44.3 Recapture of First-Year Expensing

On Form 4797, the first-year expensing deduction (Section 179 deduction (42.3)) is treated as depreciation for purposes of recapture. When expensed property is sold or exchanged, gain is ordinary income to the extent of the first-year expense deduction plus ACRS or MACRS deductions and bonus depreciation (42.21), if any (44.1). If the entire cost of the property was expensed, adjusted basis will generally be reduced to zero, gain on a sale or exchange will equal the sales price (less expenses), and the entire gain will be recaptured as ordinary income.

Expensing deductions are also subject to recapture if property placed in service after 1986 is not used more than 50% of the time for business in any year before the end of the recovery period. The amount recaptured is the excess of the first-year expensing deduction over the amount of depreciation that would have been claimed in prior years and in the recapture year without expensing.

Caution

Installment Sale

If you sell property on the installment basis, the first-year expensing deduction claimed for the property in a prior year is recaptured in the year of sale on Form 4797. An installment sale does not defer recapture of the first-year deduction (44.6).

- - - - - - - - - -

Automobiles and other “listed property.”

If the more-than-50%-business-use test for a business automobile or other “listed property” such as certain computers (42.10) is not met in a year after the auto or other “listed property” is placed in service and before the end of the recovery period, any first-year expensing deduction is subject to recapture on Form 4797; see the Example at 43.10.