PART VI—ITEMIZED DEDUCTIONS FOR INDIVIDUALS AND CORPORATIONS
Amendment of Analysis
Amendments
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1956—Act June 29, 1956, ch. 464, §4(b),
1954—Act Sept. 1, 1954, ch. 1206, title II, §210(b),
1 Section 191 was repealed by
§161. Allowance of deductions
In computing taxable income under section 63, there shall be allowed as deductions the items specified in this part, subject to the exceptions provided in part IX (sec. 261 and following, relating to items not deductible).
(Aug. 16, 1954, ch. 736,
Amendments
1977—
Effective Date of 1977 Amendment
Amendment by
§162. Trade or business expenses
(a) In general
There shall be allowed as a deduction all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business, including—
(1) a reasonable allowance for salaries or other compensation for personal services actually rendered;
(2) traveling expenses (including amounts expended for meals and lodging other than amounts which are lavish or extravagant under the circumstances) while away from home in the pursuit of a trade or business; and
(3) rentals or other payments required to be made as a condition to the continued use or possession, for purposes of the trade or business, of property to which the taxpayer has not taken or is not taking title or in which he has no equity.
For purposes of the preceding sentence, the place of residence of a Member of Congress (including any Delegate and Resident Commissioner) within the State, congressional district, or possession which he represents in Congress shall be considered his home, but amounts expended by such Members within each taxable year for living expenses shall not be deductible for income tax purposes. For purposes of paragraph (2), the taxpayer shall not be treated as being temporarily away from home during any period of employment if such period exceeds 1 year. The preceding sentence shall not apply to any Federal employee during any period for which such employee is certified by the Attorney General (or the designee thereof) as traveling on behalf of the United States in temporary duty status to investigate or prosecute, or provide support services for the investigation or prosecution of, a Federal crime.
(b) Charitable contributions and gifts excepted
No deduction shall be allowed under subsection (a) for any contribution or gift which would be allowable as a deduction under section 170 were it not for the percentage limitations, the dollar limitations, or the requirements as to the time of payment, set forth in such section.
(c) Illegal bribes, kickbacks, and other payments
(1) Illegal payments to government officials or employees
No deduction shall be allowed under subsection (a) for any payment made, directly or indirectly, to an official or employee of any government, or of any agency or instrumentality of any government, if the payment constitutes an illegal bribe or kickback or, if the payment is to an official or employee of a foreign government, the payment is unlawful under the Foreign Corrupt Practices Act of 1977. The burden of proof in respect of the issue, for the purposes of this paragraph, as to whether a payment constitutes an illegal bribe or kickback (or is unlawful under the Foreign Corrupt Practices Act of 1977) shall be upon the Secretary to the same extent as he bears the burden of proof under section 7454 (concerning the burden of proof when the issue relates to fraud).
(2) Other illegal payments
No deduction shall be allowed under subsection (a) for any payment (other than a payment described in paragraph (1)) made, directly or indirectly, to any person, if the payment constitutes an illegal bribe, illegal kickback, or other illegal payment under any law of the United States, or under any law of a State (but only if such State law is generally enforced), which subjects the payor to a criminal penalty or the loss of license or privilege to engage in a trade or business. For purposes of this paragraph, a kickback includes a payment in consideration of the referral of a client, patient, or customer. The burden of proof in respect of the issue, for purposes of this paragraph, as to whether a payment constitutes an illegal bribe, illegal kickback, or other illegal payment shall be upon the Secretary to the same extent as he bears the burden of proof under section 7454 (concerning the burden of proof when the issue relates to fraud).
(3) Kickbacks, rebates, and bribes under medicare and medicaid
No deduction shall be allowed under subsection (a) for any kickback, rebate, or bribe made by any provider of services, supplier, physician, or other person who furnishes items or services for which payment is or may be made under the Social Security Act, or in whole or in part out of Federal funds under a State plan approved under such Act, if such kickback, rebate, or bribe is made in connection with the furnishing of such items or services or the making or receipt of such payments. For purposes of this paragraph, a kickback includes a payment in consideration of the referral of a client, patient, or customer.
(d) Capital contributions to Federal National Mortgage Association
For purposes of this subtitle, whenever the amount of capital contributions evidenced by a share of stock issued pursuant to section 303(c) of the Federal National Mortgage Association Charter Act (
(e) Denial of deduction for certain lobbying and political expenditures
(1) In general
No deduction shall be allowed under subsection (a) for any amount paid or incurred in connection with—
(A) influencing legislation,
(B) participation in, or intervention in, any political campaign on behalf of (or in opposition to) any candidate for public office,
(C) any attempt to influence the general public, or segments thereof, with respect to elections, legislative matters, or referendums, or
(D) any direct communication with a covered executive branch official in an attempt to influence the official actions or positions of such official.
(2) Application to dues of tax-exempt organizations
No deduction shall be allowed under subsection (a) for the portion of dues or other similar amounts paid by the taxpayer to an organization which is exempt from tax under this subtitle which the organization notifies the taxpayer under section 6033(e)(1)(A)(ii) is allocable to expenditures to which paragraph (1) applies.
(3) Influencing legislation
For purposes of this subsection—
(A) In general
The term "influencing legislation" means any attempt to influence any legislation through communication with any member or employee of a legislative body, or with any government official or employee who may participate in the formulation of legislation.
(B) Legislation
The term "legislation" has the meaning given such term by section 4911(e)(2).
(4) Other special rules
(A) Exception for certain taxpayers
In the case of any taxpayer engaged in the trade or business of conducting activities described in paragraph (1), paragraph (1) shall not apply to expenditures of the taxpayer in conducting such activities directly on behalf of another person (but shall apply to payments by such other person to the taxpayer for conducting such activities).
(B) De minimis exception
(i) In general
Paragraph (1) shall not apply to any in-house expenditures for any taxable year if such expenditures do not exceed $2,000. In determining whether a taxpayer exceeds the $2,000 limit under this clause, there shall not be taken into account overhead costs otherwise allocable to activities described in paragraphs (1)(A) and (D).
(ii) In-house expenditures
For purposes of clause (i), the term "in-house expenditures" means expenditures described in paragraphs (1)(A) and (D) other than—
(I) payments by the taxpayer to a person engaged in the trade or business of conducting activities described in paragraph (1) for the conduct of such activities on behalf of the taxpayer, or
(II) dues or other similar amounts paid or incurred by the taxpayer which are allocable to activities described in paragraph (1).
(C) Expenses incurred in connection with lobbying and political activities
Any amount paid or incurred for research for, or preparation, planning, or coordination of, any activity described in paragraph (1) shall be treated as paid or incurred in connection with such activity.
(5) Covered executive branch official
For purposes of this subsection, the term "covered executive branch official" means—
(A) the President,
(B) the Vice President,
(C) any officer or employee of the White House Office of the Executive Office of the President, and the 2 most senior level officers of each of the other agencies in such Executive Office, and
(D)(i) any individual serving in a position in level I of the Executive Schedule under
(6) Cross reference
For reporting requirements and alternative taxes related to this subsection, see section 6033(e).
(f) Fines, penalties, and other amounts
(1) In general
Except as provided in the following paragraphs of this subsection, no deduction otherwise allowable shall be allowed under this chapter for any amount paid or incurred (whether by suit, agreement, or otherwise) to, or at the direction of, a government or governmental entity in relation to the violation of any law or the investigation or inquiry by such government or entity into the potential violation of any law.
(2) Exception for amounts constituting restitution or paid to come into compliance with law
(A) In general
Paragraph (1) shall not apply to any amount that—
(i) the taxpayer establishes—
(I) constitutes restitution (including remediation of property) for damage or harm which was or may be caused by the violation of any law or the potential violation of any law, or
(II) is paid to come into compliance with any law which was violated or otherwise involved in the investigation or inquiry described in paragraph (1),
(ii) is identified as restitution or as an amount paid to come into compliance with such law, as the case may be, in the court order or settlement agreement, and
(iii) in the case of any amount of restitution for failure to pay any tax imposed under this title in the same manner as if such amount were such tax, would have been allowed as a deduction under this chapter if it had been timely paid.
The identification under clause (ii) alone shall not be sufficient to make the establishment required under clause (i).
(B) Limitation
Subparagraph (A) shall not apply to any amount paid or incurred as reimbursement to the government or entity for the costs of any investigation or litigation.
(3) Exception for amounts paid or incurred as the result of certain court orders
Paragraph (1) shall not apply to any amount paid or incurred by reason of any order of a court in a suit in which no government or governmental entity is a party.
(4) Exception for taxes due
Paragraph (1) shall not apply to any amount paid or incurred as taxes due.
(5) Treatment of certain nongovernmental regulatory entities
For purposes of this subsection, the following nongovernmental entities shall be treated as governmental entities:
(A) Any nongovernmental entity which exercises self-regulatory powers (including imposing sanctions) in connection with a qualified board or exchange (as defined in section 1256(g)(7)).
(B) To the extent provided in regulations, any nongovernmental entity which exercises self-regulatory powers (including imposing sanctions) as part of performing an essential governmental function.
(g) Treble damage payments under the antitrust laws
If in a criminal proceeding a taxpayer is convicted of a violation of the antitrust laws, or his plea of guilty or nolo contendere to an indictment or information charging such a violation is entered or accepted in such a proceeding, no deduction shall be allowed under subsection (a) for two-thirds of any amount paid or incurred—
(1) on any judgment for damages entered against the taxpayer under section 4 of the Act entitled "An Act to supplement existing laws against unlawful restraints and monopolies, and for other purposes", approved October 15, 1914 (commonly known as the Clayton Act), on account of such violation or any related violation of the antitrust laws which occurred prior to the date of the final judgment of such conviction, or
(2) in settlement of any action brought under such section 4 on account of such violation or related violation.
(h) State legislators' travel expenses away from home
(1) In general
For purposes of subsection (a), in the case of any individual who is a State legislator at any time during the taxable year and who makes an election under this subsection for the taxable year—
(A) the place of residence of such individual within the legislative district which he represented shall be considered his home,
(B) he shall be deemed to have expended for living expenses (in connection with his trade or business as a legislator) an amount equal to the sum of the amounts determined by multiplying each legislative day of such individual during the taxable year by the greater of—
(i) the amount generally allowable with respect to such day to employees of the State of which he is a legislator for per diem while away from home, to the extent such amount does not exceed 110 percent of the amount described in clause (ii) with respect to such day, or
(ii) the amount generally allowable with respect to such day to employees of the executive branch of the Federal Government for per diem while away from home but serving in the United States, and
(C) he shall be deemed to be away from home in the pursuit of a trade or business on each legislative day.
(2) Legislative days
For purposes of paragraph (1), a legislative day during any taxable year for any individual shall be any day during such year on which—
(A) the legislature was in session (including any day in which the legislature was not in session for a period of 4 consecutive days or less), or
(B) the legislature was not in session but the physical presence of the individual was formally recorded at a meeting of a committee of such legislature.
(3) Election
An election under this subsection for any taxable year shall be made at such time and in such manner as the Secretary shall by regulations prescribe.
(4) Section not to apply to legislators who reside near capitol
This subsection shall not apply to any legislator whose place of residence within the legislative district which he represents is 50 or fewer miles from the capitol building of the State.
[(i) Repealed. Pub. L. 101–239, title VI, §6202(b)(3)(A), Dec. 19, 1989, 103 Stat. 2233 ]
(j) Certain foreign advertising expenses
(1) In general
No deduction shall be allowed under subsection (a) for any expenses of an advertisement carried by a foreign broadcast undertaking and directed primarily to a market in the United States. This paragraph shall apply only to foreign broadcast undertakings located in a country which denies a similar deduction for the cost of advertising directed primarily to a market in the foreign country when placed with a United States broadcast undertaking.
(2) Broadcast undertaking
For purposes of paragraph (1), the term "broadcast undertaking" includes (but is not limited to) radio and television stations.
(k) Stock reacquisition expenses
(1) In general
Except as provided in paragraph (2), no deduction otherwise allowable shall be allowed under this chapter for any amount paid or incurred by a corporation in connection with the reacquisition of its stock or of the stock of any related person (as defined in section 465(b)(3)(C)).
(2) Exceptions
Paragraph (1) shall not apply to—
(A) Certain specific deductions
Any—
(i) deduction allowable under section 163 (relating to interest),
(ii) deduction for amounts which are properly allocable to indebtedness and amortized over the term of such indebtedness, or
(iii) deduction for dividends paid (within the meaning of section 561).
(B) Stock of certain regulated investment companies
Any amount paid or incurred in connection with the redemption of any stock in a regulated investment company which issues only stock which is redeemable upon the demand of the shareholder.
(l) Special rules for health insurance costs of self-employed individuals
(1) Allowance of deduction
In the case of a taxpayer who is an employee within the meaning of section 401(c)(1), there shall be allowed as a deduction under this section an amount equal to the amount paid during the taxable year for insurance which constitutes medical care for—
(A) the taxpayer,
(B) the taxpayer's spouse,
(C) the taxpayer's dependents, and
(D) any child (as defined in section 152(f)(1)) of the taxpayer who as of the end of the taxable year has not attained age 27.
(2) Limitations
(A) Dollar amount
No deduction shall be allowed under paragraph (1) to the extent that the amount of such deduction exceeds the taxpayer's earned income (within the meaning of section 401(c)) derived by the taxpayer from the trade or business with respect to which the plan providing the medical care coverage is established.
(B) Other coverage
Paragraph (1) shall not apply to any taxpayer for any calendar month for which the taxpayer is eligible to participate in any subsidized health plan maintained by any employer of the taxpayer or of the spouse of, or any dependent, or individual described in subparagraph (D) of paragraph (1) with respect to, the taxpayer. The preceding sentence shall be applied separately with respect to—
(i) plans which include coverage for qualified long-term care services (as defined in section 7702B(c)) or are qualified long-term care insurance contracts (as defined in section 7702B(b)), and
(ii) plans which do not include such coverage and are not such contracts.
(C) Long-term care premiums
In the case of a qualified long-term care insurance contract (as defined in section 7702B(b)), only eligible long-term care premiums (as defined in section 213(d)(10)) shall be taken into account under paragraph (1).
(3) Coordination with medical deduction
Any amount paid by a taxpayer for insurance to which paragraph (1) applies shall not be taken into account in computing the amount allowable to the taxpayer as a deduction under section 213(a).
(4) Deduction not allowed for self-employment tax purposes
The deduction allowable by reason of this subsection shall not be taken into account in determining an individual's net earnings from self-employment (within the meaning of section 1402(a)) for purposes of
(5) Treatment of certain S corporation shareholders
This subsection shall apply in the case of any individual treated as a partner under section 1372(a), except that—
(A) for purposes of this subsection, such individual's wages (as defined in section 3121) from the S corporation shall be treated as such individual's earned income (within the meaning of section 401(c)(1)), and
(B) there shall be such adjustments in the application of this subsection as the Secretary may by regulations prescribe.
(m) Certain excessive employee remuneration
(1) In general
In the case of any publicly held corporation, no deduction shall be allowed under this chapter for applicable employee remuneration with respect to any covered employee to the extent that the amount of such remuneration for the taxable year with respect to such employee exceeds $1,000,000.
(2) Publicly held corporation
For purposes of this subsection, the term "publicly held corporation" means any corporation which is an issuer (as defined in section 3 of the Securities Exchange Act of 1934 (
(A) the securities of which are required to be registered under section 12 of such Act (
(B) that is required to file reports under section 15(d) of such Act (
(3) Covered employee
For purposes of this subsection, the term "covered employee" means any employee of the taxpayer if—
(A) such employee is the principal executive officer or principal financial officer of the taxpayer at any time during the taxable year, or was an individual acting in such a capacity,
(B) the total compensation of such employee for the taxable year is required to be reported to shareholders under the Securities Exchange Act of 1934 by reason of such employee being among the 3 highest compensated officers for the taxable year (other than any individual described in subparagraph (A)), or
(C) was a covered employee of the taxpayer (or any predecessor) for any preceding taxable year beginning after December 31, 2016.
Such term shall include any employee who would be described in subparagraph (B) if the reporting described in such subparagraph were required as so described.
(4) Applicable employee remuneration
For purposes of this subsection—
(A) In general
Except as otherwise provided in this paragraph, the term "applicable employee remuneration" means, with respect to any covered employee for any taxable year, the aggregate amount allowable as a deduction under this chapter for such taxable year (determined without regard to this subsection) for remuneration for services performed by such employee (whether or not during the taxable year).
(B) Exception for existing binding contracts
The term "applicable employee remuneration" shall not include any remuneration payable under a written binding contract which was in effect on February 17, 1993, and which was not modified thereafter in any material respect before such remuneration is paid.
(C) Remuneration
For purposes of this paragraph, the term "remuneration" includes any remuneration (including benefits) in any medium other than cash, but shall not include—
(i) any payment referred to in so much of section 3121(a)(5) as precedes subparagraph (E) thereof, and
(ii) any benefit provided to or on behalf of an employee if at the time such benefit is provided it is reasonable to believe that the employee will be able to exclude such benefit from gross income under this chapter.
For purposes of clause (i), section 3121(a)(5) shall be applied without regard to section 3121(v)(1).
(D) Coordination with disallowed golden parachute payments
The dollar limitation contained in paragraph (1) shall be reduced (but not below zero) by the amount (if any) which would have been included in the applicable employee remuneration of the covered employee for the taxable year but for being disallowed under section 280G.
(E) Coordination with excise tax on specified stock compensation
The dollar limitation contained in paragraph (1) with respect to any covered employee shall be reduced (but not below zero) by the amount of any payment (with respect to such employee) of the tax imposed by section 4985 directly or indirectly by the expatriated corporation (as defined in such section) or by any member of the expanded affiliated group (as defined in such section) which includes such corporation.
(F) Special rule for remuneration paid to beneficiaries, etc.
Remuneration shall not fail to be applicable employee remuneration merely because it is includible in the income of, or paid to, a person other than the covered employee, including after the death of the covered employee.
(5) Special rule for application to employers participating in the Troubled Assets Relief Program
(A) In general
In the case of an applicable employer, no deduction shall be allowed under this chapter—
(i) in the case of executive remuneration for any applicable taxable year which is attributable to services performed by a covered executive during such applicable taxable year, to the extent that the amount of such remuneration exceeds $500,000, or
(ii) in the case of deferred deduction executive remuneration for any taxable year for services performed during any applicable taxable year by a covered executive, to the extent that the amount of such remuneration exceeds $500,000 reduced (but not below zero) by the sum of—
(I) the executive remuneration for such applicable taxable year, plus
(II) the portion of the deferred deduction executive remuneration for such services which was taken into account under this clause in a preceding taxable year.
(B) Applicable employer
For purposes of this paragraph—
(i) In general
Except as provided in clause (ii), the term "applicable employer" means any employer from whom 1 or more troubled assets are acquired under a program established by the Secretary under section 101(a) of the Emergency Economic Stabilization Act of 2008 if the aggregate amount of the assets so acquired for all taxable years exceeds $300,000,000.
