and their structural components) used in connection with distributing petroleum or any primary product of petroleum.
5. Off-the-shelf computer software.
6. Qualified real property (described below).

Tangible personal property is any tangible property that is not real property. It includes the following property.

• Machinery and equipment.
• Property contained in or attached to a building (other than structural components), such as refrigerators, grocery store counters, office equipment, printing presses, testing equipment, and signs.
• Gasoline storage tanks and pumps at retail service stations.
• Livestock, including horses, cattle, hogs, sheep, goats, and mink and other furbearing animals.

The treatment of property as tangible personal property for the section 179 deduction is not controlled by its treatment under local law. For example, property may not be tangible personal property for the deduction even if treated so under local law, and some property (such as fixtures) may be tangible personal property for the deduction even if treated as real property under local law.

Off-the-shelf computer software placed in service during the tax year is qualifying property for purposes of the section 179 deduction. This is computer software that is readily available for purchase by the general public, is subject to a nonexclusive license, and has not been substantially modified. It includes any program designed to cause a computer to perform a desired function. However, a database or similar item is not considered computer software unless it is in the public domain and is incidental to the operation of otherwise qualifying software.

You can elect to treat certain qualified real property you placed in service as section 179 property for tax years beginning in 2012. If this election is made, the term "section 179 property" will include any qualified real property that is:

• Qualified leasehold improvement property,
• Qualified restaurant property, or
• Qualified retail improvement property.

The maximum section 179 expense deduction that can be elected for qualified section 179 real property is $250,000 of the maximum section 179 deduction of $500,000 in 2012. For more information, see Special rules for qualified section 179 real property, later. Also, see Election for certain qualified section 179 real property, later, for information on how to make this election.

Generally, this is any improvement to an interior part of a building (placed in service before January 1, 2014) that is nonresidential real property, provided all of the requirements discussed in chapter 3 under Qualified leasehold improvement property are met.

In addition, an improvement made by the lessor does not qualify as qualified leasehold improvement property to any subsequent owner unless it is acquired from the original lessor by reason of the lessor’s death or in any of the following types of transactions.

1. A transaction to which section 381(a) applies,
2. A mere change in the form of conducting the trade or business so long as the property is retained in the trade or business as qualified leasehold improvement property and the taxpayer retains a substantial interest in the trade or business,
3. A like-kind exchange, involuntary conversion, or re-acquisition of real property to the extent that the basis in the property represents the carryover basis, or
4. Certain nonrecognition transactions to the extent that your basis in the property is determined by reference to the transferor’s or distributor’s basis in the property. Examples include the following.
   1. A complete liquidation of a subsidiary.
   2. A transfer to a corporation controlled by the transferor.
   3. An exchange of property by a corporation solely for stock or securities in another corporation in a reorganization.

Qualified restaurant property is any section 1250 property that is a building or an improvement to a building placed in service after December 31, 2008, and before January 1, 2014. Also, more than 50% of the building’s square footage must be devoted to preparation of meals and seating for on-premise consumption of prepared meals.

Generally, this is any improvement (placed in service after December 31, 2008, and before January 1, 2014) to an interior portion of nonresidential real property if it meets the following requirements.

1. The portion is open to the general public and is used in the retail trade or business of selling tangible property to the general public.
2. The improvement is placed in service more than 3 years after the date the building was first placed in service.
3. The expenses are not for the enlargement of the building, any elevator or escalator, any structural components benefiting a common area, or the internal structural framework of the building.

In addition, an improvement made by the lessor does not qualify as qualified retail improvement property to any subsequent owner unless it is acquired from the original lessor by reason of the lessor’s death or in any of the following types of transactions.

1. A transaction to which section 381(a) applies,
2. A mere change in the form of conducting the trade or business so long as the property is retained in the trade or business as qualified leasehold improvement property and the taxpayer retains a substantial interest in the trade or business,
3. A like-kind exchange, involuntary conversion, or re-acquisition of real property to the extent that the basis in the property represents the carryover basis, or
4. Certain nonrecognition transactions to the extent that your basis in the property is determined by reference to the transferor’s or distributor’s basis in the property. Examples include the following.
   1. A complete liquidation of a subsidiary.
   2. A transfer to a corporation controlled by the transferor.
   3. An exchange of property by a corporation solely for stock or securities in another corporation in a reorganization.

To qualify for the section 179 deduction, your property must have been acquired for use in your trade or business. Property you acquire only for the production of income, such as investment property, rental property (if renting property is not your trade or business), and property that produces royalties, does not qualify.

When you use property for both business and nonbusiness purposes, you can elect the section 179 deduction only if you use the property more than 50% for business in the year you place it in service. If you use the property more than 50% for business, multiply the cost of the property by the percentage of business use. Use the resulting business cost to figure your section 179 deduction.

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

To qualify for the section 179 deduction, your property must have been acquired by purchase. For example, property acquired by gift or inheritance does not qualify.

Property is not considered acquired by purchase in the following situations.

1. It is acquired by one member of a controlled group from another member of the same group.
2. Its basis is determined either—
   1. In whole or in part by its adjusted basis in the hands of the person from whom it was acquired, or
   2. Under the stepped-up basis rules for property acquired from a decedent.
3. It is acquired from a related person.

Related persons are described under Related persons earlier. However, to determine whether property qualifies for the section 179 deduction, treat as an individual's family only his or her spouse, ancestors, and lineal descendants and substitute "50%" for "10%" each place it appears.

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 as section 179 property because Ken and his father are related persons. He cannot claim a section 179 deduction for the cost of these machines.