SUMMARY: This document contains temporary regulations relating to the election to
expense the cost of property subject to section 179 of the Internal Revenue Code. The
regulations reflect changes to the law made by section 202 of the Jobs and Growth Tax
Relief Reconciliation Act of 2003. The text of these temporary regulations also serves
as the text of the proposed regulations set forth in the notice of proposed rulemaking on
this subject in the Proposed Rules section in this issue of the Federal Register.
DATES: Effective Dates: These regulations are effective August 4, 2004.
Applicability Dates: For dates of applicability, see §1.179-6T.
FOR FURTHER INFORMATION CONTACT: Winston H. Douglas, (202) 622-3110 (not
a toll-free number).

SUPPLEMENTARY INFORMATION:
Paperwork Reduction Act
These temporary regulations are being issued without prior notice and public
procedure pursuant to the Administrative Procedure Act (5 U.S.C. 553). For this
reason, the collection of information contained in these regulations has been reviewed
and, pending receipt and evaluation of public comments, approved by the Office of
Management and Budget under control number 1545-1201. Responses to this
collection of information are required to obtain a benefit.

An agency may not conduct or sponsor, and a person is not required to respond
to, a collection of information unless the collection of information displays a valid OMB
control number.

For further information concerning this collection of information, where to submit
comments on the collection of information and the accuracy of the estimated burden,
and suggestions for reducing this burden, please refer to the preamble to the crossreferencing
notice of proposed rulemaking published in the Proposed Rules section in
this issue of the Federal Register.

Books or records relating to a collection of information must be retained as long
as their contents may become material in the administration of any internal revenue law.
Generally, Federal tax returns and tax return information are confidential pursuant to 26
U.S.C. 6103.

Background
This document contains amendments to 26 CFR part 1 to provide regulations
under section 179 of the Internal Revenue Code (Code). These amendments reflect the
changes to the law made by section 202 of the Jobs and Growth Tax Relief
Reconciliation Act of 2003, Public Law 108-27 (117 Stat. 752).
Prior to the enactment of the Jobs and Growth Tax Relief Reconciliation Act of
2003 (JGTRRA) (117 Stat. 752), section 179 provided that, in lieu of depreciation under
section 168 (MACRS depreciation) for taxable years beginning in 2003 and thereafter, a
taxpayer with a sufficiently small amount of current year investment in section 179
property could elect to deduct up to $25,000 of the cost of section 179 property placed
in service by the taxpayer for the taxable year. In general, section 179 property was
defined as depreciable tangible personal property that was purchased for use in the
active conduct of a trade or business. The $25,000 amount was reduced (but not below
zero) by the amount by which the cost of section 179 property placed in service by the
taxpayer during the taxable year exceeded $200,000. The election under section 179
generally was made on the taxpayer’s original Federal tax return for the taxable year to
which the election related, required specific information to be provided at the time the
election was made, and could only be revoked with the consent of the Commissioner of
Internal Revenue.

The changes made to section 179 by section 202 of JGTRRA are applicable for
section 179 property placed in service by a taxpayer in taxable years beginning after
2002 and before 2006. Section 202 of JGTRRA expands the definition of section 179
property to include off-the-shelf computer software (a category of intangible property)
and increases the $25,000 and $200,000 amounts to $100,000 and $400,000,
respectively. In addition, the $100,000 and $400,000 amounts are indexed annually for
inflation for taxable years beginning after 2003 and before 2006. JGTRRA also
modifies section 179 to provide that any election or specification for taxable years
beginning after 2002 and before 2006 may be revoked by the taxpayer with respect to
any section 179 property, and that such revocation, once made, shall be irrevocable.
The conference agreement (H.R. Conf. Rep. No. 108-126, at 35 (2003)) states that a
taxpayer may make or revoke an expensing election on an amended Federal tax return
without the consent of the Commissioner.

Explanation of Provisions
For taxable years beginning after 2002 and before 2006, the regulations reflect
the change to section 179(d)(1) by including off-the-shelf computer software in the
definition of section 179 property, and the changes to sections 179(b)(1) and (2) by
increasing the respective amounts to $100,000 and $400,000. The regulations also
provide guidance for making and revoking elections under section 179 for those taxable
years. Several examples are provided to illustrate how taxpayers may make and
revoke their section 179 elections. Additionally, each year the IRS will publish the
annual inflation indexed amounts for sections 179(b)(1) and (2). For the inflation
indexed amounts for taxable years beginning in 2004, see Rev. Proc. 2003-85, 2003-49
I.R.B. 1184.