(ii) Disregard of certain assets sold through direct purchase
If the only sales of troubled assets by an employer under the program described in clause (i) are through 1 or more direct purchases (within the meaning of section 113(c) of the Emergency Economic Stabilization Act of 2008), such assets shall not be taken into account under clause (i) in determining whether the employer is an applicable employer for purposes of this paragraph.
(iii) Aggregation rules
Two or more persons who are treated as a single employer under subsection (b) or (c) of section 414 shall be treated as a single employer, except that in applying section 1563(a) for purposes of either such subsection, paragraphs (2) and (3) thereof shall be disregarded.
(C) Applicable taxable year
For purposes of this paragraph, the term "applicable taxable year" means, with respect to any employer—
(i) the first taxable year of the employer—
(I) which includes any portion of the period during which the authorities under section 101(a) of the Emergency Economic Stabilization Act of 2008 are in effect (determined under section 120 thereof), and
(II) in which the aggregate amount of troubled assets acquired from the employer during the taxable year pursuant to such authorities (other than assets to which subparagraph (B)(ii) applies), when added to the aggregate amount so acquired for all preceding taxable years, exceeds $300,000,000, and
(ii) any subsequent taxable year which includes any portion of such period.
(D) Covered executive
For purposes of this paragraph—
(i) In general
The term "covered executive" means, with respect to any applicable taxable year, any employee—
(I) who, at any time during the portion of the taxable year during which the authorities under section 101(a) of the Emergency Economic Stabilization Act of 2008 are in effect (determined under section 120 thereof), is the chief executive officer of the applicable employer or the chief financial officer of the applicable employer, or an individual acting in either such capacity, or
(II) who is described in clause (ii).
(ii) Highest compensated employees
An employee is described in this clause if the employee is 1 of the 3 highest compensated officers of the applicable employer for the taxable year (other than an individual described in clause (i)(I)), determined—
(I) on the basis of the shareholder disclosure rules for compensation under the Securities Exchange Act of 1934 (without regard to whether those rules apply to the employer), and
(II) by only taking into account employees employed during the portion of the taxable year described in clause (i)(I).
(iii) Employee remains covered executive
If an employee is a covered executive with respect to an applicable employer for any applicable taxable year, such employee shall be treated as a covered executive with respect to such employer for all subsequent applicable taxable years and for all subsequent taxable years in which deferred deduction executive remuneration with respect to services performed in all such applicable taxable years would (but for this paragraph) be deductible.
(E) Executive remuneration
For purposes of this paragraph, the term "executive remuneration" means the applicable employee remuneration of the covered executive, as determined under paragraph (4) without regard to subparagraph (B) thereof. Such term shall not include any deferred deduction executive remuneration with respect to services performed in a prior applicable taxable year.
(F) Deferred deduction executive remuneration
For purposes of this paragraph, the term "deferred deduction executive remuneration" means remuneration which would be executive remuneration for services performed in an applicable taxable year but for the fact that the deduction under this chapter (determined without regard to this paragraph) for such remuneration is allowable in a subsequent taxable year.
(G) Coordination
Rules similar to the rules of subparagraphs (D) and (E) of paragraph (4) shall apply for purposes of this paragraph.
(H) Regulatory authority
The Secretary may prescribe such guidance, rules, or regulations as are necessary to carry out the purposes of this paragraph and the Emergency Economic Stabilization Act of 2008, including the extent to which this paragraph applies in the case of any acquisition, merger, or reorganization of an applicable employer.
(6) Special rule for application to certain health insurance providers
(A) In general
No deduction shall be allowed under this chapter—
(i) in the case of applicable individual remuneration which is for any disqualified taxable year beginning after December 31, 2012, and which is attributable to services performed by an applicable individual during such taxable year, to the extent that the amount of such remuneration exceeds $500,000, or
(ii) in the case of deferred deduction remuneration for any taxable year beginning after December 31, 2012, which is attributable to services performed by an applicable individual during any disqualified taxable year beginning after December 31, 2009, to the extent that the amount of such remuneration exceeds $500,000 reduced (but not below zero) by the sum of—
(I) the applicable individual remuneration for such disqualified taxable year, plus
(II) the portion of the deferred deduction remuneration for such services which was taken into account under this clause in a preceding taxable year (or which would have been taken into account under this clause in a preceding taxable year if this clause were applied by substituting "December 31, 2009" for "December 31, 2012" in the matter preceding subclause (I)).
(B) Disqualified taxable year
For purposes of this paragraph, the term "disqualified taxable year" means, with respect to any employer, any taxable year for which such employer is a covered health insurance provider.
(C) Covered health insurance provider
For purposes of this paragraph—
(i) In general
The term "covered health insurance provider" means—
(I) with respect to taxable years beginning after December 31, 2009, and before January 1, 2013, any employer which is a health insurance issuer (as defined in section 9832(b)(2)) and which receives premiums from providing health insurance coverage (as defined in section 9832(b)(1)), and
(II) with respect to taxable years beginning after December 31, 2012, any employer which is a health insurance issuer (as defined in section 9832(b)(2)) and with respect to which not less than 25 percent of the gross premiums received from providing health insurance coverage (as defined in section 9832(b)(1)) is from minimum essential coverage (as defined in section 5000A(f)).
(ii) Aggregation rules
Two or more persons who are treated as a single employer under subsection (b), (c), (m), or (o) of section 414 shall be treated as a single employer, except that in applying section 1563(a) for purposes of any such subsection, paragraphs (2) and (3) thereof shall be disregarded.
(D) Applicable individual remuneration
For purposes of this paragraph, the term "applicable individual remuneration" means, with respect to any applicable individual for any disqualified taxable year, the aggregate amount allowable as a deduction under this chapter for such taxable year (determined without regard to this subsection) for remuneration (as defined in paragraph (4) without regard to subparagraph (B) thereof) for services performed by such individual (whether or not during the taxable year). Such term shall not include any deferred deduction remuneration with respect to services performed during the disqualified taxable year.
(E) Deferred deduction remuneration
For purposes of this paragraph, the term "deferred deduction remuneration" means remuneration which would be applicable individual remuneration for services performed in a disqualified taxable year but for the fact that the deduction under this chapter (determined without regard to this paragraph) for such remuneration is allowable in a subsequent taxable year.
(F) Applicable individual
For purposes of this paragraph, the term "applicable individual" means, with respect to any covered health insurance provider for any disqualified taxable year, any individual—
(i) who is an officer, director, or employee in such taxable year, or
(ii) who provides services for or on behalf of such covered health insurance provider during such taxable year.
(G) Coordination
Rules similar to the rules of subparagraphs (D) and (E) of paragraph (4) shall apply for purposes of this paragraph.
(H) Regulatory authority
The Secretary may prescribe such guidance, rules, or regulations as are necessary to carry out the purposes of this paragraph.
(n) Special rule for certain group health plans
(1) In general
No deduction shall be allowed under this chapter to an employer for any amount paid or incurred in connection with a group health plan if the plan does not reimburse for inpatient hospital care services provided in the State of New York—
(A) except as provided in subparagraphs (B) and (C), at the same rate as licensed commercial insurers are required to reimburse hospitals for such services when such reimbursement is not through such a plan,
(B) in the case of any reimbursement through a health maintenance organization, at the same rate as health maintenance organizations are required to reimburse hospitals for such services for individuals not covered by such a plan (determined without regard to any government-supported individuals exempt from such rate), or
(C) in the case of any reimbursement through any corporation organized under Article 43 of the New York State Insurance Law, at the same rate as any such corporation is required to reimburse hospitals for such services for individuals not covered by such a plan.
(2) State law exception
Paragraph (1) shall not apply to any group health plan which is not required under the laws of the State of New York (determined without regard to this subsection or other provisions of Federal law) to reimburse at the rates provided in paragraph (1).
(3) Group health plan
For purposes of this subsection, the term "group health plan" means a plan of, or contributed to by, an employer or employee organization (including a self-insured plan) to provide health care (directly or otherwise) to any employee, any former employee, the employer, or any other individual associated or formerly associated with the employer in a business relationship, or any member of their family.
(o) Treatment of certain expenses of rural mail carriers
(1) General rule
In the case of any employee of the United States Postal Service who performs services involving the collection and delivery of mail on a rural route and who receives qualified reimbursements for the expenses incurred by such employee for the use of a vehicle in performing such services—
(A) the amount allowable as a deduction under this chapter for the use of a vehicle in performing such services shall be equal to the amount of such qualified reimbursements; and
(B) such qualified reimbursements shall be treated as paid under a reimbursement or other expense allowance arrangement for purposes of section 62(a)(2)(A) (and section 62(c) shall not apply to such qualified reimbursements).
(2) Special rule where expenses exceed reimbursements
Notwithstanding paragraph (1)(A), if the expenses incurred by an employee for the use of a vehicle in performing services described in paragraph (1) exceed the qualified reimbursements for such expenses, such excess shall be taken into account in computing the miscellaneous itemized deductions of the employee under section 67.
(3) Definition of qualified reimbursements
For purposes of this subsection, the term "qualified reimbursements" means the amounts paid by the United States Postal Service to employees as an equipment maintenance allowance under the 1991 collective bargaining agreement between the United States Postal Service and the National Rural Letter Carriers' Association. Amounts paid as an equipment maintenance allowance by such Postal Service under later collective bargaining agreements that supersede the 1991 agreement shall be considered qualified reimbursements if such amounts do not exceed the amounts that would have been paid under the 1991 agreement, adjusted by increasing any such amount under the 1991 agreement by an amount equal to—
(A) such amount, multiplied by
(B) the cost-of-living adjustment determined under section 1(f)(3) for the calendar year in which the taxable year begins, by substituting "calendar year 1990" for "calendar year 2016" in subparagraph (A)(ii) thereof.
(p) Treatment of expenses of members of reserve component of Armed Forces of the United States
For purposes of subsection (a)(2), in the case of an individual who performs services as a member of a reserve component of the Armed Forces of the United States at any time during the taxable year, such individual shall be deemed to be away from home in the pursuit of a trade or business for any period during which such individual is away from home in connection with such service.
(q) Payments related to sexual harassment and sexual abuse
No deduction shall be allowed under this chapter for—
(1) any settlement or payment related to sexual harassment or sexual abuse if such settlement or payment is subject to a nondisclosure agreement, or
(2) attorney's fees related to such a settlement or payment.
(r) Disallowance of FDIC premiums paid by certain large financial institutions
(1) In general
No deduction shall be allowed for the applicable percentage of any FDIC premium paid or incurred by the taxpayer.
(2) Exception for small institutions
Paragraph (1) shall not apply to any taxpayer for any taxable year if the total consolidated assets of such taxpayer (determined as of the close of such taxable year) do not exceed $10,000,000,000.
(3) Applicable percentage
For purposes of this subsection, the term "applicable percentage" means, with respect to any taxpayer for any taxable year, the ratio (expressed as a percentage but not greater than 100 percent) which—
(A) the excess of—
(i) the total consolidated assets of such taxpayer (determined as of the close of such taxable year), over
(ii) $10,000,000,000, bears to
(B) $40,000,000,000.
(4) FDIC premiums
For purposes of this subsection, the term "FDIC premium" means any assessment imposed under section 7(b) of the Federal Deposit Insurance Act (
(5) Total consolidated assets
For purposes of this subsection, the term "total consolidated assets" has the meaning given such term under section 165 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (
(6) Aggregation rule
(A) In general
Members of an expanded affiliated group shall be treated as a single taxpayer for purposes of applying this subsection.
(B) Expanded affiliated group
(i) In general
For purposes of this paragraph, the term "expanded affiliated group" means an affiliated group as defined in section 1504(a), determined—
(I) by substituting "more than 50 percent" for "at least 80 percent" each place it appears, and
(II) without regard to paragraphs (2) and (3) of section 1504(b).
(ii) Control of non-corporate entities
A partnership or any other entity (other than a corporation) shall be treated as a member of an expanded affiliated group if such entity is controlled (within the meaning of section 954(d)(3)) by members of such group (including any entity treated as a member of such group by reason of this clause).
(s) Cross reference
(1) For special rule relating to expenses in connection with subdividing real property for sale, see section 1237.
(2) For special rule relating to the treatment of payments by a transferee of a franchise, trademark, or trade name, see section 1253.
(3) For special rules relating to—
(A) funded welfare benefit plans, see section 419, and
(B) deferred compensation and other deferred benefits, see section 404.
(Aug. 16, 1954, ch. 736,
References in Text
The Foreign Corrupt Practices Act of 1977, referred to in subsec. (c)(1), is title I of
The Social Security Act, referred to in subsec. (c)(3), is act Aug. 14, 1935, ch. 531,
Section 4 of the Clayton Act, referred to in subsec. (g)(1), is classified to
The Securities Exchange Act of 1934, referred to in subsec. (m)(3)(B), (5)(D)(ii)(I), is act June 6, 1934, ch. 404,
The Emergency Economic Stabilization Act of 2008, referred to in subsec. (m)(5), is div. A of
Amendments
2017—Subsec. (a).
Subsec. (e)(2) to (8).
Subsec. (f).
Subsec. (m)(2).
Subsec. (m)(3).
Subsec. (m)(3)(A).
Subsec. (m)(3)(B).
Subsec. (m)(3)(C).
Subsec. (m)(4)(B) to (E).
Subsec. (m)(4)(F).
Subsec. (m)(4)(G).
Subsec. (m)(5)(E).
Subsec. (m)(5)(G).
Subsec. (m)(6)(D).
Subsec. (m)(6)(G).
Subsec. (o)(3).
Subsec. (q).
Subsec. (r).
Subsec. (s).
2014—Subsec. (g).
Subsec. (h)(4).
2011—Subsec. (a).
2010—Subsec. (a).
Subsec. (l)(1).
Subsec. (l)(2)(B).
Subsec. (l)(4).
Subsec. (m)(6).
2008—Subsec. (m)(5).
2004—Subsec. (m)(4)(G).
Subsec. (o).
Subsec. (o)(2), (3).
2003—Subsecs. (p), (q).
1998—Subsec. (a).
Subsec. (l)(1)(B).
| "For taxable years beginning in calendar year— | The applicable percentage is— |
|---|---|
| 1997 | 40 |
| 1998 and 1999 | 45 |
| 2000 and 2001 | 50 |
| 2002 | 60 |
| 2003 through 2005 | 80 |
| 2006 | 90 |
| 2007 and thereafter | 100." |
1997—Subsec. (a).
Subsec. (l)(1)(B).
| "For taxable years beginning in calendar year— | The applicable percentage is— |
|---|---|
| 1997 | 40 percent |
| 1998 through 2002 | 45 percent |
| 2003 | 50 percent |
| 2004 | 60 percent |
| 2005 | 70 percent |
| 2006 or thereafter | 80 percent." |
Subsec. (l)(2)(B).
Subsecs. (o), (p).
1996—Subsec. (k).
Subsec. (k)(1).
Subsec. (k)(2)(A).
Subsec. (l)(1).
"(1)
Subsec. (l)(2)(C).
1995—Subsec. (l)(1).
Subsec. (l)(6).
1993—Subsec. (e).
Subsec. (l)(2)(B).
Subsec. (l)(3).
"(A)
"(B)
Subsec. (l)(6).
Subsec. (m).
Subsec. (n).
Subsec. (o).
1992—Subsec. (a).
1991—Subsec. (l)(6).
1990—Subsec. (l)(3).
Subsec. (l)(6).
1989—Subsec. (i).
"(1)
"(2)
Subsec. (k)(2)(B)(iv).
Subsec. (l)(2).
Subsec. (l)(5).
Subsec. (l)(6).
1988—Subsec. (i)(2), (3).
Subsec. (k).
Subsec. (k)(5)(B).
Subsec . (l).
Subsec. (m).
Subsec. (m)(2)(A).
Subsec. (m)(4), (5).
Subsec. (n).
1986—Subsec. (i)(1).
Subsec. (i)(2), (3).
Subsec. (k).
Subsec. (k)(2)(A).
Subsec. (k)(2)(B)(i).
"(I) a qualifying event described in paragraph (3)(B) (relating to terminations and reduced hours), the date which is 18 months after the date of the qualifying event, and
"(II) any qualifying event not described in subclause (I), the date which is 36 months after the date of the qualifying event."
Subsec. (k)(2)(B)(i)(II).
Subsec. (k)(2)(B)(i)(III), (IV).
Subsec. (k)(2)(B)(iii).
Subsec. (k)(2)(B)(iv).
Subsec. (k)(2)(B)(iv)(I).
Subsec. (k)(2)(B)(iv)(II).
Subsec. (k)(2)(B)(v).
Subsec. (k)(3).
Subsec. (k)(5)(B).
Subsec. (k)(6)(B).
Subsec. (k)(6)(C).
Subsec. (k)(6)(D)(i).
Subsec. (k)(7)(B)(iii).
Subsec. (k)(7)(B)(iv).
Subsec. (l).
Subsec. (m).
1984—Subsec. (i)(2).
Subsec. (j).
Subsec. (j)(3).
Subsec. (k).
1982—Subsec. (a).
Subsec. (c)(1).
Subsec. (h).
Subsec. (i).
Subsec. (j).
1981—Subsec. (a).
Subsec. (h).
Subsec. (i).
1976—Subsec. (a).
Subsec. (c).
1971—Subsec. (c).
Subsec. (c)(2).
Subsec. (c)(3).
1969—Subsec. (c).
Subsecs. (f), (g).
Subsec. (h).
1962—Subsec. (a)(2).
Subsecs. (e), (f).
1960—Subsec. (b).
Subsecs. (d), (e).
1958—Subsecs. (c), (d).
Effective Date of 2017 Amendment
Amendment by section 11002(d)(6) of
"(1)
"(2)
Effective Date of 2014 Amendment
Amendment by
Effective Date of 2011 Amendment
Amendment by
Effective Date of 2010 Amendment
Effective Date of 2008 Amendment
Effective Date of 2004 Amendment
Amendment by section 802(b)(2) of
Effective Date of 2003 Amendment
Amendment by
Effective Date of 1998 Amendments
Amendment by
Effective Date of 1997 Amendment
Amendment by section 1602(c) of
Effective Date of 1996 Amendment
Amendment by section 311(a) of
"(A)
"(B)
Effective Date of 1995 Amendment
"(1)
"(2)
Effective Date of 1993 Amendment
Amendment by section 13131(d)(2) of
Effective Date of 1992 Amendment
Effective Date of 1991 Amendment
Effective Date of 1990 Amendment
Amendment by section 11111(d)(2) of
Effective Date of 1989 Amendment
"(i) qualifying events occurring after December 31, 1989, and
"(ii) in the case of qualified beneficiaries who elected continuation coverage after December 31, 1988, the period for which the required premium was paid (or was attempted to be paid but was rejected as such)."
