* The $10,000 limit on the amount of qualifying property that can be expensed in a taxable year is reduced one dollar for every dollar of investment in qualifying property in excess of $200,000;

* The deduction for a taxable year is limited to the taxable income from the active conduct of a trade or business with disallowed amounts carried forward;

* The definition of Sec. 179 property now requires that the property be purchased for use in the active conduct of a trade or business, and

* The period for recapture of the Sec. 179 deduction is extended from a limited recapture period to the end of the property's recovery period.

On March 28, 1991, the IRS issued amendments to its regulations under Sec. 179 (Prop. Regs. Secs. 1.179-0 to 1.179-6). The IRS proposes that these amended regulations will apply to Sec. 179 property placed into service in taxable years ending after April 29, 1991. For Sec. 179 property placed into service before January 1, 1987, the existing final regulations will apply. For Sec. 179 property placed into service after December 31, 1986, and in taxable years ending on or before April 29, 1991, a taxpayer may apply any reasonable method to apply the TRA 86 and TAMRA 88 changes to the existing regulations.

For partners or S corporation shareholders, the limit applies to the partnership or S corporation as well as to the individual partners or shareholders. When each partner or shareholder calculates his or her excess Sec. 179 property placed into service, the cost of Sec. 179 property placed into service by the partnership or shareholder is not attributed to any partner or shareholder.

Example: During 1991, Scorp, Inc., purchases and places into service $150,000 of qualifying Sec. 179 property. Scorp properly allocates to Mary, a full-year 50% shareholder, $5,000 of Sec. 179 expense. For 1991, Mary must include the $5,000 in applying her dollar limitation. For purposes of determining any excess Sec. 179 property placed into service, Mary will not include any of Scorp's qualifying purchases of $150,000.

Example: Same as above, except that Scorp's qualifying purchases total $204,000. In this case, the maximum available Sec. 179 pass-through is limited to $6,000 i.e., $10,000 - ($204,000 - $200,000). Scorp properly allocates to Mary, a full-year 50% shareholder, $3,000 of Sec. 179 expense. For 1991, Mary must include the $3,000 in applying her dollar limitation. For purposes of determining any excess Sec. 179 property placed into service, Mary will again not include any of Scorp's qualifying purchases of $204,000.

Members of a Controlled Group

In general, component members of a controlled group are treated as one taxpayer for the purposes of applying the Sec. 179 limitations. Taxable income limitation: for any taxable year, the Sec. 179 expense deduction cannot exceed the aggregate amount of taxable income that is derived from the active conduct of a trade or business. This is computed by aggregating the net income (or losses) of all trades and businesses actively conducted by the taxpayer. This limitation applies to partnerships and their partners as well as to S corporations and their shareholders. In addition, the limitation is computed without regard to any Sec. 179 deduction, the Sec. 164(f) deduction for one-half of self- employment taxes, and any net operating loss carryback or carryforward.

If a partnership is engaged in more than one trade or business, and if a partner is engaged in the active conduct of any one of the partnership's trades or businesses, then that partner will include in his or her calculation of net income from the active conduct of a trade or business his or her allocable share of taxable income of any of the partnership's trades or businesses. Similar rules apply to shareholders of S corporations.

The term "trade or business" has the same meaning as in Sec. 162 and the regulations thereunder.

To determine whether a taxpayer actively conducts a trade or business, the proposed regulations propose a "facts and circumstances" test. The proposed regulations state that a taxpayer is generally considered to actively conduct a trade or business if the taxpayer meaningfully participates in the management or operations of the trade or business.

A mere passive investor in a trade or business does not actively conduct the trade or business.

Example: Smith owns a salon as a sole proprietor and hires Zimmerman to operate it. Smith periodically meets with Zimmerman to review business developments. Smith approves the annual budget prepared by Zimmerman. Zimmerman actually operates the salon. In 1991, consistent with the budget that she prepared, Zimmerman purchases and places into service Sec. 179 property costing $9,500 for use in the active conduct of the salon. Smith's net income from the salon for 1991 was $8,000, before any Sec. 179 deduction. Smith is also a partner in Acme Foodstuffs, a calendar year partnership that owns a grocery. Wilson, a partner in Acme, runs the store making all management and operating decisions. Acme Foodstuffs did not purchase any Sec. 179 property in 1991. Smith's share of partnership income for 1991 is $6,000. Based on these facts and circumstances, Smith meaningfully participates in the active conduct of the salon but not in Acme Foodstuffs. Therefore, Smith's taxable income derived from the active conduct of any trade or business is $8,000, the net income of the salon.

Employees are considered to be actively engaged in the trade or business of their employment with any wages, salaries, tips, etc., that they earn included in the aggregate amount of taxable income from the active conduct of a trade or business. In addition, Sec. 1231 gains or losses and interest from working capital are included in the computation of taxable income from trade or business.

Carryover of Disallowed

Deduction

The proposed regulations provide that any amounts elected to be expensed under Sec. 179 but not deducted due to the taxable income limitation may be carried forward indefinitely. The amount elected to be expensed based on the current year's purchases plus the amount of the carryover to be deducted cannot exceed the $10,000 limitation in any given taxable year.