Making or Revoking Section 179 Elections on Amended Federal Tax Returns
prior to the enactment of JGTRRA, an election to expense the cost of property
under section 179 generally was made on the taxpayer’s original federal tax return for
the taxable year to which the election applied. An election could only be revoked with
the consent of the Commissioner. The section 179 regulations (pre-JGTRRA) provided
that a revocation of an election would only be granted in extraordinary circumstances.

Small business taxpayers are often unaware of the advantages or disadvantages
of section 179 expensing. Some taxpayers may not have been aware of the section
179 election until after filing an original Federal tax return. In addition, making the
section 179 election is not always to a taxpayer’s advantage. For example, the section
179 election may prevent the taxpayer from fully using exemptions and deductions,
reduce a taxpayer’s coverage under the social security system, and make various tax
credits unusable. See Internal Revenue Service, Publication 946, "How to Depreciate
Property (For use in preparing 2003 Returns)", p. 14, and "General Explanations of the
Administration’s Fiscal Year 2004 Revenue Proposals", Department of the Treasury,
p. 23 (February 2003).

Permitting taxpayers to make or revoke section 179 elections on amended
Federal tax returns without the consent of the Commissioner reflects Congress’ intent
"that the process of making and revoking section 179 elections should be made simpler
and more efficient for taxpayers." H.R. Rep. No. 108-94, at 25 and 26 (2003) and S.
Prt. No. 108-26, at 10 (2003). Such a process will provide flexibility to small business
taxpayers in determining whether the section 179 election is to their advantage or
disadvantage.

Section 1.179-5T(c)(1) establishes the time period during which a taxpayer may
make or revoke a section 179 election on an amended Federal tax return.
Section 1.179-5T(c)(2) provides that a section 179 election made on an amended
Federal tax return must specify the item of section 179 property to which the election
applies and the portion of the cost of each such item to be taken into account under
section 179. Further, if a taxpayer elected to expense only a portion of the cost basis of
an item of section 179 property for a particular taxable year (or did not elect to expense
any portion of the cost basis of an item of section 179 property), §1.179-5T(c)(2) allows
the taxpayer to file an amended Federal tax return and expense any portion of the cost
basis of an item of section 179 property that was not expensed pursuant to a prior
section 179 election. Any such increase in the amount expensed under section 179 is
not deemed to be a revocation of the prior election for that particular taxable year.
Section 1.179-5T(c)(3) provides that any election under section 179, or
specification of such election, for any taxable year beginning after 2002 and before
2006 for any item of section 179 property may be revoked by the taxpayer on an
amended Federal tax return without the Commissioner’s consent and that such
revocation, once made, is irrevocable. For this purpose, a specification refers to both
the selected specific item of section 179 property subject to a section 179 election and a
selected dollar amount allocable to the specific item of section 179 property. In
addition, §1.179-5T(c)(3) describes the circumstances under which partial and entire
revocations of elections and specifications occur. Section 1.179-5T(c)(3) also
discusses the effect of a revocation of an election under section 179 or a revocation of
any specification of such election.

Section 1.179-5T(c)(4) sets forth examples illustrating the rules of paragraphs
(c)(1), (2), and (3).
Section 1.179-6T provides the applicability dates for the provisions of §§1.179-
2T, 1.179-4T, and 1.179-5T.

Special Analyses
It has been determined that this Treasury decision is not a significant regulatory
action as defined in Executive Order 12866. Therefore, a regulatory assessment is not
required. It also has been determined that section 553(b) of the Administrative
Procedure Act (5 U.S.C. chapter 5) does not apply to these regulations. For the
applicability of the Regulatory Flexibility Act (5 U.S.C. chapter 6), refer to the Special
Analyses section of the preamble to the cross-reference notice of proposed rulemaking
published in the proposed rules section in this issue of the Federal Register. Pursuant
to section 7805(f) of the Code, these temporary regulations will be submitted to the
Chief Counsel for Advocacy of the Small Business Administration for comment on its
impact on small business.