Amendment by
Effective Date of 1988 Amendment
Amendment by sections 1011B(b)(1)–(3) and 1018(t)(7)(B) of
Effective Date of 1986 Amendment
"(1)
"(2)
"(3)
Amendment by section 9307(c)(2)(B) of
"(1)
"(2)
"(A) a qualifying event described in section 162(k)(3)(F) of the Internal Revenue Code of 1986 or section 603(6) of the Employee Retirement Income Security Act of 1974 [
"(B) a qualifying event described in section 162(k)(3)(A) of the Internal Revenue Code of 1986 or section 603(1) of the Employee Retirement Income Security Act of 1974 [
"(3)
"(4)
Amendment by
Effective Date of 1984 Amendment
Amendment by section 512(b) of
Amendment by section 2354(d) of
Effective Date of 1982 Amendment
Amendment by section 128(b) of
Effective Date of 1981 Amendment
Effective Date of 1976 Amendment
Amendment by section 1901(c)(4) of
Effective Date of 1971 Amendment
Effective Date of 1969 Amendment
Amendment by section 516(c)(2)(A) of
Effective Date of 1962 Amendment
Effective Date of 1960 Amendment
Effective Date of 1958 Amendment
Deduction for Special Assessments
Special Rule for Deductions Under Subsection (l) for Certain Taxable Years
Business Use of Automobiles by Rural Mail Carriers
Plan Amendments Not Required Until January 1, 1989
For provisions directing that if any amendments made by subtitle A or subtitle C of title XI [§§1101–1147 and 1171–1177] or title XVIII [§§1800–1899A] of
Living Expenses of Members of Congress While Away From Home; Sense of Congress
State Legislators' Travel Expenses Away From Home
"(a) In
"(1) the place of residence of such individual within the legislative district which he represented shall be considered his home, and
"(2) he shall be deemed to have expended for living expenses (in connection with his trade or business as a legislator) an amount equal to the sum of the amounts determined by multiplying each legislative day of such individual during the taxable year by the amount generally allowable with respect to such day to employees of the executive branch of the Federal Government for per diem while away from home but serving in the United States.
"(b)
"(c)
"(d)
[Amendment of section 604 of
Denial of Deduction for Amounts Paid or Incurred on Judgments in Suits Brought To Recover Price Increases in Purchase of New Principal Residence
No deductions to be allowed in computing taxable income for two-thirds of any amount paid or incurred on a judgment entered against any person in a suit brought under section 208(b) of
Deductibility of Accrued Vacation Pay
Investigation of, and Reports on, Treatment of Entertainment and Certain Other Expenses
Filing of Claims for Refunds of Overpayments
Extension of time for filing of claims for refunds or credit of overpayments of income tax resulting from application of this section, see section 96 of
§163. Interest
(a) General rule
There shall be allowed as a deduction all interest paid or accrued within the taxable year on indebtedness.
(b) Installment purchases where interest charge is not separately stated
(1) General rule
If personal property or educational services are purchased under a contract—
(A) which provides that payment of part or all of the purchase price is to be made in installments, and
(B) in which carrying charges are separately stated but the interest charge cannot be ascertained,
then the payments made during the taxable year under the contract shall be treated for purposes of this section as if they included interest equal to 6 percent of the average unpaid balance under the contract during the taxable year. For purposes of the preceding sentence, the average unpaid balance is the sum of the unpaid balance outstanding on the first day of each month beginning during the taxable year, divided by 12. For purposes of this paragraph, the term "educational services" means any service (including lodging) which is purchased from an educational organization described in section 170(b)(1)(A)(ii) and which is provided for a student of such organization.
(2) Limitation
In the case of any contract to which paragraph (1) applies, the amount treated as interest for any taxable year shall not exceed the aggregate carrying charges which are properly attributable to such taxable year.
(c) Redeemable ground rents
For purposes of this subtitle, any annual or periodic rental under a redeemable ground rent (excluding amounts in redemption thereof) shall be treated as interest on an indebtedness secured by a mortgage.
(d) Limitation on investment interest
(1) In general
In the case of a taxpayer other than a corporation, the amount allowed as a deduction under this chapter for investment interest for any taxable year shall not exceed the net investment income of the taxpayer for the taxable year.
(2) Carryforward of disallowed interest
The amount not allowed as a deduction for any taxable year by reason of paragraph (1) shall be treated as investment interest paid or accrued by the taxpayer in the succeeding taxable year.
(3) Investment interest
For purposes of this subsection—
(A) In general
The term "investment interest" means any interest allowable as a deduction under this chapter (determined without regard to paragraph (1)) which is paid or accrued on indebtedness properly allocable to property held for investment.
(B) Exceptions
The term "investment interest" shall not include—
(i) any qualified residence interest (as defined in subsection (h)(3)), or
(ii) any interest which is taken into account under section 469 in computing income or loss from a passive activity of the taxpayer.
(C) Personal property used in short sale
For purposes of this paragraph, the term "interest" includes any amount allowable as a deduction in connection with personal property used in a short sale.
(4) Net investment income
For purposes of this subsection—
(A) In general
The term "net investment income" means the excess of—
(i) investment income, over
(ii) investment expenses.
(B) Investment income
The term "investment income" means the sum of—
(i) gross income from property held for investment (other than any gain taken into account under clause (ii)(I)),
(ii) the excess (if any) of—
(I) the net gain attributable to the disposition of property held for investment, over
(II) the net capital gain determined by only taking into account gains and losses from dispositions of property held for investment, plus
(iii) so much of the net capital gain referred to in clause (ii)(II) (or, if lesser, the net gain referred to in clause (ii)(I)) as the taxpayer elects to take into account under this clause.
Such term shall include qualified dividend income (as defined in section 1(h)(11)(B)) only to the extent the taxpayer elects to treat such income as investment income for purposes of this subsection.
(C) Investment expenses
The term "investment expenses" means the deductions allowed under this chapter (other than for interest) which are directly connected with the production of investment income.
(D) Income and expenses from passive activities
Investment income and investment expenses shall not include any income or expenses taken into account under section 469 in computing income or loss from a passive activity.
(5) Property held for investment
For purposes of this subsection—
(A) In general
The term "property held for investment" shall include—
(i) any property which produces income of a type described in section 469(e)(1), and
(ii) any interest held by a taxpayer in an activity involving the conduct of a trade or business—
(I) which is not a passive activity, and
(II) with respect to which the taxpayer does not materially participate.
(B) Investment expenses
In the case of property described in subparagraph (A)(i), expenses shall be allocated to such property in the same manner as under section 469.
(C) Terms
For purposes of this paragraph, the terms "activity", "passive activity", and "materially participate" have the meanings given such terms by section 469.
(e) Original issue discount
(1) In general
The portion of the original issue discount with respect to any debt instrument which is allowable as a deduction to the issuer for any taxable year shall be equal to the aggregate daily portions of the original issue discount for days during such taxable year.
(2) Definitions and special rules
For purposes of this subsection—
(A) Debt instrument
The term "debt instrument" has the meaning given such term by section 1275(a)(1).
(B) Daily portions
The daily portion of the original issue discount for any day shall be determined under section 1272(a) (without regard to paragraph (7) thereof and without regard to section 1273(a)(3)).
(C) Short-term obligations
In the case of an obligor of a short-term obligation (as defined in section 1283(a)(1)(A)) who uses the cash receipts and disbursements method of accounting, the original issue discount (and any other interest payable) on such obligation shall be deductible only when paid.
(3) Special rule for original issue discount on obligation held by related foreign person
(A) In general
If any debt instrument having original issue discount is held by a related foreign person, any portion of such original issue discount shall not be allowable as a deduction to the issuer until paid. The preceding sentence shall not apply to the extent that the original issue discount is effectively connected with the conduct by such foreign related person of a trade or business within the United States unless such original issue discount is exempt from taxation (or is subject to a reduced rate of tax) pursuant to a treaty obligation of the United States.
(B) Special rule for certain foreign entities
(i) In general
In the case of any debt instrument having original issue discount which is held by a related foreign person which is a controlled foreign corporation (as defined in section 957) or a passive foreign investment company (as defined in section 1297), a deduction shall be allowable to the issuer with respect to such original issue discount for any taxable year before the taxable year in which paid only to the extent such original issue discount is includible (determined without regard to properly allocable deductions and qualified deficits under section 952(c)(1)(B)) during such prior taxable year in the gross income of a United States person who owns (within the meaning of section 958(a)) stock in such corporation.
(ii) Secretarial authority
The Secretary may by regulation exempt transactions from the application of clause (i), including any transaction which is entered into by a payor in the ordinary course of a trade or business in which the payor is predominantly engaged.
(C) Related foreign person
For purposes of subparagraph (A), the term "related foreign person" means any person—
(i) who is not a United States person, and
(ii) who is related (within the meaning of section 267(b)) to the issuer.
(4) Exception
This subsection shall not apply to any debt instrument described in section 1272(a)(2)(D) (relating to loans between natural persons).
(5) Special rules for original issue discount on certain high yield obligations
(A) In general
In the case of an applicable high yield discount obligation issued by a corporation—
(i) no deduction shall be allowed under this chapter for the disqualified portion of the original issue discount on such obligation, and
(ii) the remainder of such original issue discount shall not be allowable as a deduction until paid.
For purposes of this paragraph, rules similar to the rules of subsection (i)(3)(B) shall apply in determining the amount of the original issue discount and when the original issue discount is paid.
(B) Disqualified portion treated as stock distribution for purposes of dividend received deduction
(i) In general
Solely for purposes of sections 243, 245, 246, and 246A, the dividend equivalent portion of any amount includible in gross income of a corporation under section 1272(a) in respect of an applicable high yield discount obligation shall be treated as a dividend received by such corporation from the corporation issuing such obligation.
(ii) Dividend equivalent portion
For purposes of clause (i), the dividend equivalent portion of any amount includible in gross income under section 1272(a) in respect of an applicable high yield discount obligation is the portion of the amount so includible—
(I) which is attributable to the disqualified portion of the original issue discount on such obligation, and
(II) which would have been treated as a dividend if it had been a distribution made by the issuing corporation with respect to stock in such corporation.
(C) Disqualified portion
(i) In general
For purposes of this paragraph, the disqualified portion of the original issue discount on any applicable high yield discount obligation is the lesser of—
(I) the amount of such original issue discount, or
(II) the portion of the total return on such obligation which bears the same ratio to such total return as the disqualified yield on such obligation bears to the yield to maturity on such obligation.
(ii) Definitions
For purposes of clause (i), the term "disqualified yield" means the excess of the yield to maturity on the obligation over the sum referred to in subsection (i)(1)(B) plus 1 percentage point, and the term "total return" is the amount which would have been the original issue discount on the obligation if interest described in the parenthetical in section 1273(a)(2) were included in the stated redemption price at maturity.
(D) Exception for S corporations
This paragraph shall not apply to any obligation issued by any corporation for any period for which such corporation is an S corporation.
(E) Effect on earnings and profits
This paragraph shall not apply for purposes of determining earnings and profits; except that, for purposes of determining the dividend equivalent portion of any amount includible in gross income under section 1272(a) in respect of an applicable high yield discount obligation, no reduction shall be made for any amount attributable to the disqualified portion of any original issue discount on such obligation.
(F) Suspension of application of paragraph
(i) Temporary suspension
This paragraph shall not apply to any applicable high yield discount obligation issued during the period beginning on September 1, 2008, and ending on December 31, 2009, in exchange (including an exchange resulting from a modification of the debt instrument) for an obligation which is not an applicable high yield discount obligation and the issuer (or obligor) of which is the same as the issuer (or obligor) of such applicable high yield discount obligation. The preceding sentence shall not apply to any obligation the interest on which is interest described in section 871(h)(4) (without regard to subparagraph (D) thereof) or to any obligation issued to a related person (within the meaning of section 108(e)(4)).
(ii) Successive application
Any obligation to which clause (i) applies shall not be treated as an applicable high yield discount obligation for purposes of applying this subparagraph to any other obligation issued in exchange for such obligation.
(iii) Secretarial authority to suspend application
The Secretary may apply this paragraph with respect to debt instruments issued in periods following the period described in clause (i) if the Secretary determines that such application is appropriate in light of distressed conditions in the debt capital markets.
(G) Cross reference
For definition of applicable high yield discount obligation, see subsection (i).
(6) Cross references
For provision relating to deduction of original issue discount on tax-exempt obligation, see section 1288.
For special rules in the case of the borrower under certain loans for personal use, see section 1275(b).
(f) Denial of deduction for interest on certain obligations not in registered form
(1) In general
Nothing in subsection (a) or in any other provision of law shall be construed to provide a deduction for interest on any registration-required obligation unless such obligation is in registered form.
(2) Registration-required obligation
For purposes of this section—
(A) In general
The term "registration-required obligation" means any obligation (including any obligation issued by a governmental entity) other than an obligation which—
(i) is issued by a natural person,
(ii) is not of a type offered to the public, or
(iii) has a maturity (at issue) of not more than 1 year.
(B) Authority to include other obligations
Clauses (ii) and (iii) of subparagraph (A) shall not apply to any obligation if—
(i) such obligation is of a type which the Secretary has determined by regulations to be used frequently in avoiding Federal taxes, and
(ii) such obligation is issued after the date on which the regulations referred to in clause (i) take effect.
(3) Book entries permitted, etc.
For purposes of this subsection, rules similar to the rules of section 149(a)(3) shall apply, except that a dematerialized book entry system or other book entry system specified by the Secretary shall be treated as a book entry system described in such section.
(g) Reduction of deduction where section 25 credit taken
The amount of the deduction under this section for interest paid or accrued during any taxable year on indebtedness with respect to which a mortgage credit certificate has been issued under section 25 shall be reduced by the amount of the credit allowable with respect to such interest under section 25 (determined without regard to section 26).
(h) Disallowance of deduction for personal interest
(1) In general
In the case of a taxpayer other than a corporation, no deduction shall be allowed under this chapter for personal interest paid or accrued during the taxable year.
(2) Personal interest
For purposes of this subsection, the term "personal interest" means any interest allowable as a deduction under this chapter other than—
(A) interest paid or accrued on indebtedness properly allocable to a trade or business (other than the trade or business of performing services as an employee),
(B) any investment interest (within the meaning of subsection (d)),
(C) any interest which is taken into account under section 469 in computing income or loss from a passive activity of the taxpayer,
(D) any qualified residence interest (within the meaning of paragraph (3)),
(E) any interest payable under section 6601 on any unpaid portion of the tax imposed by section 2001 for the period during which an extension of time for payment of such tax is in effect under section 6163, and
(F) any interest allowable as a deduction under section 221 (relating to interest on educational loans).
(3) Qualified residence interest
For purposes of this subsection—
(A) In general
The term "qualified residence interest" means any interest which is paid or accrued during the taxable year on—
(i) acquisition indebtedness with respect to any qualified residence of the taxpayer, or
(ii) home equity indebtedness with respect to any qualified residence of the taxpayer.
For purposes of the preceding sentence, the determination of whether any property is a qualified residence of the taxpayer shall be made as of the time the interest is accrued.
(B) Acquisition indebtedness
(i) In general
The term "acquisition indebtedness" means any indebtedness which—
(I) is incurred in acquiring, constructing, or substantially improving any qualified residence of the taxpayer, and
(II) is secured by such residence.
Such term also includes any indebtedness secured by such residence resulting from the refinancing of indebtedness meeting the requirements of the preceding sentence (or this sentence); but only to the extent the amount of the indebtedness resulting from such refinancing does not exceed the amount of the refinanced indebtedness.
(ii) $1,000,000 limitation
The aggregate amount treated as acquisition indebtedness for any period shall not exceed $1,000,000 ($500,000 in the case of a married individual filing a separate return).
(C) Home equity indebtedness
(i) In general
The term "home equity indebtedness" means any indebtedness (other than acquisition indebtedness) secured by a qualified residence to the extent the aggregate amount of such indebtedness does not exceed—
(I) the fair market value of such qualified residence, reduced by
(II) the amount of acquisition indebtedness with respect to such residence.
(ii) Limitation
The aggregate amount treated as home equity indebtedness for any period shall not exceed $100,000 ($50,000 in the case of a separate return by a married individual).
(D) Treatment of indebtedness incurred on or before October 13, 1987
(i) In general
In the case of any pre-October 13, 1987, indebtedness—
(I) such indebtedness shall be treated as acquisition indebtedness, and
(II) the limitation of subparagraph (B)(ii) shall not apply.
(ii) Reduction in $1,000,000 limitation
The limitation of subparagraph (B)(ii) shall be reduced (but not below zero) by the aggregate amount of outstanding pre-October 13, 1987, indebtedness.
(iii) Pre-October 13, 1987, indebtedness
The term "pre-October 13, 1987, indebtedness" means—
(I) any indebtedness which was incurred on or before October 13, 1987, and which was secured by a qualified residence on October 13, 1987, and at all times thereafter before the interest is paid or accrued, or
(II) any indebtedness which is secured by the qualified residence and was incurred after October 13, 1987, to refinance indebtedness described in subclause (I) (or refinanced indebtedness meeting the requirements of this subclause) to the extent (immediately after the refinancing) the principal amount of the indebtedness resulting from the refinancing does not exceed the principal amount of the refinanced indebtedness (immediately before the refinancing).
(iv) Limitation on period of refinancing
Subclause (II) of clause (iii) shall not apply to any indebtedness after—
(I) the expiration of the term of the indebtedness described in clause (iii)(I), or
(II) if the principal of the indebtedness described in clause (iii)(I) is not amortized over its term, the expiration of the term of the 1st refinancing of such indebtedness (or if earlier, the date which is 30 years after the date of such 1st refinancing).
(E) Mortgage insurance premiums treated as interest
(i) In general
Premiums paid or accrued for qualified mortgage insurance by a taxpayer during the taxable year in connection with acquisition indebtedness with respect to a qualified residence of the taxpayer shall be treated for purposes of this section as interest which is qualified residence interest.
(ii) Phaseout
The amount otherwise treated as interest under clause (i) shall be reduced (but not below zero) by 10 percent of such amount for each $1,000 ($500 in the case of a married individual filing a separate return) (or fraction thereof) that the taxpayer's adjusted gross income for the taxable year exceeds $100,000 ($50,000 in the case of a married individual filing a separate return).
(iii) Limitation
Clause (i) shall not apply with respect to any mortgage insurance contracts issued before January 1, 2007.
(iv) Termination
Clause (i) shall not apply to amounts—
(I) paid or accrued after December 31, 2020, or
(II) properly allocable to any period after such date.
(F) Special rules for taxable years 2018 through 2025
(i) In general
In the case of taxable years beginning after December 31, 2017, and before January 1, 2026—
(I) Disallowance of home equity indebtedness interest
Subparagraph (A)(ii) shall not apply.
(II) Limitation on acquisition indebtedness
Subparagraph (B)(ii) shall be applied by substituting "$750,000 ($375,000" for "$1,000,000 ($500,000".
(III) Treatment of indebtedness incurred on or before December 15, 2017
Subclause (II) shall not apply to any indebtedness incurred on or before December 15, 2017, and, in applying such subclause to any indebtedness incurred after such date, the limitation under such subclause shall be reduced (but not below zero) by the amount of any indebtedness incurred on or before December 15, 2017, which is treated as acquisition indebtedness for purposes of this subsection for the taxable year.
(IV) Binding contract exception
In the case of a taxpayer who enters into a written binding contract before December 15, 2017, to close on the purchase of a principal residence before January 1, 2018, and who purchases such residence before April 1, 2018, subclause (III) shall be applied by substituting "April 1, 2018" for "December 15, 2017".
