Page 181

TITLE 26-INTERNAL REVENUE CODE to the expenditures paid or incurred during the taxable year which are treatcd as deferred ex- penses shall be adhered to in computing his taxable income for the taxable year for which the election is made and all subsequent years. (d) Cross reference For adjustments to basis of property for amounts al. lowed as deductions for expenditures treated as deferred expenses under this section, see section 1016(a)(16). (Added June 29, 1956, ch. 464, § 4(a), 70 Stat. 406, and amended Oct. 4, 1976, Pub. L. 94-455, title XIX, § 1906(b)(13)(A), 90 Stat. 1834.) AMENDMENTS 1976-Subsec. (a). Pub. L. 94-455 struck out "or his delegate" following "Secretary". SECTION REFERRED TO IN OTHER SECTIONS This section is referred to In section 1016 of this title. § 178. Depreciation or amortization of improvements made by lessee on lessor's property (a) General rule Except as provided in subsection (b), in deter- mining the amount allowable to a lessee as a deduction for any taxable year for exhaustion, wear and tear, obsolescence, or amortization- (1) In respect of any building erected (or other improvement made) on the leased prop- erty, if the portion of the term of the lease (excluding any period for which the lease may subsequently be renewed, extended, or continued pursuant to an option exercisable by the lessee) remaining upon the completion of such building or other improvement is less than 60 percent of the useful life of such building or other improvement, or (2) in respect of any cost of acquiring the lease, if less than 75 percent of such cost is at- tributable to the portion of the term of the lease (excluding any period for which the lease may subsequently be renewed, ex- tended, or continued pursuant to an option exercisable by the lessee) remaining on the date of its acquisition, the term of the lease shall be treated as includ- ing any period for which the lease may be re- newed, extended, or continued pursuant to an option exercisable by the lessee, unless the lessee establishes that (as of the close of the taxable year) it is more probable that the lease will not be renewed, extended, or continued for such period than that the lease will be so re- newed, extended, or continued. (b) Related lessee and lessor (1) General rule If a lessee and lessor are related persons (as determined under paragraph (2)) at any time during the taxable year then, in determining the amount allowable to the lessee as a de- duction for such taxable year for exhauption, wear and tear, obsolescence, or amortization in respect of any building erected (or other improvement made) on the leased property, the lease shall be treated as including a period of not less duration than the remain- ing useful life of such improvement. (2) Related persons defined For purposes of paragraph (1), a lessor and lessee shall be considered to be related per- sons if- (A) the lessor and the lessee are members of an affiliated group (as defined in section 1504), or (B) the relationship between the lessor and lessee is one described in subsection (b) of section 267, except that, for purposes of this subparagraph, the phrase "80 percent or more" shall be substituted for the phrase "more than 50 percent" each place it ap- pears in such subsection. For purposes of determining the ownership of stock in applying subparagraph (B), the rules of subsection (c) of section 267 shall apply, except that the family of an individual shall include only his spouse, ancestors, and lineal descendants. (c) Reasonable certainty test In any case in which neither subsection (a) nor subsection (b) applies, the determination as to the amount allowable to a lessee as a deduc- tion for any taxable year for exhaustion, wear and tear, obsolescence, or amortization- (1) in respect of any building erected (or other improvement made) on the leased prop- erty, or (2) in respect of any cost of acquiring the lease, shall be made with reference to the term of the lease (excluding any period for which the lease may subsequently be renewed, extended, or continued pursuant to an option exercisable by the lessee), unless the lease has been renewed, extended, or continued or the facts show with reasonable certainty that the lease will be re- newed, extended, or continued. (Added Pub. L. 85-866, title I, § 15(a), Sept. 2, 1958, 72 Stat. 1612.) EFFECTIVE DATE Section 15(c) of Pub. L. 85-866 provided that: "The amendments made by this section [adding this section and amending analysis preceding section 161 of this title] shall apply with respect to costs of acquiring a lease incurred, and improvements begun, after July 28, 1958 (other than improvements which, on July 28, 1958, and at all times thereafter, the lessee was under a binding legal obligation to make)." § 179. Additional first-year depreciation allowance for small business (a) General rule In the case of section 179 property, the term "reasonable allowance" as used in section 167(a) may, at the election of the taxpayer, in- clude an allowance, for the first taxable year for which a deduction is allowable under sec- tion 167 to the taxpayer with respect to such property, of 20 percent of the cost of such prop- erty. (b) Dollar limitation If in any one taxable year the cost of section 179 property with respect to which the taxpay- er may elect an allowance under subsection (a) for such taxable year exceeds $10,000, then sub- section (a) shall apply with respect to those items selected by the taxpayer, but only to the extent of an aggregate cost of $10,000. In the 71-099 o - 78 - 14 (Vol. 7) Page 181 § 179