Drafting Information
The principal author of these regulations is Winston H. Douglas, Office of
Associate Chief Counsel (Passthroughs and Special Industries). However, other
personnel from the IRS and Treasury Department participated in their development.

List of Subjects
26 CFR Part 1
Income taxes, Reporting and recordkeeping requirements.
26 CFR Part 602
Reporting and recordkeeping requirements.

Adoption of Amendments to the Regulations
Accordingly, 26 CFR part 1 is amended as follows:

PART 1--INCOME TAXES
Paragraph 1. The authority citation for part 1 continues to read in part as follows:
Authority: 26 U.S.C. 7805 * * *
Par. 2. Section 1.179-0 is amended as follows:
1. Paragraphs (b)(1) and (b)(2) of §1.179-2 are revised.
2. Section 1.179-2T is added.
3. Paragraph (a) of §1.179-4 is revised.
4. Section 1.179-4T is added.
5. Paragraph (c) of §1.179-5 is added.
6. Section 1.179-5T is added.
7. Section 1.179-6T is added.
The revisions and additions read as follows:
§1.179-0 Table of contents for section 179 expensing rules.
* * * * *
§1.179-2 Limitations on amount subject to section 179 election.
* * * * *
(b) * * *
(1) [Reserved].
(2) [Reserved].
* * * * *
§1.179-2T Limitations on amount subject to section 179 election (temporary).
(a) [Reserved].
(b) Dollar Limitation.
(1) In general.
(2) Excess section 179 property.
(3) through (d) [Reserved].
* * * * *

§1.179-4 Definitions.
(a) Section 179 property [Reserved].
* * * * *

§1.179-4T Definitions.
(a) Section 179 property.
(b) through (f) [Reserved].
§1.179-5 Time and manner of making election.
* * * * *

(c) Section 179 property placed in service by the taxpayer in a taxable year beginning
after 2002 and before 2006.
§1.179-5T Time and manner of making election.
(a) and (b) [Reserved].
(c) Section 179 property placed in service by the taxpayer in a taxable year beginning
after 2002 and before 2006.
* * * * *

§1.179-6T Effective dates.
(a) In general.
(b) Section 179 property placed in service by the taxpayer in a taxable year beginning
after 2002 and before 2006.
Par. 3. Section 1.179-2 is amended by revising paragraphs (b)(1) and (b)(2)(ii) to
read as follows:
§1.179-2 Limitations on amount subject to section 179 election.
* * * * *
(b) * * *
(1) [Reserved]. For further guidance, see §1.179-2T(b)(1).
(2) * * *
(i) * * *
(ii) [Reserved]. For further guidance, see §1.179-2T(b)(2)(ii).
* * * * *

Par. 4. Section 1.179-2T is added to read as follows:
§1.179-2T Limitations on amount subject to section 179 election (temporary).
(a) [Reserved]. For further guidance, see §1.179-2(a).
(b) Dollar limitation--(1) In general. The aggregate cost of section 179 property
that a taxpayer may elect to expense under section 179 for any taxable year beginning
in 2003 and thereafter is $25,000 ($100,000 in the case of taxable years beginning after
2002 and before 2006 under section 179(b)(1), indexed annually for inflation under
section179(b)(5) for taxable years beginning after 2003 and before 2006), reduced (but
not below zero) by the amount of any excess section 179 property (described in
paragraph (b)(2) of this section) placed in service during the taxable year.

(b)(2) and (b)(2)(i) [Reserved]. For further guidance, see §1.179-2(b)(2) and
(b)(2)(i).
(ii) $200,000 ($400,000 in the case of taxable years beginning after 2002 and
before 2006 under section 179(b)(2), indexed annually for inflation under section
179(b)(5) for taxable years beginning after 2003 and before 2006).
(b)(3) through (d) [Reserved]. For further guidance, see §1.179-2(b)(3) through
(d).