(ii) Treatment of limitation in taxable years after December 31, 2025
In the case of taxable years beginning after December 31, 2025, the limitation under subparagraph (B)(ii) shall be applied to the aggregate amount of indebtedness of the taxpayer described in subparagraph (B)(i) without regard to the taxable year in which the indebtedness was incurred.
(iii) Treatment of refinancings of indebtedness
(I) In general
In the case of any indebtedness which is incurred to refinance indebtedness, such refinanced indebtedness shall be treated for purposes of clause (i)(III) as incurred on the date that the original indebtedness was incurred to the extent the amount of the indebtedness resulting from such refinancing does not exceed the amount of the refinanced indebtedness.
(II) Limitation on period of refinancing
Subclause (I) shall not apply to any indebtedness after the expiration of the term of the original indebtedness or, if the principal of such original indebtedness is not amortized over its term, the expiration of the term of the 1st refinancing of such indebtedness (or if earlier, the date which is 30 years after the date of such 1st refinancing).
(iv) Coordination with exclusion of income from discharge of indebtedness
Section 108(h)(2) shall be applied without regard to this subparagraph.
(4) Other definitions and special rules
For purposes of this subsection—
(A) Qualified residence
(i) In general
The term "qualified residence" means—
(I) the principal residence (within the meaning of section 121) of the taxpayer, and
(II) 1 other residence of the taxpayer which is selected by the taxpayer for purposes of this subsection for the taxable year and which is used by the taxpayer as a residence (within the meaning of section 280A(d)(1)).
(ii) Married individuals filing separate returns
If a married couple does not file a joint return for the taxable year—
(I) such couple shall be treated as 1 taxpayer for purposes of clause (i), and
(II) each individual shall be entitled to take into account 1 residence unless both individuals consent in writing to 1 individual taking into account the principal residence and 1 other residence.
(iii) Residence not rented
For purposes of clause (i)(II), notwithstanding section 280A(d)(1), if the taxpayer does not rent a dwelling unit at any time during a taxable year, such unit may be treated as a residence for such taxable year.
(B) Special rule for cooperative housing corporations
Any indebtedness secured by stock held by the taxpayer as a tenant-stockholder (as defined in section 216) in a cooperative housing corporation (as so defined) shall be treated as secured by the house or apartment which the taxpayer is entitled to occupy as such a tenant-stockholder. If stock described in the preceding sentence may not be used to secure indebtedness, indebtedness shall be treated as so secured if the taxpayer establishes to the satisfaction of the Secretary that such indebtedness was incurred to acquire such stock.
(C) Unenforceable security interests
Indebtedness shall not fail to be treated as secured by any property solely because, under any applicable State or local homestead or other debtor protection law in effect on August 16, 1986, the security interest is ineffective or the enforceability of the security interest is restricted.
(D) Special rules for estates and trusts
For purposes of determining whether any interest paid or accrued by an estate or trust is qualified residence interest, any residence held by such estate or trust shall be treated as a qualified residence of such estate or trust if such estate or trust establishes that such residence is a qualified residence of a beneficiary who has a present interest in such estate or trust or an interest in the residuary of such estate or trust.
(E) Qualified mortgage insurance
The term "qualified mortgage insurance" means—
(i) mortgage insurance provided by the Department of Veterans Affairs, the Federal Housing Administration, or the Rural Housing Service, and
(ii) private mortgage insurance (as defined by section 2 of the Homeowners Protection Act of 1998 (
(F) Special rules for prepaid qualified mortgage insurance
Any amount paid by the taxpayer for qualified mortgage insurance that is properly allocable to any mortgage the payment of which extends to periods that are after the close of the taxable year in which such amount is paid shall be chargeable to capital account and shall be treated as paid in such periods to which so allocated. No deduction shall be allowed for the unamortized balance of such account if such mortgage is satisfied before the end of its term. The preceding sentences shall not apply to amounts paid for qualified mortgage insurance provided by the Department of Veterans Affairs or the Rural Housing Service.
(i) Applicable high yield discount obligation
(1) In general
For purposes of this section, the term "applicable high yield discount obligation" means any debt instrument if—
(A) the maturity date of such instrument is more than 5 years from the date of issue,
(B) the yield to maturity on such instrument equals or exceeds the sum of—
(i) the applicable Federal rate in effect under section 1274(d) for the calendar month in which the obligation is issued, plus
(ii) 5 percentage points, and
(C) such instrument has significant original issue discount.
For purposes of subparagraph (B)(i), the Secretary may by regulation (i) permit a rate to be used with respect to any debt instrument which is higher than the applicable Federal rate if the taxpayer establishes to the satisfaction of the Secretary that such higher rate is based on the same principles as the applicable Federal rate and is appropriate for the term of the instrument, or (ii) permit, on a temporary basis, a rate to be used with respect to any debt instrument which is higher than the applicable Federal rate if the Secretary determines that such rate is appropriate in light of distressed conditions in the debt capital markets.
(2) Significant original issue discount
For purposes of paragraph (1)(C), a debt instrument shall be treated as having significant original issue discount if—
(A) the aggregate amount which would be includible in gross income with respect to such instrument for periods before the close of any accrual period (as defined in section 1272(a)(5)) ending after the date 5 years after the date of issue, exceeds—
(B) the sum of—
(i) the aggregate amount of interest to be paid under the instrument before the close of such accrual period, and
(ii) the product of the issue price of such instrument (as defined in sections 1273(b) and 1274(a)) and its yield to maturity.
(3) Special rules
For purposes of determining whether a debt instrument is an applicable high yield discount obligation—
(A) any payment under the instrument shall be assumed to be made on the last day permitted under the instrument, and
(B) any payment to be made in the form of another obligation of the issuer (or a related person within the meaning of section 453(f)(1)) shall be assumed to be made when such obligation is required to be paid in cash or in property other than such obligation.
Except for purposes of paragraph (1)(B), any reference to an obligation in subparagraph (B) of this paragraph shall be treated as including a reference to stock.
(4) Debt instrument
For purposes of this subsection, the term "debt instrument" means any instrument which is a debt instrument as defined in section 1275(a).
(5) Regulations
The Secretary shall prescribe such regulations as may be appropriate to carry out the purposes of this subsection and subsection (e)(5), including—
(A) regulations providing for modifications to the provisions of this subsection and subsection (e)(5) in the case of varying rates of interest, put or call options, indefinite maturities, contingent payments, assumptions of debt instruments, conversion rights, or other circumstances where such modifications are appropriate to carry out the purposes of this subsection and subsection (e)(5), and
(B) regulations to prevent avoidance of the purposes of this subsection and subsection (e)(5) through the use of issuers other than C corporations, agreements to borrow amounts due under the debt instrument, or other arrangements.
(j) Limitation on business interest
(1) In general
The amount allowed as a deduction under this chapter for any taxable year for business interest shall not exceed the sum of—
(A) the business interest income of such taxpayer for such taxable year,
(B) 30 percent of the adjusted taxable income of such taxpayer for such taxable year, plus
(C) the floor plan financing interest of such taxpayer for such taxable year.
The amount determined under subparagraph (B) shall not be less than zero.
(2) Carryforward of disallowed business interest
The amount of any business interest not allowed as a deduction for any taxable year by reason of paragraph (1) shall be treated as business interest paid or accrued in the succeeding taxable year.
(3) Exemption for certain small businesses
In the case of any taxpayer (other than a tax shelter prohibited from using the cash receipts and disbursements method of accounting under section 448(a)(3)) which meets the gross receipts test of section 448(c) for any taxable year, paragraph (1) shall not apply to such taxpayer for such taxable year. In the case of any taxpayer which is not a corporation or a partnership, the gross receipts test of section 448(c) shall be applied in the same manner as if such taxpayer were a corporation or partnership.
(4) Application to partnerships, etc.
(A) In general
In the case of any partnership—
(i) this subsection shall be applied at the partnership level and any deduction for business interest shall be taken into account in determining the non-separately stated taxable income or loss of the partnership, and
(ii) the adjusted taxable income of each partner of such partnership—
(I) shall be determined without regard to such partner's distributive share of any items of income, gain, deduction, or loss of such partnership, and
(II) shall be increased by such partner's distributive share of such partnership's excess taxable income.
For purposes of clause (ii)(II), a partner's distributive share of partnership excess taxable income shall be determined in the same manner as the partner's distributive share of nonseparately stated taxable income or loss of the partnership.
(B) Special rules for carryforwards
(i) In general
The amount of any business interest not allowed as a deduction to a partnership for any taxable year by reason of paragraph (1) for any taxable year—
(I) shall not be treated under paragraph (2) as business interest paid or accrued by the partnership in the succeeding taxable year, and
(II) shall, subject to clause (ii), be treated as excess business interest which is allocated to each partner in the same manner as the non-separately stated taxable income or loss of the partnership.
(ii) Treatment of excess business interest allocated to partners
If a partner is allocated any excess business interest from a partnership under clause (i) for any taxable year—
(I) such excess business interest shall be treated as business interest paid or accrued by the partner in the next succeeding taxable year in which the partner is allocated excess taxable income from such partnership, but only to the extent of such excess taxable income, and
(II) any portion of such excess business interest remaining after the application of subclause (I) shall, subject to the limitations of subclause (I), be treated as business interest paid or accrued in succeeding taxable years.
For purposes of applying this paragraph, excess taxable income allocated to a partner from a partnership for any taxable year shall not be taken into account under paragraph (1)(A) with respect to any business interest other than excess business interest from the partnership until all such excess business interest for such taxable year and all preceding taxable years has been treated as paid or accrued under clause (ii).
(iii) Basis adjustments
(I) In general
The adjusted basis of a partner in a partnership interest shall be reduced (but not below zero) by the amount of excess business interest allocated to the partner under clause (i)(II).
(II) Special rule for dispositions
If a partner disposes of a partnership interest, the adjusted basis of the partner in the partnership interest shall be increased immediately before the disposition by the amount of the excess (if any) of the amount of the basis reduction under subclause (I) over the portion of any excess business interest allocated to the partner under clause (i)(II) which has previously been treated under clause (ii) as business interest paid or accrued by the partner. The preceding sentence shall also apply to transfers of the partnership interest (including by reason of death) in a transaction in which gain is not recognized in whole or in part. No deduction shall be allowed to the transferor or transferee under this chapter for any excess business interest resulting in a basis increase under this subclause.
(C) Excess taxable income
The term "excess taxable income" means, with respect to any partnership, the amount which bears the same ratio to the partnership's adjusted taxable income as—
(i) the excess (if any) of—
(I) the amount determined for the partnership under paragraph (1)(B), over
(II) the amount (if any) by which the business interest of the partnership, reduced by the floor plan financing interest, exceeds the business interest income of the partnership, bears to
(ii) the amount determined for the partnership under paragraph (1)(B).
(D) Application to S corporations
Rules similar to the rules of subparagraphs (A) and (C) shall apply with respect to any S corporation and its shareholders.
(5) Business interest
For purposes of this subsection, the term "business interest" means any interest paid or accrued on indebtedness properly allocable to a trade or business. Such term shall not include investment interest (within the meaning of subsection (d)).
(6) Business interest income
For purposes of this subsection, the term "business interest income" means the amount of interest includible in the gross income of the taxpayer for the taxable year which is properly allocable to a trade or business. Such term shall not include investment income (within the meaning of subsection (d)).
(7) Trade or business
For purposes of this subsection—
(A) In general
The term "trade or business" shall not include—
(i) the trade or business of performing services as an employee,
(ii) any electing real property trade or business,
(iii) any electing farming business, or
(iv) the trade or business of the furnishing or sale of—
(I) electrical energy, water, or sewage disposal services,
(II) gas or steam through a local distribution system, or
(III) transportation of gas or steam by pipeline,
if the rates for such furnishing or sale, as the case may be, have been established or approved by a State or political subdivision thereof, by any agency or instrumentality of the United States, by a public service or public utility commission or other similar body of any State or political subdivision thereof, or by the governing or ratemaking body of an electric cooperative.
(B) Electing real property trade or business
For purposes of this paragraph, the term "electing real property trade or business" means any trade or business which is described in section 469(c)(7)(C) and which makes an election under this subparagraph. Any such election shall be made at such time and in such manner as the Secretary shall prescribe, and, once made, shall be irrevocable.
(C) Electing farming business
For purposes of this paragraph, the term "electing farming business" means—
(i) a farming business (as defined in section 263A(e)(4)) which makes an election under this subparagraph, or
(ii) any trade or business of a specified agricultural or horticultural cooperative (as defined in section 199A(g)(2)) 1 with respect to which the cooperative makes an election under this subparagraph.
Any such election shall be made at such time and in such manner as the Secretary shall prescribe, and, once made, shall be irrevocable.
(8) Adjusted taxable income
For purposes of this subsection, the term "adjusted taxable income" means the taxable income of the taxpayer—
(A) computed without regard to—
(i) any item of income, gain, deduction, or loss which is not properly allocable to a trade or business,
(ii) any business interest or business interest income,
(iii) the amount of any net operating loss deduction under section 172,
(iv) the amount of any deduction allowed under section 199A, and
(v) in the case of taxable years beginning before January 1, 2022, any deduction allowable for depreciation, amortization, or depletion, and
(B) computed with such other adjustments as provided by the Secretary.
(9) Floor plan financing interest defined
For purposes of this subsection—
(A) In general
The term "floor plan financing interest" means interest paid or accrued on floor plan financing indebtedness.
(B) Floor plan financing indebtedness
The term "floor plan financing indebtedness" means indebtedness—
(i) used to finance the acquisition of motor vehicles held for sale or lease, and
(ii) secured by the inventory so acquired.
(C) Motor vehicle
The term "motor vehicle" means a motor vehicle that is any of the following:
(i) Any self-propelled vehicle designed for transporting persons or property on a public street, highway, or road.
(ii) A boat.
(iii) Farm machinery or equipment.
(10) Special rule for taxable years beginning in 2019 and 2020
(A) In general
(i) In general
Except as provided in clause (ii) or (iii), in the case of any taxable year beginning in 2019 or 2020, paragraph (1)(B) shall be applied by substituting "50 percent" for "30 percent".
(ii) Special rule for partnerships
In the case of a partnership—
(I) clause (i) shall not apply to any taxable year beginning in 2019, but
(II) unless a partner elects not to have this subclause apply, in the case of any excess business interest of the partnership for any taxable year beginning in 2019 which is allocated to the partner under paragraph (4)(B)(i)(II)—
(aa) 50 percent of such excess business interest shall be treated as business interest which, notwithstanding paragraph (4)(B)(ii), is paid or accrued by the partner in the partner's first taxable year beginning in 2020 and which is not subject to the limits of paragraph (1), and
(bb) 50 percent of such excess business interest shall be subject to the limitations of paragraph (4)(B)(ii) in the same manner as any other excess business interest so allocated.
(iii) Election out
A taxpayer may elect, at such time and in such manner as the Secretary may prescribe, not to have clause (i) apply to any taxable year. Such an election, once made, may be revoked only with the consent of the Secretary. In the case of a partnership, any such election shall be made by the partnership and may be made only for taxable years beginning in 2020.
(B) Election to use 2019 adjusted taxable income for taxable years beginning in 2020
(i) In general
Subject to clause (ii), in the case of any taxable year beginning in 2020, the taxpayer may elect to apply this subsection by substituting the adjusted taxable income of the taxpayer for the last taxable year beginning in 2019 for the adjusted taxable income for such taxable year. In the case of a partnership, any such election shall be made by the partnership.
(ii) Special rule for short taxable years
If an election is made under clause (i) for a taxable year which is a short taxable year, the adjusted taxable income for the taxpayer's last taxable year beginning in 2019 which is substituted under clause (i) shall be equal to the amount which bears the same ratio to such adjusted taxable income determined without regard to this clause as the number of months in the short taxable year bears to 12 2
(11) Cross references
(A) For requirement that an electing real property trade or business use the alternative depreciation system, see section 168(g)(1)(F).
(B) For requirement that an electing farming business use the alternative depreciation system, see section 168(g)(1)(G).
(k) Section 6166 interest
No deduction shall be allowed under this section for any interest payable under section 6601 on any unpaid portion of the tax imposed by section 2001 for the period during which an extension of time for payment of such tax is in effect under section 6166.
(l) Disallowance of deduction on certain debt instruments of corporations
(1) In general
No deduction shall be allowed under this chapter for any interest paid or accrued on a disqualified debt instrument.
(2) Disqualified debt instrument
For purposes of this subsection, the term "disqualified debt instrument" means any indebtedness of a corporation which is payable in equity of the issuer or a related party or equity held by the issuer (or any related party) in any other person.
(3) Special rules for amounts payable in equity
For purposes of paragraph (2), indebtedness shall be treated as payable in equity of the issuer or any other person only if—
(A) a substantial amount of the principal or interest is required to be paid or converted, or at the option of the issuer or a related party is payable in, or convertible into, such equity,
(B) a substantial amount of the principal or interest is required to be determined, or at the option of the issuer or a related party is determined, by reference to the value of such equity, or
(C) the indebtedness is part of an arrangement which is reasonably expected to result in a transaction described in subparagraph (A) or (B).
For purposes of this paragraph, principal or interest shall be treated as required to be so paid, converted, or determined if it may be required at the option of the holder or a related party and there is a substantial certainty the option will be exercised.
(4) Capitalization allowed with respect to equity of persons other than issuer and related parties
If the disqualified debt instrument of a corporation is payable in equity held by the issuer (or any related party) in any other person (other than a related party), the basis of such equity shall be increased by the amount not allowed as a deduction by reason of paragraph (1) with respect to the instrument.
(5) Exception for certain instruments issued by dealers in securities
For purposes of this subsection, the term "disqualified debt instrument" does not include indebtedness issued by a dealer in securities (or a related party) which is payable in, or by reference to, equity (other than equity of the issuer or a related party) held by such dealer in its capacity as a dealer in securities. For purposes of this paragraph, the term "dealer in securities" has the meaning given such term by section 475.
(6) Related party
For purposes of this subsection, a person is a related party with respect to another person if such person bears a relationship to such other person described in section 267(b) or 707(b).
(7) Regulations
The Secretary shall prescribe such regulations as may be necessary or appropriate to carry out the purposes of this subsection, including regulations preventing avoidance of this subsection through the use of an issuer other than a corporation.
(m) Interest on unpaid taxes attributable to nondisclosed reportable transactions
No deduction shall be allowed under this chapter for any interest paid or accrued under section 6601 on any underpayment of tax which is attributable to the portion of any reportable transaction understatement (as defined in section 6662A(b)) with respect to which the requirement of section 6664(d)(2)(A) 1 is not met.
(n) Cross references
(1) For disallowance of certain amounts paid in connection with insurance, endowment, or annuity contracts, see section 264.
(2) For disallowance of deduction for interest relating to tax-exempt income, see section 265(a)(2).
(3) For disallowance of deduction for carrying charges chargeable to capital account, see section 266.
(4) For disallowance of interest with respect to transactions between related taxpayers, see section 267.
(5) For treatment of redeemable ground rents and real property held subject to liabilities under redeemable ground rents, see section 1055.
