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IRS Refuses Change Of Section 179 Election To Expense Depreciable Property

U.S. tax law is rich in tax elections—maybe too rich, if tax simplification is a goal. But many clients who welcome elections don’t realize that an election isn’t a gift. It’s a choice of this treatment of that the taxpayer may be stuck with later.

The Section 179 election is an election so beloved by small businesses that it’s easy to mistake for a gift. Instead of writing off business equipment over, say, 5 or 7 years, deducting one-fifth or one-seventh of the cost each year, Section 179 lets the business owner deduct 100% (subject to certain limits) in the year it’s acquired (put into use). For 2002, the dollar limitation is $24,000.

In an actual situation, a business owner used the Section 179 election for a $4,100 item he bought for his welding business. The IRS later audited his return and found he had misstated his income by, among other things, deducting as expenses equipment he should have treated as depreciable capital assets.

These equipment items were the kind which could be 100% deductible under Section 179. So the client argued to be allowed to extend his previous Section 179 election to these depreciable assets as well.

No luck. The Section 179 system requires the taxpayer to choose and specify which assets are being deducted under section 179, in the first return filed for the year, or in an amended return filed within 3 years of the return due date. The client can change that election within that 3-year period—or later if the IRS consents.

Here, the IRS audit took the client beyond that 3-year deadline, so he had no right to add the other items to his election. He therefore needed consent, which the IRS refused.

A recent tax court case upheld the IRS. The client’s plight was of his own making. His effort to change his election arose only after the IRS discovered his misreporting of the other depreciable assets (and some unreported income), and after time had run out on his right to change. Consent to change an election is discretionary with the IRS, and refusing to consent here was no abuse of that discretion.

Sam H. Patton, 116 T.C. No. 17

For further information, contact James J. Holtzman, CPA at (412) 635-9210 or

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