Par. 5. Section 1.179-4 is amended by revising paragraph (a) to reads as
follows:
§1.179-4 Definitions.
* * * * *

(a) [Reserved]. For further guidance, see §1.179-4T(a).
* * * * *

Par. 6. Section 1.179-4T is added to read as follows:
§1.179-4T Definitions (temporary).
The following definitions apply for purposes of section 179, §§1.179-1 through
1.179-6, and §§1.179-2T, 5T, and 6T:
(a) Section 179 property. The term section 179 property means any tangible
property described in section 179(d)(1) that is acquired by purchase for use in the active
conduct of the taxpayer’s trade or business (as described in §1.179-2(c)(6)). For
taxable years beginning after 2002 and before 2006, the term section 179 property
includes computer software described in section 179(d)(1) that is placed in service by
the taxpayer in a taxable year beginning after 2002 and before 2006 and is acquired by
purchase for use in the active conduct of the taxpayer’s trade or business (as described
in §1.179-2(c)(6)). For purposes of this paragraph (a), the term trade or business has
the same meaning as in section 162 and the regulations thereunder.

(b) through (f) [Reserved]. For further guidance, see §1.179-4(b) through (f).
Par. 7. Section 1.179-5 is amended by adding paragraph (c) to read as follows:
§1.179-5 Time and manner of making election.
* * * * *

(c) Section 179 property placed in service by the taxpayer in a taxable year
beginning after 2002 and before 2006. [Reserved]. For further guidance, see §1.179-5T(c).

Par. 8. Section 1.179-5T is added to read as follows:
1.179-5T Time and manner of making election (temporary).
(a) and (b) [Reserved]. For further guidance, see §1.179-5(a) and (b).
(c) Section 179 property placed in service by the taxpayer in a taxable year
beginning after 2002 and before 2006--(1) In general. For any taxable year beginning
after 2002 and before 2006, a taxpayer is permitted to make or revoke an election under
section 179 without the consent of the Commissioner on an amended Federal tax return
for that taxable year. This amended return must be filed within the time prescribed by
law for filing an amended return for such taxable year.

(2) Election--(i) In general. For any taxable year beginning after 2002 and before
2006, a taxpayer is permitted to make an election under section 179 on an amended
Federal tax return for that taxable year without the consent of the Commissioner. Thus,
the election under section 179 and §1.179-1 to claim a section 179 expense deduction
for section 179 property may be made on an amended Federal tax return for the taxable
year to which the election applies. The amended Federal tax return must include the
adjustment to taxable income for the section 179 election and any collateral
adjustments to taxable income or to the tax liability (for example, the amount of
depreciation allowed or allowable in that taxable year for the item of section 179
property to which the election pertains). Such adjustments must also be made on
amended Federal tax returns for any affected succeeding taxable years.

(ii) Specifications of election. Any election under section 179 must specify the
items of section 179 property and the portion of the cost of each such item to be taken
into account under section 179(a). Any election under section 179 must comply with the
specification requirements of section 179(c)(1)(A), §1.179-1(b), and §1.179-5(a). If a
taxpayer elects to expense only a portion of the cost basis of an item of section 179
property for a taxable year beginning after 2002 and before 2006 (or did not elect to
expense any portion of the cost basis of the item of section 179 property), the taxpayer
is permitted to file an amended Federal tax return for that particular taxable year and
increase the portion of the cost of the item of section 179 property to be taken into
account under section 179(a) (or elect to expense any portion of the cost basis of the
item of section 179 property if no prior election was made) without the consent of the
Commissioner. Any such increase in the amount expensed under section 179 is not
deemed to be a revocation of the prior election for that particular taxable year.

(3) Revocation--(i) In general. Section 179(c)(2) permits the revocation of an
entire election or specification, or a portion of the selected dollar amount of a
specification. The term specification in section 179(c)(2) refers to both the selected
specific item of section 179 property subject to a section 179 election and the selected
dollar amount allocable to the specific item of section 179 property. Any portion of the
cost basis of an item of section 179 property subject to an election under section 179 for
a taxable year beginning after 2002 and before 2006 may be revoked by the taxpayer
without the consent of the Commissioner by filing an amended Federal tax return for
that particular taxable year. The amended Federal tax return must include the
adjustment to taxable income for the section 179 revocation and any collateral
adjustments to taxable income or to the tax liability (for example, allowable depreciation
in that taxable year for the item of section 179 property to which the revocation
pertains). Such adjustments must also be made on amended Federal tax returns for
any affected succeeding taxable years. Reducing or eliminating a specified dollar
amount for any item of section 179 property with respect to any taxable year beginning
after 2002 and before 2006 results in a revocation of that specified dollar amount.