(Aug. 16, 1954, ch. 736,
References in Text
The date of the enactment of this subparagraph, referred to in subsec. (h)(4)(E)(ii), is the date of enactment of
Section 199A(g)(2), referred to in subsec. (j)(7)(C)(ii), probably should be a reference to section 199A(g)(4), which defines "specified agricultural or horticultural cooperative" after the general amendment of section 199A(g) by
Section 6664(d)(2)(A), referred to in subsec. (m), was redesignated as section 6664(d)(3)(A) by
Amendments
2020—Subsec. (j)(10), (11).
2019—Subsec. (h)(3)(E)(iv)(I).
2018—Subsec. (d)(4)(E).
Subsec. (e)(1).
Subsec. (e)(4).
"(A) subparagraph (D) of section 1272(a)(2) (relating to obligations issued by natural persons before March 2, 1984), and
"(B) subparagraph (E) of section 1272(a)(2) (relating to loans between natural persons)."
Subsec. (e)(5)(C)(ii).
Subsec. (h)(3)(E)(iv)(I).
2017—Subsec. (h)(3)(F).
Subsec. (j).
2015—Subsec. (h)(3)(E)(iv)(I).
2014—Subsec. (d)(6).
Subsec. (h)(3)(E)(iv)(I).
Subsec. (h)(4)(F).
Subsec. (h)(5).
2013—Subsec. (h)(3)(E)(iv)(I).
Subsec. (h)(4)(E)(i).
2010—Subsec. (f)(2)(A)(ii) to (iv).
Subsec. (f)(2)(B).
Subsec. (f)(2)(B)(i).
"(I) subparagraph (A), such obligation is of a type which the Secretary has determined by regulations to be used frequently in avoiding Federal taxes, or
"(II) subparagraph (B), such obligation is of a type specified by the Secretary in regulations, and".
Subsec. (f)(2)(C).
Subsec. (f)(3).
Subsec. (h)(3)(E)(iv)(I).
2009—Subsec. (e)(5)(F), (G).
Subsec. (i)(1).
2007—Subsec. (h)(3)(E)(iv)(I).
2006—Subsec. (h)(3)(E).
Subsec. (h)(4)(E), (F).
Subsec. (j)(8).
Subsec. (j)(9).
2005—Subsec. (j)(6)(A)(i)(III), (IV).
2004—Subsec. (e)(3)(B), (C).
Subsec. (l)(2).
Subsec. (l)(3).
Subsec. (l)(4) to (7).
Subsecs. (m), (n).
2003—Subsec. (d)(4)(B).
1999—Subsec. (j)(3)(C).
1998—Subsec. (h)(2)(F).
1997—Subsec. (h)(2)(E).
Subsec. (h)(4)(A)(i)(I).
Subsec. (j)(2)(B)(iii).
Subsec. (k).
Subsec. (l).
Subsec. (m).
1996—Subsec. (j)(1)(B).
Subsec. (j)(6)(E)(ii).
Subsec. (j)(7), (8).
1993—Subsec. (d)(4)(B).
"(i) gross income (other than gain taken into account under clause (ii)) from property held for investment, and
"(ii) any net gain attributable to the disposition of property held for investment."
Subsec. (j).
Subsec. (j)(3).
"(A)
"(B)
"(i) which was issued on or before July 10, 1989, or
"(ii) which was issued after such date pursuant to a written binding contract in effect on such date and all times thereafter before such indebtedness was issued."
Subsec. (j)(5)(B).
Subsec. (j)(6)(D), (E).
1990—Subsec. (e)(5)(A).
Subsec. (i)(3).
Subsec. (i)(3)(B).
Subsec. (j)(2)(A)(ii).
Subsec. (j)(2)(C).
1989—Subsec. (e)(5), (6).
Subsec. (i).
Subsec. (j).
Subsec. (k).
1988—Subsec. (d)(3)(A).
Subsec. (d)(4)(B).
"(i) gross income (other than gain described in clause (ii)) from property held for investment, and
"(ii) any net gain attributable to the disposition of property held for investment,
but only to the extent such amounts are not derived from the conduct of a trade or business."
Subsec. (d)(6)(A).
"(i) the applicable percentage of the amount which (without regard to this paragraph) is not allowed as a deduction under this subsection for the taxable year to the extent such amount does not exceed the ceiling amount,
"(ii) the amount which (without regard to this paragraph) is not allowed as a deduction under this subsection in excess of the ceiling amount, plus
"(iii) the amount of any carryforward to such taxable year under paragraph (2) with respect to which a deduction was disallowed under this subsection for a preceding taxable year.
For purposes of this subparagraph, the amount under clause (i) or (ii) shall be computed without regard to the amount described in clause (iii)."
Subsec. (e)(2)(B).
Subsec. (h)(2)(A).
Subsec. (h)(2)(E).
Subsec. (h)(3)(C).
Subsec. (h)(4).
Subsec. (h)(4)(A).
Subsec. (h)(4)(B).
Subsec. (h)(4)(C), (D).
Subsec. (h)(5).
Subsec. (h)(6).
Subsec. (i)(2).
1987—Subsec. (d)(4)(E).
Subsec. (h)(3).
"(A)
"(B)
"(i) the fair market value of such qualified residence, or
"(ii) the sum of—
"(I) the taxpayer's basis in such qualified residence (adjusted only by the cost of any improvements to such residence), plus
"(II) the aggregate amount of qualified indebtedness of the taxpayer with respect to such qualified residence.
"(C)
"(i)
"(I) which was incurred on or before August 16, 1986, and which was secured by the qualified residence on August 16, 1986, or
"(II) which is secured by the qualified residence and was incurred after August 16, 1986, to refinance indebtedness described in subclause (I) (or refinanced indebtedness meeting the requirements of this subclause) to the extent (immediately after the refinancing) the principal amount of the indebtedness resulting from the refinancing does not exceed the principal amount of the refinanced indebtedness (immediately before the refinancing).
"(ii)
"(I) the expiration of the term of the indebtedness described in clause (i)(I), or
"(II) if the principal of the indebtedness described in clause (i)(I) is not amortized over its term, the expiration of the term of the 1st refinancing of such indebtedness (or if earlier, the date which is 30 years after the date of such refinancing).
"(D)
Subsec. (h)(4), (5).
1986—Subsec. (d).
Subsec. (e)(2)(C).
Subsec. (e)(3)(A).
Subsec. (e)(5).
Subsec. (f)(3).
Subsec. (h).
Subsec. (i)(2).
1984—Subsec. (d)(3)(D).
Subsec. (e)(1).
Subsec. (e)(2).
Subsec. (e)(3).
Subsec. (e)(4).
Subsec. (f)(2)(C)(i).
Subsecs. (g), (h).
1982—Subsec. (d)(4).
Subsec. (e).
Subsec. (f).
Subsec. (g).
1976—Subsec. (b)(1).
Subsec. (d)(1).
Subsec. (d)(2).
Subsec. (d)(3)(A).
Subsec. (d)(3)(B)(iii).
Subsec. (d)(3)(E).
Subsec. (d)(4)(B), (C).
Subsec. (d)(5).
Subsec. (d)(6).
Subsec. (d)(7).
1971—Subsec. (d)(1)(B).
Subsec. (d)(3)(C).
Subsec. (d)(4)(A)(i).
Subsec. (d)(7).
1969—Subsecs. (d), (e).
1964—Subsec. (b)(1).
1963—Subsecs. (c), (d).
Effective Dateof 2020 Amendment
Effective Date of 2019 Amendment
Effective Date of 2018 Amendment
Effective Date of 2017 Amendment
Effective Date of 2015 Amendment
Effective Date of 2014 Amendment
Amendment by section 221(a)(25)(A) of
Effective Date of 2013 Amendment
Effective Date of 2010 Amendment
Amendment by
Effective Date of 2009 Amendment
"(1)
"(2)
Effective Date of 2007 Amendment
Effective Date of 2006 Amendment
Effective Date of 2005 Amendment
Amendment by
Effective Date of 2004 Amendment
Effective Date of 2003 Amendment
Amendment by
Effective Date of 1999 Amendment
Amendment by
Effective Date of 1998 Amendment
Amendment by
Effective Date of 1997 Amendment
Amendment by section 312(d)(1) of
"(1)
"(2)
"(1)
"(2)
"(A) issued pursuant to a written agreement which was binding on such date and at all times thereafter,
"(B) described in a ruling request submitted to the Internal Revenue Service on or before such date, or
"(C) described on or before such date in a public announcement or in a filing with the Securities and Exchange Commission required solely by reason of the issuance."
Effective Date of 1996 Amendment
Amendment by section 1703(n)(4) of
Effective Date of 1993 Amendment
Amendment by section 13206(d)(1) of
Effective Date of 1990 Amendment
Amendment by
Effective Date of 1989 Amendment
"(1)
"(2)
"(A) The amendments made by this section shall not apply to any instrument if—
"(i) such instrument is issued in connection with an acquisition—
"(I) which is made on or before July 10, 1989,
"(II) for which there was a written binding contract in effect on July 10, 1989, and at all times thereafter before such acquisition, or
"(III) for which a tender offer was filed with the Securities and Exchange Commission on or before July 10, 1989,
"(ii) the term of such instrument is not greater than—
"(I) the term specified in the written documents described in clause (iii), or
"(II) if no term is determined under subclause (I), 10 years, and
"(iii) the use of such instrument in connection with such acquisition (and the maximum amount of proceeds from such instrument) was determined on or before July 10, 1989, and such determination is evidenced by written documents—
"(I) which were transmitted on or before July 10, 1989, between the issuer and any governmental regulatory bodies or prospective parties to the issuance or acquisition, and
"(II) which are customarily used for the type of acquisition or financing involved.
"(B) The amendments made by this section shall not apply to any instrument issued pursuant to the terms of a debt instrument issued on or before July 10, 1989, or described in subparagraph (A) or (D).
"(C) The amendments made by this section shall not apply to any instrument issued to refinance an original issue discount debt instrument to which the amendments made by this section do not apply if—
"(i) the maturity date of the refinancing instrument is not later than the maturity date of the refinanced instrument,
"(ii) the issue price of the refinancing instrument does not exceed the adjusted issue price of the refinanced instrument,
"(iii) the stated redemption price at maturity of the refinancing instrument is not greater than the stated redemption price at maturity of the refinanced instrument, and
"(iv) the interest payments required under the refinancing instrument before maturity are not less than (and are paid not later than) the interest payments required under the refinanced instrument.
"(D) The amendments made by this section shall not apply to instruments issued after July 10, 1989, pursuant to a reorganization plan in a title 11 or similar case (as defined in section 368(a)(3) of the Internal Revenue Code of 1986) if the amount of proceeds of such instruments, and the maturities of such instruments, do not exceed the amount or maturities specified in the last reorganization plan filed in such case on or before July 10, 1989."
"(1)
"(2)
Effective Date of 1988 Amendment
Amendment by sections 1006(u)(1) and 1009(b)(6) of
Amendment by section 2004(b)(1) of
Effective Date of 1987 Amendment
Amendment by section 10212(b) of
Effective Date of 1986 Amendment
Amendment by section 902(e)(1) of
Amendment by section 1301(j)(3) of
Amendment by sections 1803(a)(4) and 1810(e)(1) of
Effective Date of 1984 Amendment
Amendment by section 42(a)(3) of
Amendment by section 127(f) of
Amendment by section 128(c) of
Amendment by section 612(c) of
Effective Date of 1982 Amendment
Amendment by
Amendment by
Effective Date of 1976 Amendment
Amendment by section 205(c)(3) of
"(1)
"(2)
"(A) is for a specified term, and
"(B) was incurred before September 11, 1975, or is incurred after September 10, 1975, pursuant to a written contract or commitment which on September 11, 1975, and at all times thereafter before the incurring of such indebtedness, is binding on the taxpayer,
the amendments made by this section shall not apply, but section 163(d) of the Internal Revenue Code of 1986 [formerly I.R.C. 1954] (as in effect before the enactment of this Act [Oct. 4, 1976]) shall apply. For purposes of the preceding sentence, so much of the net investment income (as defined in section 163(d)(3)(A) of such Code) for any taxable year as is not taken into account under section 163(d) of such Code, as amended by this Act, by reason of the last sentence of section 163(d)(3)(A) of such Code, shall be taken into account for purposes of applying such section as in effect before the date of enactment of this Act [Oct. 4, 1976] with respect to interest on indebtedness referred to in the preceding sentence."
Amendment by section 1901(b)(8)(C), (3)(K) of
Effective Date of 1971 Amendment
Effective Date of 1969 Amendment
Effective Date of 1964 Amendment
Effective Date of 1963 Amendment
Subsec. (c) effective as of Jan. 1, 1962, and applicable with respect to taxable years ending on or after such date, see section 2 of
Savings Provision
For provisions that nothing in amendment by section 401(b)(12) of
Application of Subsection (h) to Taxable Years Beginning in 1987
"(A) For purposes of applying section 163(h) of the 1986 Code to any taxable year beginning during 1987, if, incident to a divorce or legal separation—
"(i) an individual acquires the interest of a spouse or former spouse in a qualified residence in a transfer to which section 1041 of the 1986 Code applies, and
"(ii) such individual incurs indebtedness which is secured by such qualified residence,
the amount determined under paragraph (3)(B)(ii)(I) of section 163(h) of the 1986 Code (as in effect before the amendments made by the Revenue Act of 1987 [
"(B) The amount determined under this subparagraph shall be equal to the excess (if any) of—
"(i) the lesser of the amount of the indebtedness described in subparagraph (A)(ii), or the fair market value of the spouse's or former spouse's interest in the qualified residence as of the time of the transfer, over
"(ii) the basis of the spouse or former spouse in such interest in such residence (adjusted only by the cost of any improvements to such residence)."
Plan Amendments Not Required Until January 1, 1989
For provisions directing that if any amendments made by subtitle A or subtitle C of title XI [§§1101–1147 and 1171–1177] or title XVIII [§§1800–1899A] of
Transitional Rule for Treatment of Certain Income From S Corporations
"(a)
"(1) a corporation had an election in effect under subchapter S of the Internal Revenue Code of 1986 [formerly I.R.C. 1954] for the taxable years of such corporation beginning in 1982, 1983, and 1984, and
"(2) a shareholder of such corporation makes an election to have this section apply,
then any qualified income which such shareholder takes into account by reason of holding stock in such corporation for any taxable year of such corporation beginning in 1983 or 1984 shall be treated for purposes of section 163(d) of the Internal Revenue Code of 1986 as such income would have been treated but for the enactment of the Subchapter S Revision Act of 1982 [
"(b)
"(c)
Transitional Rule
For provision that, for purposes of amendments by section 231(b) of
1 See References in Text note below.
2 So in original. Probably should be followed by a period.
§164. Taxes
(a) General rule
Except as otherwise provided in this section, the following taxes shall be allowed as a deduction for the taxable year within which paid or accrued:
(1) State and local, and foreign, real property taxes.
(2) State and local personal property taxes.
(3) State and local, and foreign, income, war profits, and excess profits taxes.
(4) The GST tax imposed on income distributions.
In addition, there shall be allowed as a deduction State and local, and foreign, taxes not described in the preceding sentence which are paid or accrued within the taxable year in carrying on a trade or business or an activity described in section 212 (relating to expenses for production of income). Notwithstanding the preceding sentence, any tax (not described in the first sentence of this subsection) which is paid or accrued by the taxpayer in connection with an acquisition or disposition of property shall be treated as part of the cost of the acquired property or, in the case of a disposition, as a reduction in the amount realized on the disposition.
(b) Definitions and special rules
For purposes of this section—
(1) Personal property taxes
The term "personal property tax" means an ad valorem tax which is imposed on an annual basis in respect of personal property.
(2) State or local taxes
A State or local tax includes only a tax imposed by a State, a possession of the United States, or a political subdivision of any of the foregoing, or by the District of Columbia.
(3) Foreign taxes
A foreign tax includes only a tax imposed by the authority of a foreign country.
(4) Special rules for GST tax
(A) In general
The GST tax imposed on income distributions is—
(i) the tax imposed by section 2601, and
(ii) any State tax described in section 2604 (as in effect before its repeal),
but only to the extent such tax is imposed on a transfer which is included in the gross income of the distributee and to which section 666 does not apply.
(B) Special rule for tax paid before due date
Any tax referred to in subparagraph (A) imposed with respect to a transfer occurring during the taxable year of the distributee (or, in the case of a taxable termination, the trust) which is paid not later than the time prescribed by law (including extensions) for filing the return with respect to such transfer shall be treated as having been paid on the last day of the taxable year in which the transfer was made.
(5) General sales taxes
For purposes of subsection (a)—
(A) Election to deduct State and local sales taxes in lieu of State and local income taxes
At the election of the taxpayer for the taxable year, subsection (a) shall be applied—
(i) without regard to the reference to State and local income taxes, and
(ii) as if State and local general sales taxes were referred to in a paragraph thereof.
(B) Definition of general sales tax
The term "general sales tax" means a tax imposed at one rate with respect to the sale at retail of a broad range of classes of items.
(C) Special rules for food, etc.
In the case of items of food, clothing, medical supplies, and motor vehicles—
(i) the fact that the tax does not apply with respect to some or all of such items shall not be taken into account in determining whether the tax applies with respect to a broad range of classes of items, and
(ii) the fact that the rate of tax applicable with respect to some or all of such items is lower than the general rate of tax shall not be taken into account in determining whether the tax is imposed at one rate.
(D) Items taxed at different rates
Except in the case of a lower rate of tax applicable with respect to an item described in subparagraph (C), no deduction shall be allowed under this paragraph for any general sales tax imposed with respect to an item at a rate other than the general rate of tax.
(E) Compensating use taxes
A compensating use tax with respect to an item shall be treated as a general sales tax. For purposes of the preceding sentence, the term "compensating use tax" means, with respect to any item, a tax which—
(i) is imposed on the use, storage, or consumption of such item, and
(ii) is complementary to a general sales tax, but only if a deduction is allowable under this paragraph with respect to items sold at retail in the taxing jurisdiction which are similar to such item.
(F) Special rule for motor vehicles
In the case of motor vehicles, if the rate of tax exceeds the general rate, such excess shall be disregarded and the general rate shall be treated as the rate of tax.
(G) Separately stated general sales taxes
If the amount of any general sales tax is separately stated, then, to the extent that the amount so stated is paid by the consumer (other than in connection with the consumer's trade or business) to the seller, such amount shall be treated as a tax imposed on, and paid by, such consumer.
(H) Amount of deduction may be determined under tables
(i) In general
At the election of the taxpayer for the taxable year, the amount of the deduction allowed under this paragraph for such year shall be—
(I) the amount determined under this paragraph (without regard to this subparagraph) with respect to motor vehicles, boats, and other items specified by the Secretary, and
(II) the amount determined under tables prescribed by the Secretary with respect to items to which subclause (I) does not apply.
(ii) Requirements for tables
The tables prescribed under clause (i)—
(I) shall reflect the provisions of this paragraph,
(II) shall be based on the average consumption by taxpayers on a State-by-State basis (as determined by the Secretary) of items to which clause (i)(I) does not apply, taking into account filing status, number of dependents, adjusted gross income, and rates of State and local general sales taxation, and
(III) need only be determined with respect to adjusted gross incomes up to the applicable amount (as determined under section 68(b)).