(ii) Effect of revocation. Such revocation, once made, shall be irrevocable. If the
selected dollar amount reflects the entire cost of the item of section 179 property subject
to the section 179 election, a revocation of the entire selected dollar amount is treated
as a revocation of the section 179 election for that item of section 179 property and the
taxpayer is unable to make a new section 179 election with respect to that item of
property. If the selected dollar amount is a portion of the cost of the item of section 179
property, revocation of a selected dollar amount shall be treated as a revocation of only
that selected dollar amount. The revoked dollars cannot be the subject of a new section
179 election for the same item of property.

(4) Examples. The following examples illustrate the rules of this paragraph (c):
Example 1. Taxpayer, a sole proprietor, owns and operates a jewelry store.
During 2003, Taxpayer purchased and placed in service two items of section 179
property – a cash register costing $4,000 (5-year MACRS property) and office furniture
costing $10,000 (7-year MACRS property). On his 2003 Federal tax return filed on April
15, 2004, Taxpayer elected to expense under section 179 the full cost of the cash
register and, with respect to the office furniture, claimed the depreciation allowable. In
November 2004, Taxpayer determines it would have been more advantageous to have
made an election under section 179 to expense the full cost of the office furniture rather
than the cash register. Pursuant to paragraph (c)(1) of this section, Taxpayer is
permitted to file an amended Federal tax return for 2003 revoking the section 179
election for the cash register, claiming the depreciation allowable in 2003 for the cash
register, and making an election to expense under section 179 the cost of the office
furniture. The amended return must include an adjustment for the depreciation
previously claimed in 2003 for the office furniture, an adjustment for the depreciation
allowable in 2003 for the cash register, and any other collateral adjustments to taxable
income or to the tax liability. In addition, once Taxpayer revokes the section 179
election for the entire cost basis of the cash register, Taxpayer can no longer expense
under section 179 any portion of the cost of the cash register.

Example 2. Taxpayer, a sole proprietor, owns and operates a machine shop that
does specialized repair work on industrial equipment. During 2003, Taxpayer
purchased and placed in service one item of section 179 property – a milling machine
costing $135,000. On Taxpayer’s 2003 Federal tax return filed on April 15, 2004,
Taxpayer elected to expense under section 179 $5,000 of the cost of the milling
machine and claimed allowable depreciation on the remaining cost. Subsequently,
Taxpayer determines it would have been to Taxpayer’s advantage to have elected to
expense $100,000 of the cost of the milling machine on Taxpayer’s 2003 Federal tax
return. In November 2004, Taxpayer files an amended Federal tax return for 2003,
increasing the amount of the cost of the milling machine that is to be taken into account
under section 179(a) to $100,000, decreasing the depreciation allowable in 2003 for the
milling machine, and making any other collateral adjustments to taxable income or to
the tax liability. Pursuant to paragraph (c)(2)(ii) of this section, increasing the amount of
the cost of the milling machine to be taken into account under section 179(a)
supplements the portion of the cost of the milling machine that was already taken into
account by the original section 179 election made on the 2003 Federal tax return and no
revocation of any specification with respect to the milling machine has occurred.

Example 3. Taxpayer, a sole proprietor, owns and operates a real estate
brokerage business located in a rented storefront office. During 2003, Taxpayer
purchases and places in service two items of section 179 property – a laptop computer
costing $2,500 and a desktop computer costing $1,500. On Taxpayer’s 2003 Federal
tax return filed on April 15, 2004, Taxpayer elected to expense under section 179 the
full cost of the laptop computer and the full cost of the desktop computer.
Subsequently, Taxpayer determines it would have been to Taxpayer’s advantage to
have originally elected to expense under section 179 only $1,500 of the cost of the
laptop computer on Taxpayer’s 2003 Federal tax return. In November 2004, Taxpayer
files an amended Federal tax return for 2003 reducing the amount of the cost of the
laptop computer that was taken into account under section 179(a) to $1,500, claiming
the depreciation allowable in 2003 on the remaining cost of $1,000 for that item, and
making any other collateral adjustments to taxable income or to the tax liability.
Pursuant to paragraph (c)(3)(ii) of this section, the $1,000 reduction represents a
revocation of a portion of the selected dollar amount and no portion of those revoked
dollars may be the subject of a new section 179 election for the laptop computer.