(6) Limitation on individual deductions for taxable years 2018 through 2025
In the case of an individual and a taxable year beginning after December 31, 2017, and before January 1, 2026—
(A) foreign real property taxes shall not be taken into account under subsection (a)(1), and
(B) the aggregate amount of taxes taken into account under paragraphs (1), (2), and (3) of subsection (a) and paragraph (5) of this subsection for any taxable year shall not exceed $10,000 ($5,000 in the case of a married individual filing a separate return).
The preceding sentence shall not apply to any foreign taxes described in subsection (a)(3) or to any taxes described in paragraph (1) and (2) of subsection (a) which are paid or accrued in carrying on a trade or business or an activity described in section 212. For purposes of subparagraph (B), an amount paid in a taxable year beginning before January 1, 2018, with respect to a State or local income tax imposed for a taxable year beginning after December 31, 2017, shall be treated as paid on the last day of the taxable year for which such tax is so imposed.
(c) Deduction denied in case of certain taxes
No deduction shall be allowed for the following taxes:
(1) Taxes assessed against local benefits of a kind tending to increase the value of the property assessed; but this paragraph shall not prevent the deduction of so much of such taxes as is properly allocable to maintenance or interest charges.
(2) Taxes on real property, to the extent that subsection (d) requires such taxes to be treated as imposed on another taxpayer.
(d) Apportionment of taxes on real property between seller and purchaser
(1) General rule
For purposes of subsection (a), if real property is sold during any real property tax year, then—
(A) so much of the real property tax as is properly allocable to that part of such year which ends on the day before the date of the sale shall be treated as a tax imposed on the seller, and
(B) so much of such tax as is properly allocable to that part of such year which begins on the date of the sale shall be treated as a tax imposed on the purchaser.
(2) Special rules
(A) In the case of any sale of real property, if—
(i) a taxpayer may not, by reason of his method of accounting, deduct any amount for taxes unless paid, and
(ii) the other party to the sale is (under the law imposing the real property tax) liable for the real property tax for the real property tax year,
then for purposes of subsection (a) the taxpayer shall be treated as having paid, on the date of the sale, so much of such tax as, under paragraph (1) of this subsection, is treated as imposed on the taxpayer. For purposes of the preceding sentence, if neither party is liable for the tax, then the party holding the property at the time the tax becomes a lien on the property shall be considered liable for the real property tax for the real property tax year.
(B) In the case of any sale of real property, if the taxpayer's taxable income for the taxable year during which the sale occurs is computed under an accrual method of accounting, and if no election under section 461(c) (relating to the accrual of real property taxes) applies, then, for purposes of subsection (a), that portion of such tax which—
(i) is treated, under paragraph (1) of this subsection, as imposed on the taxpayer, and
(ii) may not, by reason of the taxpayer's method of accounting, be deducted by the taxpayer for any taxable year,
shall be treated as having accrued on the date of the sale.
(e) Taxes of shareholder paid by corporation
Where a corporation pays a tax imposed on a shareholder on his interest as a shareholder, and where the shareholder does not reimburse the corporation, then—
(1) the deduction allowed by subsection (a) shall be allowed to the corporation; and
(2) no deduction shall be allowed the shareholder for such tax.
(f) Deduction for one-half of self-employment taxes
(1) In general
In the case of an individual, in addition to the taxes described in subsection (a), there shall be allowed as a deduction for the taxable year an amount equal to one-half of the taxes imposed by section 1401 (other than the taxes imposed by section 1401(b)(2)) for such taxable year.
(2) Deduction treated as attributable to trade or business
For purposes of this chapter, the deduction allowed by paragraph (1) shall be treated as attributable to a trade or business carried on by the taxpayer which does not consist of the performance of services by the taxpayer as an employee.
(g) Cross references
(1) For provisions disallowing any deduction for certain taxes, see section 275.
(2) For treatment of taxes imposed by Indian tribal governments (or their subdivisions), see section 7871.
(Aug. 16, 1954, ch. 736,
References in Text
Section 2604, referred to in subsec. (b)(4)(A)(ii), was repealed by
Amendments
2017—Subsec. (b)(6).
2015—Subsec. (b)(5)(I).
2014—Subsec. (a)(5).
Subsec. (a)(6).
Subsec. (b)(4)(A)(ii).
Subsec. (b)(5)(I).
Subsec. (b)(6).
Subsec. (b)(6)(E) to (G).
2013—Subsec. (b)(5)(I).
2010—Subsec. (b)(5)(I).
Subsec. (f)(1).
2009—Subsec. (a)(6).
Subsec. (b)(6).
2008—Subsec. (b)(5)(I).
2006—Subsec. (b)(5)(I).
2005—Subsec. (b)(5)(A).
"(i)
"(I) without regard to the reference to State and local income taxes, and
"(II) as if State and local general sales taxes were referred to in a paragraph thereof."
2004—Subsec. (b)(5).
1996—Subsec. (a)(4), (5).
"(4) The environmental tax imposed by section 59A.
"(5) The GST tax imposed on income distributions."
1988—Subsec. (a)(4).
Subsec. (a)(5).
1986—Subsec. (a).
Subsec. (a)(4).
Subsec. (a)(5).
Subsec. (b)(2).
Subsec. (b)(3).
Subsec. (b)(4).
Subsec. (b)(5).
1984—Subsec. (f).
1983—Subsec. (f).
Subsec. (f)(3).
Subsec. (g).
1980—Subsec. (a)(5).
1978—Subsec. (a)(5).
Subsec. (b)(5).
1976—Subsec. (d)(2).
Subsecs. (f), (g).
1972—Subsec. (b)(2)(E).
1964—Subsec. (a).
Subsec. (b).
Subsec. (c).
Subsec. (f).
Subsec. (g).
1958—Subsecs. (f), (g).
Effective Date of 2017 Amendment
Effective Date of 2015 Amendment
Effective Date of 2014 Amendment
Amendment by section 209(c) of
Amendment by section 221(a)(12)(D), (26), (95)(B)(ii) of
Effective Date of 2013 Amendment
Effective Date of 2010 Amendment
Effective Date of 2009 Amendment
Amendment by
Effective Date of 2008 Amendment
Effective Date of 2006 Amendment
Effective Date of 2005 Amendment
Amendment by
Effective Date of 2004 Amendment
Effective Date of 1988 Amendment
Amendment by
Effective Date of 1986 Amendment
Amendment by section 134 of
Amendment by section 1432(a)(1), (2) of
Amendment by
Effective Date of 1984 Amendment
Amendment by
Effective Date of 1983 Amendment
Amendment by
For effective date of amendment by
Effective Date of 1980 Amendment
Amendment by
Effective Date of 1978 Amendment
Effective Date of 1976 Amendment
Amendment by
Effective Date of 1972 Amendment
Effective Date of 1964 Amendment
"(1)
"(2)
Effective Date of 1958 Amendment
Savings Provision
§165. Losses
(a) General rule
There shall be allowed as a deduction any loss sustained during the taxable year and not compensated for by insurance or otherwise.
(b) Amount of deduction
For purposes of subsection (a), the basis for determining the amount of the deduction for any loss shall be the adjusted basis provided in section 1011 for determining the loss from the sale or other disposition of property.
(c) Limitation on losses of individuals
In the case of an individual, the deduction under subsection (a) shall be limited to—
(1) losses incurred in a trade or business;
(2) losses incurred in any transaction entered into for profit, though not connected with a trade or business; and
(3) except as provided in subsection (h), losses of property not connected with a trade or business or a transaction entered into for profit, if such losses arise from fire, storm, shipwreck, or other casualty, or from theft.
(d) Wagering losses
Losses from wagering transactions shall be allowed only to the extent of the gains from such transactions. For purposes of the preceding sentence, in the case of taxable years beginning after December 31, 2017, and before January 1, 2026, the term "losses from wagering transactions" includes any deduction otherwise allowable under this chapter incurred in carrying on any wagering transaction.
(e) Theft losses
For purposes of subsection (a), any loss arising from theft shall be treated as sustained during the taxable year in which the taxpayer discovers such loss.
(f) Capital losses
Losses from sales or exchanges of capital assets shall be allowed only to the extent allowed in sections 1211 and 1212.
(g) Worthless securities
(1) General rule
If any security which is a capital asset becomes worthless during the taxable year, the loss resulting therefrom shall, for purposes of this subtitle, be treated as a loss from the sale or exchange, on the last day of the taxable year, of a capital asset.
(2) Security defined
For purposes of this subsection, the term "security" means—
(A) a share of stock in a corporation;
(B) a right to subscribe for, or to receive, a share of stock in a corporation; or
(C) a bond, debenture, note, or certificate, or other evidence of indebtedness, issued by a corporation or by a government or political subdivision thereof, with interest coupons or in registered form.
(3) Securities in affiliated corporation
For purposes of paragraph (1), any security in a corporation affiliated with a taxpayer which is a domestic corporation shall not be treated as a capital asset. For purposes of the preceding sentence, a corporation shall be treated as affiliated with the taxpayer only if—
(A) the taxpayer owns directly stock in such corporation meeting the requirements of section 1504(a)(2), and
(B) more than 90 percent of the aggregate of its gross receipts for all taxable years has been from sources other than royalties, rents (except rents derived from rental of properties to employees of the corporation in the ordinary course of its operating business), dividends, interest (except interest received on deferred purchase price of operating assets sold), annuities, and gains from sales or exchanges of stocks and securities.
In computing gross receipts for purposes of the preceding sentence, gross receipts from sales or exchanges of stocks and securities shall be taken into account only to the extent of gains therefrom.
(h) Treatment of casualty gains and losses
(1) Dollar limitation per casualty
Any loss of an individual described in subsection (c)(3) shall be allowed only to the extent that the amount of the loss to such individual arising from each casualty, or from each theft, exceeds $500 ($100 for taxable years beginning after December 31, 2009).
(2) Net casualty loss allowed only to the extent it exceeds 10 percent of adjusted gross income
(A) In general
If the personal casualty losses for any taxable year exceed the personal casualty gains for such taxable year, such losses shall be allowed for the taxable year only to the extent of the sum of—
(i) the amount of the personal casualty gains for the taxable year, plus
(ii) so much of such excess as exceeds 10 percent of the adjusted gross income of the individual.
(B) Special rule where personal casualty gains exceed personal casualty losses
If the personal casualty gains for any taxable year exceed the personal casualty losses for such taxable year—
(i) all such gains shall be treated as gains from sales or exchanges of capital assets, and
(ii) all such losses shall be treated as losses from sales or exchanges of capital assets.
(3) Definitions of personal casualty gain and personal casualty loss
For purposes of this subsection—
(A) Personal casualty gain
The term "personal casualty gain" means the recognized gain from any involuntary conversion of property which is described in subsection (c)(3) arising from fire, storm, shipwreck, or other casualty, or from theft.
(B) Personal casualty loss
The term "personal casualty loss" means any loss described in subsection (c)(3). For purposes of paragraph (2), the amount of any personal casualty loss shall be determined after the application of paragraph (1).
(4) Special rules
(A) Personal casualty losses allowable in computing adjusted gross income to the extent of personal casualty gains
In any case to which paragraph (2)(A) applies, the deduction for personal casualty losses for any taxable year shall be treated as a deduction allowable in computing adjusted gross income to the extent such losses do not exceed the personal casualty gains for the taxable year.
(B) Joint returns
For purposes of this subsection, a husband and wife making a joint return for the taxable year shall be treated as 1 individual.
(C) Determination of adjusted gross income in case of estates and trusts
For purposes of paragraph (2), the adjusted gross income of an estate or trust shall be computed in the same manner as in the case of an individual, except that the deductions for costs paid or incurred in connection with the administration of the estate or trust shall be treated as allowable in arriving at adjusted gross income.
(D) Coordination with estate tax
No loss described in subsection (c)(3) shall be allowed if, at the time of filing the return, such loss has been claimed for estate tax purposes in the estate tax return.
(E) Claim required to be filed in certain cases
Any loss of an individual described in subsection (c)(3) to the extent covered by insurance shall be taken into account under this section only if the individual files a timely insurance claim with respect to such loss.
(5) Limitation for taxable years 2018 through 2025
(A) In general
In the case of an individual, except as provided in subparagraph (B), any personal casualty loss which (but for this paragraph) would be deductible in a taxable year beginning after December 31, 2017, and before January 1, 2026, shall be allowed as a deduction under subsection (a) only to the extent it is attributable to a Federally declared disaster (as defined in subsection (i)(5)).
(B) Exception related to personal casualty gains
If a taxpayer has personal casualty gains for any taxable year to which subparagraph (A) applies—
(i) subparagraph (A) shall not apply to the portion of the personal casualty loss not attributable to a Federally declared disaster (as so defined) to the extent such loss does not exceed such gains, and
(ii) in applying paragraph (2) for purposes of subparagraph (A) to the portion of personal casualty loss which is so attributable to such a disaster, the amount of personal casualty gains taken into account under paragraph (2)(A) shall be reduced by the portion of such gains taken into account under clause (i).
(i) Disaster losses
(1) Election to take deduction for preceding year
Notwithstanding the provisions of subsection (a), any loss occurring in a disaster area and attributable to a federally declared disaster may, at the election of the taxpayer, be taken into account for the taxable year immediately preceding the taxable year in which the disaster occurred.
(2) Year of loss
If an election is made under this subsection, the casualty resulting in the loss shall be treated for purposes of this title as having occurred in the taxable year for which the deduction is claimed.
(3) Amount of loss
The amount of the loss taken into account in the preceding taxable year by reason of paragraph (1) shall not exceed the uncompensated amount determined on the basis of the facts existing at the date the taxpayer claims the loss.
(4) Use of disaster loan appraisals to establish amount of loss
Nothing in this title shall be construed to prohibit the Secretary from prescribing regulations or other guidance under which an appraisal for the purpose of obtaining a loan of Federal funds or a loan guarantee from the Federal Government as a result of a federally declared disaster may be used to establish the amount of any loss described in paragraph (1) or (2).
(5) Federally declared disasters
For purposes of this subsection—
(A) In general
The term "Federally 1 declared disaster" means any disaster subsequently determined by the President of the United States to warrant assistance by the Federal Government under the Robert T. Stafford Disaster Relief and Emergency Assistance Act.
(B) Disaster area
The term "disaster area" means the area so determined to warrant such assistance.
(j) Denial of deduction for losses on certain obligations not in registered form
(1) In general
Nothing in subsection (a) or in any other provision of law shall be construed to provide a deduction for any loss sustained on any registration-required obligation unless such obligation is in registered form (or the issuance of such obligation was subject to tax under section 4701).
(2) Definitions
For purposes of this subsection—
(A) Registration-required obligation
The term "registration-required obligation" has the meaning given to such term by section 163(f)(2).
(B) Registered form
The term "registered form" has the same meaning as when used in section 163(f).
(3) Exceptions
The Secretary may, by regulations, provide that this subsection and section 1287 shall not apply with respect to obligations held by any person if—
(A) such person holds such obligations in connection with a trade or business outside the United States,
(B) such person holds such obligations as a broker dealer (registered under Federal or State law) for sale to customers in the ordinary course of his trade or business,
(C) such person complies with reporting requirements with respect to ownership, transfers, and payments as the Secretary may require, or
(D) such person promptly surrenders the obligation to the issuer for the issuance of a new obligation in registered form,
but only if such obligations are held under arrangements provided in regulations or otherwise which are designed to assure that such obligations are not delivered to any United States person other than a person described in subparagraph (A), (B), or (C).
(k) Treatment as disaster loss where taxpayer ordered to demolish or relocate residence in disaster area because of disaster
In the case of a taxpayer whose residence is located in an area which has been determined by the President of the United States to warrant assistance by the Federal Government under the Robert T. Stafford Disaster Relief and Emergency Assistance Act, if—
(1) not later than the 120th day after the date of such determination, the taxpayer is ordered, by the government of the State or any political subdivision thereof in which such residence is located, to demolish or relocate such residence, and
(2) the residence has been rendered unsafe for use as a residence by reason of the disaster,
any loss attributable to such disaster shall be treated as a loss which arises from a casualty and which is described in subsection (i).
(l) Treatment of certain losses in insolvent financial institutions
(1) In general
If—
(A) as of the close of the taxable year, it can reasonably be estimated that there is a loss on a qualified individual's deposit in a qualified financial institution, and
(B) such loss is on account of the bankruptcy or insolvency of such institution,
then the taxpayer may elect to treat the amount so estimated as a loss described in subsection (c)(3) incurred during the taxable year.
(2) Qualified individual defined
For purposes of this subsection, the term "qualified individual" means any individual, except an individual—
(A) who owns at least 1 percent in value of the outstanding stock of the qualified financial institution,
(B) who is an officer of the qualified financial institution,
(C) who is a sibling (whether by the whole or half blood), spouse, aunt, uncle, nephew, niece, ancestor, or lineal descendant of an individual described in subparagraph (A) or (B), or
(D) who otherwise is a related person (as defined in section 267(b)) with respect to an individual described in subparagraph (A) or (B).
(3) Qualified financial institution
For purposes of this subsection, the term "qualified financial institution" means—
(A) any bank (as defined in section 581),
(B) any institution described in section 591,
(C) any credit union the deposits or accounts in which are insured under Federal or State law or are protected or guaranteed under State law, or
(D) any similar institution chartered and supervised under Federal or State law.
(4) Deposit
For purposes of this subsection, the term "deposit" means any deposit, withdrawable account, or withdrawable or repurchasable share.
(5) Election to treat as ordinary loss
(A) In general
In lieu of any election under paragraph (1), the taxpayer may elect to treat the amount referred to in paragraph (1) for the taxable year as an ordinary loss described in subsection (c)(2) incurred during the taxable year.
(B) Limitations
(i) Deposit may not be federally insured
No election may be made under subparagraph (A) with respect to any loss on a deposit in a qualified financial institution if part or all of such deposit is insured under Federal law.
(ii) Dollar limitation
With respect to each financial institution, the aggregate amount of losses attributable to deposits in such financial institution to which an election under subparagraph (A) may be made by the taxpayer for any taxable year shall not exceed $20,000 ($10,000 in the case of a separate return by a married individual). The limitation of the preceding sentence shall be reduced by the amount of any insurance proceeds under any State law which can reasonably be expected to be received with respect to losses on deposits in such institution.
(6) Election
Any election by the taxpayer under this subsection for any taxable year—
(A) shall apply to all losses for such taxable year of the taxpayer on deposits in the institution with respect to which such election was made, and
(B) may be revoked only with the consent of the Secretary.
(7) Coordination with section 166
Section 166 shall not apply to any loss to which an election under this subsection applies.
(m) Cross references
(1) For special rule for banks with respect to worthless securities, see section 582.
(2) For disallowance of deduction for worthlessness of securities to which subsection (g)(2)(C) applies, if issued by a political party or similar organization, see section 271.
(3) For special rule for losses on stock in a small business investment company, see section 1242.
(4) For special rule for losses of a small business investment company, see section 1243.
(5) For special rule for losses on small business stock, see section 1244.
(Aug. 16, 1954, ch. 736,
References in Text
The Robert T. Stafford Disaster Relief and Emergency Assistance Act, referred to in subsecs. (i)(5)(A) and (k), is
Amendments
2017—Subsec. (d).
Subsec. (h)(5).
2014—Subsec. (h)(1).
Subsec. (h)(3).
Subsec. (h)(3)(B).
Subsec. (h)(4), (5).
Subsec. (i)(1).
Subsec. (i)(4).
Subsec. (i)(5).
2010—Subsec. (j)(2)(A).
2008—Subsec. (h)(1).
Subsec. (h)(3).
Subsec. (h)(4).
Subsec. (h)(4)(B).
Subsec. (h)(5).
Subsec. (i)(1).
Subsec. (i)(4).
2004—Subsecs. (i)(1), (k).
2000—Subsec. (g)(3).
Subsec. (g)(3)(A).
1997—Subsec. (i)(4).
1988—Subsecs. (i)(1), (k).
Subsec. (l)(5) to (7).
1986—Subsec. (h)(4)(E).
Subsecs. (l), (m).
1984—Subsec. (c)(3).
Subsec. (h).
"(A) the amount of loss to such individual arising from each casualty, or from each theft, exceeds $100, and
"(B) the aggregate amount of all such losses sustained by such individual during the taxable year (determined after application of subparagraph (A) exceeds 10 percent of the adjusted gross income of the individual.";
added par. (2) "Net casualty loss allowed only to the extent it exceeds 10 percent of adjusted gross income" provision and par. (3) "Definitions of personal casualty gain and personal casualty loss" provisions; redesignated as par. (4) former par. (2) catchline; added par. (4)(A) "Personal casualty losses allowable in computing adjusted gross income to the extent of personal casualty gains" provision; redesignated as par. (4)(B) former par. (2)(A) joint returns provision, substituting "For purposes of this section" for "For purposes of the $100 and 10 percent limitations described in paragraph (1)" and "individual" for "one individual"; redesignated as par. (4)(C) former par. (2)(B), substituting therein paragraph "(2)" for "(1)"; and redesignated as par. (4)(D) former par. (2)(C).
Subsec. (j)(3).
Subsecs. (k), (l).
1982—Subsec. (c)(3).
Subsec. (h).
Subsec. (i).
Subsec. (j).
Subsec. (k).
1976—Subsecs. (i), (j).
1974—Subsec. (h).
1972—Subsec. (h).
Subsec. (h)(1).
1971—Subsec. (g)(3).
Subsec. (i)(1).
Subsec. (i)(2)(B).
Subsec. (i)(3).
1970—Subsec. (h)(2).
1964—Subsec. (c)(3).
Subsec. (i).
Subsec. (j).
1962—Subsecs. (h), (i).
1958—Subsec. (g)(3)(B).
Subsec. (h)(3), (4).
Subsec. (h)(5).
Effective Date of 2017 Amendment
Effective Date of 2014 Amendment
Amendment by section 211(c)(1)(C) of
Amendment by section 221(a)(27)(A)–(C) of
Effective Date of 2010 Amendment
Amendment by
Effective Date of 2008 Amendment
Amendment by section 706(a)(1), (2)(A)–(C) of
Amendment by section 706(c) of
Effective Date of 2000 Amendment
Effective Date of 1997 Amendment
Effective Date of 1988 Amendment
Amendment by
Effective Date of 1986 Amendment
Amendment by section 905(a) of
Effective Date of 1984 Amendment
Amendment by section 42(a)(4) of
Amendment by section 711(c)(1) of
Effective Date of 1982 Amendment
Amendment by section 310(b)(5) of
Effective Date of 1976 Amendment
Amendment by
Effective Date of 1974 Amendment
Amendment by
Effective Date of 1972 Amendment
Effective Date of 1971 Amendment
Effective Date of 1970 Amendment
Effective Date of 1964 Amendment
Effective Date of 1962 Amendment
Effective Date of 1958 Amendment
"(1) amendments made by this title to subtitle A of the Internal Revenue Code of 1986 [formerly I.R.C. 1954] (relating to income taxes) [enacting
"(2) amendments made by this title to subtitle F of such Code (relating to procedure and administration) [enacting
Amendment by section 57(c)(1) of
Transitional Rule for 1984 Amendment
"(i) For purposes of paragraph (1)(B) of section 165(h) of the Internal Revenue Code of 1986 [formerly I.R.C. 1954], adjusted gross income shall be determined without regard to the application of section 1231 of such Code to any gain or loss from an involuntary conversion of property described in subsection (c)(3) of section 165 of such Code arising from fire, storm, shipwreck, or other casualty or from theft.
"(ii) Section 1231 of such Code shall be applied after the application of paragraph (1) of section 165(h) of such Code."
Clarification of Treatment of Certain FSLIC Financial Assistance
"(a)
"(1) any FSLIC assistance with respect to any loss of principal, capital, or similar amount upon the disposition of any asset shall be taken into account as compensation for such loss for purposes of section 165 of such Code, and
"(2) any FSLIC assistance with respect to any debt shall be taken into account for purposes of section 166, 585, or 593 of such Code in determining whether such debt is worthless (or the extent to which such debt is worthless) and in determining the amount of any addition to a reserve for bad debts arising from the worthlessness or partial worthlessness of such debts.
"(b)
"(c)
"(1)
"(A) The provisions of this section shall apply to taxable years ending on or after March 4, 1991, but only with respect to FSLIC assistance not credited before March 4, 1991.
"(B) If any FSLIC assistance not credited before March 4, 1991, is with respect to a loss sustained or charge-off in a taxable year ending before March 4, 1991, for purposes of determining the amount of any net operating loss carryover to a taxable year ending on or after March 4, 1991, the provisions of this section shall apply to such assistance for purposes of determining the amount of the net operating loss for the taxable year in which such loss was sustained or debt written off. Except as provided in the preceding sentence, this section shall not apply to any FSLIC assistance with respect to a loss sustained or charge-off in a taxable year ending before March 4, 1991.
"(2)
Overpayments or Underpayments of Tax Attributable to Certain Amendments by Pub. L. 99–514 or Pub. L. 100–647
"(A) credit or refund of any such overpayment may nevertheless be made if claim therefore [sic] is filed before the date 1 year after such date of enactment, and
"(B) assessment of any such underpayment may nevertheless be made if made before the date 1 year after such date of enactment."
Deduction for Bus and Freight Forwarder Operating Authority
"(a)
"(1)
"(2)
"(A) by substituting 'November 19, 1982' for 'July 1, 1980' each place it appears, and
"(B) by substituting 'November 1982' for 'July 1980' in subsection (a) thereof.
"(3)
"(A) a certificate or permit held by a motor common or contract carrier of passengers which was issued pursuant to subchapter II of
"(B) a certificate or permit held by a motor carrier authorizing the transportation of passengers, as a common carrier, over regular routes in intrastate commerce which was issued by the appropriate State agency.
"(b)
"(1)
"(2)
"(A) 60-
"(i) the deregulation month, or
"(ii) at the election of the taxpayer, the 1st month of the taxpayer's 1st taxable year beginning after the deregulation month.
"(B)
"(C)
"(3)
"(c)
"(d)
"(e)
"(1)
"(A)
"(B)
"(2)
Deduction for Motor Carrier Operating Authority
"(a)
"(b)
"(c)
"(1)
"(2)
"(A)
"(i) on or before July 1, 1980 (or after such date pursuant to a binding contract in effect on such date), acquired stock in a corporation which held, directly or indirectly, any motor carrier operating authority at the time of such acquisition, and
"(ii) would have been able to allocate to the basis of such authority that portion of the acquiring corporation's cost basis in such stock attributable to such authority if the acquiring corporation had received such authority in the liquidation of the acquired corporation immediately following such acquisition and such allocation would have been proper under section 334(b)(2) of such Code,
the holder of the authority may, for purposes of this section, allocate a portion of the basis of the acquiring corporation in the stock of the acquired corporation to the basis of such authority in such manner as the Secretary may prescribe in such regulations.
"(B)
"(i) a noncorporate taxpayer or group of noncorporate taxpayers on or before July 1, 1980, acquired in one purchase stock in a corporation which held, directly or indirectly, any motor carrier operating authority at the time of such acquisition, and
"(ii) the acquisition referred to in clause (i) would have satisfied the requirements of subparagraph (A) if the stock had been acquired by a corporation,
then, for purposes of subparagraphs (A) and (C), the noncorporate taxpayer or group of noncorporate taxpayers referred to in clause (i) shall be treated as a corporation. The preceding sentence shall apply only if such noncorporate taxpayer (or group of noncorporate taxpayers) on July 1, 1980, held stock constituting control (within the meaning of section 368(c) of the Internal Revenue Code of 1986) of the corporation holding (directly or indirectly) the motor carrier operating authority.
"(C)
"(3)
"(d)
[
Tax Treatment of Certain 1972 Disaster Loans
"(a)
"(1) who was allowed a deduction under section 165 of the Internal Revenue Code of 1986 [formerly I.R.C. 1954] (relating to losses) for a loss attributable to a disaster occurring during calendar year 1972 which was determined by the President, under section 102 of the Disaster Relief Act of 1970, to warrant disaster assistance by the Federal Government.
"(2) who in connection with such disaster—
"(A) received income in the form of cancellation of a disaster loan under section 7 of the Small Business Act [
"(B) received income in the form of compensation (not taken into account in computing the amount of the deduction) for such loss in settlement of any claim of the taxpayer against a person for that person's liability in tort for the damage or destruction of that taxpayer's property in connection with the disaster, and
"(3) who elects (at such time and in such manner as the Secretary of the Treasury or his delegate may by regulations prescribe) to take the benefits of this section.
"(b)
"(1) the tax imposed by
"(2) any amount of tax imposed by
"(3) no interest on any deficiency shall be payable for any period before April 16, 1977, to the extent such deficiency is attributable to the receipt of such compensation, and no interest on any installment referred to in paragraph (2) shall be payable for any period before the due date of such installment.
"(c)
"(1) in the case of an individual described in subsection (a)(2)(A), the amount of income (not in excess of $5,000) attributable to the cancellation of a disaster loan under section 7 of the Small Business Act or an emergency loan under subtitle C of the Consolidated Farm and Rural Development Act received by reason of the disaster described in subsection (a)(1), or
"(2) in the case of an individual described in subsection (a)(2)(B), the amount of compensation (not in excess of $5,000) for the loss in settlement of any claim of the taxpayer against a person for that person's liability in tort for the damage or destruction of that taxpayer's property in connection with the disaster described in subsection (a)(1).
"(d)
"(e)
Refund or Credit of Overpayment; Time for Filing Claim; Interest
1 So in original. Probably should not be capitalized.
§166. Bad debts
(a) General rule
(1) Wholly worthless debts
There shall be allowed as a deduction any debt which becomes worthless within the taxable year.
(2) Partially worthless debts
When satisfied that a debt is recoverable only in part, the Secretary may allow such debt, in an amount not in excess of the part charged off within the taxable year, as a deduction.
(b) Amount of deduction
For purposes of subsection (a), the basis for determining the amount of the deduction for any bad debt shall be the adjusted basis provided in section 1011 for determining the loss from the sale or other disposition of property.
[(c) Repealed. Pub. L. 99–514, title VIII, §805(a), Oct. 22, 1986, 100 Stat. 2361 ]
(d) Nonbusiness debts
(1) General rule
In the case of a taxpayer other than a corporation—
(A) subsection (a) shall not apply to any nonbusiness debt; and
(B) where any nonbusiness debt becomes worthless within the taxable year, the loss resulting therefrom shall be considered a loss from the sale or exchange, during the taxable year, of a capital asset held for not more than 1 year.
(2) Nonbusiness debt defined
For purposes of paragraph (1), the term "nonbusiness debt" means a debt other than—
(A) a debt created or acquired (as the case may be) in connection with a trade or business of the taxpayer; or
(B) a debt the loss from the worthlessness of which is incurred in the taxpayer's trade or business.
(e) Worthless securities
This section shall not apply to a debt which is evidenced by a security as defined in section 165(g)(2)(C).
(f) Cross references
(1) For disallowance of deduction for worthlessness of debts owed by political parties and similar organizations, see section 271.
(2) For special rule for banks with respect to worthless securities, see section 582.
(Aug. 16, 1954, ch. 736,
Amendments
1988—Subsec. (d)(1)(A).
Subsecs. (f), (g).
1986—Subsec. (c).
Subsec. (f).
Subsec. (g).
"(3) For special rule for bad debt reserves of certain mutual savings banks, domestic building and loan associations, and cooperative banks, see section 593.
"(4) For special rule for bad debt reserves of banks, small business investment-companies, etc., see sections 585 and 586."
1984—Subsec. (d)(1)(B).
1976—Subsecs. (a)(2), (c).
Subsec. (d)(1)(B).
Subsec. (f).
Subsecs. (g), (h).
1969—Subsec. (h)(4).
1966—Subsecs. (g), (h).
1958—Subsec. (d)(2)(A).
Effective Date of 1988 Amendment
Amendment by
Effective Date of 1986 Amendment
"(1)
"(2)
"(A) such change shall be treated as initiated by the taxpayer,
"(B) such change shall be treated as made with the consent of the Secretary, and
"(C) the net amount of adjustments required by section 481 of the Internal Revenue Code of 1986 to be taken into account by the taxpayer shall—
"(i) in the case of a taxpayer maintaining a reserve under section 166(f), be reduced by the balance in the suspense account under section 166(f)(4) of such Code as of the close of such last taxable year, and
"(ii) be taken into account ratably in each of the first 4 taxable years beginning after December 31, 1986."
Effective Date of 1984 Amendment
Effective Date of 1976 Amendment
Effective Date of 1969 Amendment
Amendment by
Effective Date of 1966 Amendment
"(a) Except as provided in subsections (b) and (c), the amendments made by the first section of this Act [amending this section and
"(b) If—
"(1) the taxpayer before October 22, 1965, claimed a deduction, for a taxable year ending before such date, under section 166(c) of the Internal Revenue Code of 1986 [formerly I.R.C. 1954] for an addition to a reserve for bad debts on account of debt obligations described in section 166(g)(1)(A) of such Code (as amended by the first section of this Act), and
"(2) the assessment of a deficiency of the tax imposed by
then such deduction on account of such debt obligations shall be allowed for each such taxable year under such section 166(c) to the extent that the deduction would have been allowable under the provisions of such section 166(g)(1)(A) if such provisions applied to such taxable years.
"(c) Section 166(g)(2) of the Internal Revenue Code of 1986 (as amended by the first section of this Act) shall apply to taxable years beginning after December 31, 1953, and ending after August 16, 1954."
Effective Date of 1958 Amendment
Amendment by
Establishment of Reserve for Taxable Year Ending After Oct. 21, 1965, and Beginning Before Aug. 2, 1966
§167. Depreciation
(a) General rule
There shall be allowed as a depreciation deduction a reasonable allowance for the exhaustion, wear and tear (including a reasonable allowance for obsolescence)—
(1) of property used in the trade or business, or
(2) of property held for the production of income.
(b) Cross reference
For determination of depreciation deduction in case of property to which section 168 applies, see section 168.
(c) Basis for depreciation
(1) In general
The basis on which exhaustion, wear and tear, and obsolescence are to be allowed in respect of any property shall be the adjusted basis provided in section 1011, for the purpose of determining the gain on the sale or other disposition of such property.
(2) Special rule for property subject to lease
If any property is acquired subject to a lease—
(A) no portion of the adjusted basis shall be allocated to the leasehold interest, and
(B) the entire adjusted basis shall be taken into account in determining the depreciation deduction (if any) with respect to the property subject to the lease.
(d) Life tenants and beneficiaries of trusts and estates
In the case of property held by one person for life with remainder to another person, the deduction shall be computed as if the life tenant were the absolute owner of the property and shall be allowed to the life tenant. In the case of property held in trust, the allowable deduction shall be apportioned between the income beneficiaries and the trustee in accordance with the pertinent provisions of the instrument creating the trust, or, in the absence of such provisions, on the basis of the trust income allocable to each. In the case of an estate, the allowable deduction shall be apportioned between the estate and the heirs, legatees, and devisees on the basis of the income of the estate allocable to each.
(e) Certain term interests not depreciable
(1) In general
No depreciation deduction shall be allowed under this section (and no depreciation or amortization deduction shall be allowed under any other provision of this subtitle) to the taxpayer for any term interest in property for any period during which the remainder interest in such property is held (directly or indirectly) by a related person.
(2) Coordination with other provisions
(A) Section 273
This subsection shall not apply to any term interest to which section 273 applies.
(B) Section 305(e)
This subsection shall not apply to the holder of the dividend rights which were separated from any stripped preferred stock to which section 305(e)(1) applies.
(3) Basis adjustments
If, but for this subsection, a depreciation or amortization deduction would be allowable to the taxpayer with respect to any term interest in property—
(A) the taxpayer's basis in such property shall be reduced by any depreciation or amortization deductions disallowed under this subsection, and
(B) the basis of the remainder interest in such property shall be increased by the amount of such disallowed deductions (properly adjusted for any depreciation deductions allowable under subsection (d) to the taxpayer).
(4) Special rules
(A) Denial of increase in basis of remainderman
No increase in the basis of the remainder interest shall be made under paragraph (3)(B) for any disallowed deductions attributable to periods during which the term interest was held—
(i) by an organization exempt from tax under this subtitle, or
(ii) by a nonresident alien individual or foreign corporation but only if income from the term interest is not effectively connected with the conduct of a trade or business in the United States.
(B) Coordination with subsection (d)
If, but for this subsection, a depreciation or amortization deduction would be allowable to any person with respect to any term interest in property, the principles of subsection (d) shall apply to such person with respect to such term interest.
(5) Definitions
For purposes of this subsection—
(A) Term interest in property
The term "term interest in property" has the meaning given such term by section 1001(e)(2).
(B) Related person
The term "related person" means any person bearing a relationship to the taxpayer described in subsection (b) or (e) of section 267.
(6) Regulations
The Secretary shall prescribe such regulations as may be necessary to carry out the purposes of this subsection, including regulations preventing avoidance of this subsection through cross-ownership arrangements or otherwise.
(f) Treatment of certain property excluded from section 197
(1) Computer software
(A) In general
If a depreciation deduction is allowable under subsection (a) with respect to any computer software, such deduction shall be computed by using the straight line method and a useful life of 36 months.
(B) Computer software
For purposes of this section, the term "computer software" has the meaning given to such term by section 197(e)(3)(B); except that such term shall not include any such software which is an amortizable section 197 intangible.
(C) Tax-exempt use property subject to lease
In the case of computer software which would be tax-exempt use property as defined in subsection (h) of section 168 if such section applied to computer software, the useful life under subparagraph (A) shall not be less than 125 percent of the lease term (within the meaning of section 168(i)(3)).