Example 4. Taxpayer, a sole proprietor, owns and operates a furniture making
business. During 2003, Taxpayer purchases and places in service one item of section
179 property – an industrial-grade cabinet table saw costing $5,000. On Taxpayer’s
2003 Federal tax return filed on April 15, 2004, Taxpayer elected to expense under
section 179 $3,000 of the cost of the saw and, with respect to the remaining $2,000 of
the cost of the saw, claimed the depreciation allowable. In November 2004, Taxpayer
files an amended Federal tax return for 2003 revoking the selected $3,000 amount for
the saw, claiming the depreciation allowable in 2003 on the $3,000 cost of the saw, and
making any other collateral adjustments to taxable income or to the tax liability.
Subsequently, in December 2004, Taxpayer files a second amended Federal tax return
for 2003 selecting a new dollar amount of $2,000 for the saw, including an adjustment
for the depreciation previously claimed in 2003 on the $2,000, and making any other
collateral adjustments to taxable income or to the tax liability. Pursuant to paragraph
(c)(2)(ii) of this section, Taxpayer is permitted to select a new selected dollar amount to
expense under section 179 encompassing all or a part of the initially non-elected portion
of the cost of the elected item of section 179 property. However, no portion of the
revoked $3,000 may be the subject of a new section 179 dollar amount selection for the
saw. In December 2005, Taxpayer files a third amended Federal tax return for 2003
revoking the entire selected $2,000 amount with respect to the saw, claiming the
depreciation allowable in 2003 for the $2,000, and making any other collateral
adjustments to taxable income or to the tax liability. Because Taxpayer elected to
expense, and subsequently revoke, the entire cost basis of the saw, the section 179
election for the saw has been revoked and Taxpayer is unable to make a new section
179 election with respect to the saw.

Par. 9. Section 1.179-6T is added to read as follows:
§1.179-6T Effective dates.
(a) In general. Except as provided in paragraph (b) of this section, the
provisions of §§1.179-1 through 1.179-5 apply for property placed in service by the
taxpayer in taxable years ending after January 25, 1993. However, a taxpayer may
apply the provisions of §§1.179-1 through 1.179-5 to property placed in service by the
taxpayer after December 31, 1986, in taxable years ending on or before January 25,
1993. Otherwise, for property placed in service by the taxpayer after December 31,
1986, in taxable years ending on or before January 25, 1993, the final regulations under
section 179 as in effect for the year the property was placed in service apply, except to
the extent modified by the changes made to section 179 by the Tax Reform Act of 1986
(100 Stat. 2085), the Technical and Miscellaneous Revenue Act of 1988 (102 Stat.
3342) and the Revenue Reconciliation Act of 1990 (104 Stat. 1388-400). For that
property, a taxpayer may apply any reasonable method that clearly reflects income in
applying the changes to section 179, provided the taxpayer consistently applies the
method to the property.

(b) Section 179 property placed in service by the taxpayer in a taxable year
beginning after 2002 and before 2006. The provisions of §§1.179-2T, 1.179-4T,
and 1.179-5T, reflecting changes made to section 179 by the Jobs and Growth Tax
Relief Reconciliation Act of 2003 (117 Stat. 752), apply for property placed in service in
taxable years beginning after 2002 and before 2006.

PART 602--OMB CONTROL NUMBERS UNDER THE PAPERWORK REDUCTION
ACT

Par. 10. The authority citation for part 602 continues to read as follows:
Authority: 26 U.S.C. 7805.

Par. 11. In §602.101, paragraph (b) is amended by adding the following entries
in numerical order to the table to read as follows:
§602.101 OMB Control numbers.
* * * * *
(b) * * *

______________________________________________________________________

CFR part or section where Current OMB
identified and described control No.
* * * * *

1.179-2T………………………………………………………………………………1545-1201
* * * * *

1.179-5T………………………………………………………………………………1545-1201* * * * *

______________________________________________________________________

Mark E. Matthews,
Deputy Commissioner for Services and Enforcement.
Approved: July 21, 2004
Gregory F. Jenner,
Acting Assistant Secretary of the Treasury (Tax Policy).