(2) Certain interests or rights acquired separately
If a depreciation deduction is allowable under subsection (a) with respect to any property described in subparagraph (B), (C), or (D) of section 197(e)(4), such deduction shall be computed in accordance with regulations prescribed by the Secretary. If such property would be tax-exempt use property as defined in subsection (h) of section 168 if such section applied to such property, the useful life under such regulations shall not be less than 125 percent of the lease term (within the meaning of section 168(i)(3)).
(3) Mortgage servicing rights
If a depreciation deduction is allowable under subsection (a) with respect to any right described in section 197(e)(6), such deduction shall be computed by using the straight line method and a useful life of 108 months.
(g) Depreciation under income forecast method
(1) In general
If the depreciation deduction allowable under this section to any taxpayer with respect to any property is determined under the income forecast method or any similar method—
(A) the income from the property to be taken into account in determining the depreciation deduction under such method shall be equal to the amount of income earned in connection with the property before the close of the 10th taxable year following the taxable year in which the property was placed in service,
(B) the adjusted basis of the property shall only include amounts with respect to which the requirements of section 461(h) are satisfied,
(C) the depreciation deduction under such method for the 10th taxable year beginning after the taxable year in which the property was placed in service shall be equal to the adjusted basis of such property as of the beginning of such 10th taxable year, and
(D) such taxpayer shall pay (or be entitled to receive) interest computed under the look-back method of paragraph (2) for any recomputation year.
(2) Look-back method
The interest computed under the look-back method of this paragraph for any recomputation year shall be determined by—
(A) first determining the depreciation deductions under this section with respect to such property which would have been allowable for prior taxable years if the determination of the amounts so allowable had been made on the basis of the sum of the following (instead of the estimated income from such property)—
(i) the actual income earned in connection with such property for periods before the close of the recomputation year, and
(ii) an estimate of the future income to be earned in connection with such property for periods after the recomputation year and before the close of the 10th taxable year following the taxable year in which the property was placed in service,
(B) second, determining (solely for purposes of computing such interest) the overpayment or underpayment of tax for each such prior taxable year which would result solely from the application of subparagraph (A), and
(C) then using the adjusted overpayment rate (as defined in section 460(b)(7)), compounded daily, on the overpayment or underpayment determined under subparagraph (B).
For purposes of the preceding sentence, any cost incurred after the property is placed in service (which is not treated as a separate property under paragraph (5)) shall be taken into account by discounting (using the Federal mid-term rate determined under section 1274(d) as of the time such cost is incurred) such cost to its value as of the date the property is placed in service. The taxpayer may elect with respect to any property to have the preceding sentence not apply to such property.
(3) Exception from look-back method
Paragraph (1)(D) shall not apply with respect to any property which had a cost basis of $100,000 or less.
(4) Recomputation year
For purposes of this subsection, except as provided in regulations, the term "recomputation year" means, with respect to any property, the 3d and the 10th taxable years beginning after the taxable year in which the property was placed in service, unless the actual income earned in connection with the property for the period before the close of such 3d or 10th taxable year is within 10 percent of the income earned in connection with the property for such period which was taken into account under paragraph (1)(A).
(5) Special rules
(A) Certain costs treated as separate property
For purposes of this subsection, the following costs shall be treated as separate properties:
(i) Any costs incurred with respect to any property after the 10th taxable year beginning after the taxable year in which the property was placed in service.
(ii) Any costs incurred after the property is placed in service and before the close of such 10th taxable year if such costs are significant and give rise to a significant increase in the income from the property which was not included in the estimated income from the property.
(B) Syndication income from television series
In the case of property which is 1 or more episodes in a television series, income from syndicating such series shall not be required to be taken into account under this subsection before the earlier of—
(i) the 4th taxable year beginning after the date the first episode in such series is placed in service, or
(ii) the earliest taxable year in which the taxpayer has an arrangement relating to the future syndication of such series.
(C) Special rules for financial exploitation of characters, etc.
For purposes of this subsection, in the case of television and motion picture films, the income from the property shall include income from the exploitation of characters, designs, scripts, scores, and other incidental income associated with such films, but only to the extent that such income is earned in connection with the ultimate use of such items by, or the ultimate sale of merchandise to, persons who are not related persons (within the meaning of section 267(b)) to the taxpayer.
(D) Collection of interest
For purposes of subtitle F (other than sections 6654 and 6655), any interest required to be paid by the taxpayer under paragraph (1) for any recomputation year shall be treated as an increase in the tax imposed by this chapter for such year.
(E) Treatment of distribution costs
For purposes of this subsection, the income with respect to any property shall be the taxpayer's gross income from such property.
(F) Determinations
For purposes of paragraph (2), determinations of the amount of income earned in connection with any property shall be made in the same manner as for purposes of applying the income forecast method; except that any income from the disposition of such property shall be taken into account.
(G) Treatment of pass-thru entities
Rules similar to the rules of section 460(b)(4) shall apply for purposes of this subsection.
(6) Limitation on property for which income forecast method may be used
The depreciation deduction allowable under this section may be determined under the income forecast method or any similar method only with respect to—
(A) property described in paragraph (3) or (4) of section 168(f),
(B) copyrights,
(C) books,
(D) patents, and
(E) other property specified in regulations.
Such methods may not be used with respect to any amortizable section 197 intangible (as defined in section 197(c)).
(7) Treatment of participations and residuals
(A) In general
For purposes of determining the depreciation deduction allowable with respect to a property under this subsection, the taxpayer may include participations and residuals with respect to such property in the adjusted basis of such property for the taxable year in which the property is placed in service, but only to the extent that such participations and residuals relate to income estimated (for purposes of this subsection) to be earned in connection with the property before the close of the 10th taxable year referred to in paragraph (1)(A).
(B) Participations and residuals
For purposes of this paragraph, the term "participations and residuals" means, with respect to any property, costs the amount of which by contract varies with the amount of income earned in connection with such property.
(C) Special rules relating to recomputation years
If the adjusted basis of any property is determined under this paragraph, paragraph (4) shall be applied by substituting "for each taxable year in such period" for "for such period".
(D) Other special rules
(i) Participations and residuals
Notwithstanding subparagraph (A), the taxpayer may exclude participations and residuals from the adjusted basis of such property and deduct such participations and residuals in the taxable year that such participations and residuals are paid.
(ii) Coordination with other rules
Deductions computed in accordance with this paragraph shall be allowable notwithstanding paragraph (1)(B), section 263, 263A, 404, 419, or 461(h).
(E) Authority to make adjustments
The Secretary shall prescribe appropriate adjustments to the basis of property and to the look-back method for the additional amounts allowable as a deduction solely by reason of this paragraph.
(8) Special rules for certain musical works and copyrights
(A) In general
If an election is in effect under this paragraph for any taxable year, then, notwithstanding paragraph (1), any expense which—
(i) is paid or incurred by the taxpayer in creating or acquiring any applicable musical property placed in service during the taxable year, and
(ii) is otherwise properly chargeable to capital account,
shall be amortized ratably over the 5-year period beginning with the month in which the property was placed in service. The preceding sentence shall not apply to any expense which, without regard to this paragraph, would not be allowable as a deduction.
(B) Exclusive method
Except as provided in this paragraph, no depreciation or amortization deduction shall be allowed with respect to any expense to which subparagraph (A) applies.
(C) Applicable musical property
For purposes of this paragraph—
(i) In general
The term "applicable musical property" means any musical composition (including any accompanying words), or any copyright with respect to a musical composition, which is property to which this subsection applies without regard to this paragraph.
(ii) Exceptions
Such term shall not include any property—
(I) with respect to which expenses are treated as qualified creative expenses to which section 263A(h) applies,
(II) to which a simplified procedure established under section 263A(i)(2) 1 applies, or
(III) which is an amortizable section 197 intangible (as defined in section 197(c)).
(D) Election
An election under this paragraph shall be made at such time and in such form as the Secretary may prescribe and shall apply to all applicable musical property placed in service during the taxable year for which the election applies.
(E) Termination
An election may not be made under this paragraph for any taxable year beginning after December 31, 2010.
(h) Amortization of geological and geophysical expenditures
(1) In general
Any geological and geophysical expenses paid or incurred in connection with the exploration for, or development of, oil or gas within the United States (as defined in section 638) shall be allowed as a deduction ratably over the 24-month period beginning on the date that such expense was paid or incurred.
(2) Half-year convention
For purposes of paragraph (1), any payment paid or incurred during the taxable year shall be treated as paid or incurred on the mid-point of such taxable year.
(3) Exclusive method
Except as provided in this subsection, no depreciation or amortization deduction shall be allowed with respect to such payments.
(4) Treatment upon abandonment
If any property with respect to which geological and geophysical expenses are paid or incurred is retired or abandoned during the 24-month period described in paragraph (1), no deduction shall be allowed on account of such retirement or abandonment and the amortization deduction under this subsection shall continue with respect to such payment.
(5) Special rule for major integrated oil companies
(A) In general
In the case of a major integrated oil company, paragraphs (1) and (4) shall be applied by substituting "7-year" for "24 month".
(B) Major integrated oil company
For purposes of this paragraph, the term "major integrated oil company" means, with respect to any taxable year, a producer of crude oil—
(i) which has an average daily worldwide production of crude oil of at least 500,000 barrels for the taxable year,
(ii) which had gross receipts in excess of $1,000,000,000 for its last taxable year ending during calendar year 2005, and
(iii) to which subsection (c) of section 613A does not apply by reason of paragraph (4) of section 613A(d), determined—
(I) by substituting "15 percent" for "5 percent" each place it occurs in paragraph (3) of section 613A(d), and
(II) without regard to whether subsection (c) of section 613A does not apply by reason of paragraph (2) of section 613A(d).
For purposes of clauses (i) and (ii), all persons treated as a single employer under subsections (a) and (b) of section 52 shall be treated as 1 person and, in case of a short taxable year, the rule under section 448(c)(3)(B) shall apply.
(i) Cross references
(1) For additional rule applicable to depreciation of improvements in the case of mines, oil and gas wells, other natural deposits, and timber, see section 611.
(2) For amortization of goodwill and certain other intangibles, see section 197.
(Aug. 16, 1954, ch. 736,
References in Text
Section 263A(i)(2), referred to in subsec. (g)(8)(C)(ii)(II), was redesignated section 263A(j)(2) by
Amendments
2007—Subsec. (g)(8)(C)(ii)(II).
Subsec. (h)(5)(A).
2006—Subsec. (g)(8).
Subsec. (h)(5).
2005—Subsec. (f)(3).
Subsecs. (h), (i).
2004—Subsec. (f)(1)(C).
Subsec. (f)(2).
Subsec. (g)(5)(E) to (G).
Subsec. (g)(7).
1997—Subsec. (g)(6).
1996—Subsecs. (g), (h).
1993—Subsec. (c).
Subsec. (e)(2).
Subsec. (f).
Subsec. (g).
1990—Subsec. (b).
"(1) the straight line method,
"(2) the declining balance method, using a rate not exceeding twice the rate which would have been used had the annual allowance been computed under the method described in paragraph (1),
"(3) the sum of the years-digits method, and
"(4) any other consistent method productive of an annual allowance which, when added to all allowances for the period commencing with the taxpayer's use of the property and including the taxable year, does not, during the first two-thirds of the useful life of the property, exceed the total of such allowances which would have been used had such allowances been computed under the method described in paragraph (2).
Nothing in this subsection shall be construed to limit or reduce an allowance otherwise allowable under subsection (a)."
Subsec. (c).
"(1) the construction, reconstruction, or erection of which is completed after December 31, 1953, and then only to that portion of the basis which is properly attributable to such construction, reconstruction, or erection after December 31, 1953, or
"(2) acquired after December 31, 1953, if the original use of such property commences with the taxpayer and commences after such date.
Paragraphs (2), (3), and (4) of subsection (b) shall not apply to any motion picture film, video tape, or sound recording."
Subsec. (d).
Subsec. (e).
Subsec. (e)(3)(B).
Subsec. (e)(4)(B).
Subsec. (f).
"(1)
"(2)
Subsecs. (g), (h).
Subsec. (j).
Subsec. (k).
Subsec. (l).
Subsec. (m).
Subsec. (p).
Subsec. (q).
Subsecs. (r), (s).
1989—Subsec. (r).
1988—Subsec. (a).
Subsec. (d).
Subsec. (l)(3)(G).
Subsecs. (r), (s).
1986—Subsec. (c).
Subsec. (m)(4).
Subsec. (q)(2)(B).
1984—Subsec. (k)(1), (3)(D).
1983—Subsec. (l)(3)(G).
1981—Subsec. (a).
Subsec. (d).
Subsec. (k)(2).
Subsec. (l)(3)(C).
Subsec. (m)(4).
Subsecs. (n), (o).
Subsec. (r).
Subsec. (s).
1980—Subsec. (k).
Subsec. (n)(4).
Subsec. (o)(3).
Subsecs. (r), (s).
1978—Subsec. (i).
Subsec. (k)(1), (3)(D).
Subsec. (n).
Subsec. (o).
Subsec. (p).
Subsec. (q).
Subsec. (r).
1977—Subsec. (k).
1976—Subsec. (b).
Subsec. (d).
Subsec. (e).
Subsec. (f)(1).
Subsec. (f)(2).
Subsec. (i).
Subsec. (j).
Subsec. (k)(1).
Subsec. (k)(2)(A).
Subsec. (k)(3)(B).
Subsec. (k)(3)(D).
Subsec. (l)(3)(F).
Subsec. (l)(4)(A).
Subsec. (l)(5).
Subsec. (m).
Subsec. (n).
Subsec. (o).
Subsec. (p).
1975—Subsec. (k)(1).
1971—Subsecs. (m), (n).
1969—Subsec. (e)(3).
Subsecs. (j), (k).
Subsec. (l).
Subsec. (m).
1967—Subsec. (i)(1).
Subsec. (i)(3).
1966—Subsecs. (i), (j).
1962—Subsec. (e).
Subsecs. (f) to (i).
1958—Subsec. (d).
Effective Date of 2007 Amendment
Amendment by
Effective Date of 2006 Amendment
Effective Date of 2005 Amendment
Effective Date of 2004 Amendment
Amendment by section 847(b)(1) of
Effective Date of 1997 Amendment
Effective Date of 1996 Amendment
"(1)
"(2)
"(3)
Effective Date of 1993 Amendment
Amendment by section 13261(b) and (f)(1) of
Effective Date of 1990 Amendment
Amendment by
Effective Date of 1989 Amendment
"(1)
"(2)
Effective Date of 1988 Amendment
Amendment by
Effective Date of 1986 Amendment
Amendment by section 201(d)(1) of
Amendment by section 201(d)(1) of
Amendment by section 1511(c)(4) of
Effective Date of 1983 Amendment
Amendment by
Effective Date of 1981 Amendment
Amendment by sections 203 and 209 of
Amendment by section 212(d)(1) of
Effective Date of 1980 Amendment
Effective and Termination Dates of 1978 Amendment
Amendment by section 312(c)(4) of
Amendment by
Amendment by section 301(d)(3) of
Effective Date of 1976 Amendment
Amendment by section 1901(a)(27)(A) of
Amendment by section 202(c)(3) of
[Section 7(b) of
Effective Date of 1975 Amendment
Effective Date of 1971 Amendment
Effective Date of 1969 Amendment
Effective Date of 1967 Amendment
Amendment by
Effective Date of 1966 Amendment
Amendment by
Effective Date of 1962 Amendment
Amendment by section 13(b) of
Effective Date of 1958 Amendment
Amendment by
Savings Provision
For provisions that nothing in amendment by
Plan Amendments Not Required Until January 1, 1989
For provisions directing that if any amendments made by subtitle A or subtitle C of title XI [§§1101–1147 and 1171–1177] or title XVIII [§§1800–1899A] of
Discontinuation of Retirement-Replacement-Betterment Method of Depreciation; Transitional Rule
"(2)
"(3)
Internal Revenue Code Provisions Relating to Depreciation as Not Applicable to Calculations of Secretary of Health and Human Services in Determining Costs of Programs
Class Life System; Application to Real Property; General Rule
"(1) under Revenue Procedure 62–21 (as amended and supplemented) as in effect on December 31, 1970, or
"(2) on the facts and circumstances."
Transitional Rules for Reasonable Allowance for Depreciation
"(1) [Repealed.
"(2)
Rehabilitation Expenditures for Low Income Rental Housing Incurred After December 31, 1974, and Before January 1, 1978, Pursuant to Contract Entered Before December 31, 1974
1 See References in Text note below.
§168. Accelerated cost recovery system
(a) General rule
Except as otherwise provided in this section, the depreciation deduction provided by section 167(a) for any tangible property shall be determined by using—
(1) the applicable depreciation method,
(2) the applicable recovery period, and
(3) the applicable convention.
(b) Applicable depreciation method
For purposes of this section—
(1) In general
Except as provided in paragraphs (2) and (3), the applicable depreciation method is—
(A) the 200 percent declining balance method,
(B) switching to the straight line method for the 1st taxable year for which using the straight line method with respect to the adjusted basis as of the beginning of such year will yield a larger allowance.
(2) 150 percent declining balance method in certain cases
Paragraph (1) shall be applied by substituting "150 percent" for "200 percent" in the case of—
(A) any 15-year or 20-year property not referred to in paragraph (3),
(B) any property (other than property described in paragraph (3)) which is a qualified smart electric meter or qualified smart electric grid system, or
(C) any property (other than property described in paragraph (3)) with respect to which the taxpayer elects under paragraph (5) to have the provisions of this paragraph apply.
(3) Property to which straight line method applies
The applicable depreciation method shall be the straight line method in the case of the following property:
(A) Nonresidential real property.
(B) Residential rental property.
(C) Any railroad grading or tunnel bore.
(D) Property with respect to which the taxpayer elects under paragraph (5) to have the provisions of this paragraph apply.
(E) Property described in subsection (e)(3)(D)(ii).
(F) Water utility property described in subsection (e)(5).
(G) Qualified improvement property described in subsection (e)(6).
(4) Salvage value treated as zero
Salvage value shall be treated as zero.
(5) Election
An election under paragraph (2)(D) 1 or (3)(D) may be made with respect to 1 or more classes of property for any taxable year and once made with respect to any class shall apply to all property in such class placed in service during such taxable year. Such an election, once made, shall be irrevocable.
(c) Applicable recovery period
For purposes of this section, the applicable recovery period shall be determined in accordance with the following table:
| In the case of: | The applicable recovery period is: |
|---|---|
| 3-year property | 3 years |
| 5-year property | 5 years |
| 7-year property | 7 years |
| 10-year property | 10 years |
| 15-year property | 15 years |
| 20-year property | 20 years |
| Water utility property | 25 years |
| Residential rental property | 27.5 years |
| Nonresidential real property | 39 years. |
| Any railroad grading or tunnel bore | 50 years. |
(d) Applicable convention
For purposes of this section—
(1) In general
Except as otherwise provided in this subsection, the applicable convention is the half-year convention.
(2) Real property
In the case of—
(A) nonresidential real property,
(B) residential rental property, and
(C) any railroad grading or tunnel bore,
the applicable convention is the mid-month convention.
(3) Special rule where substantial property placed in service during last 3 months of taxable year
(A) In general
Except as provided in regulations, if during any taxable year—
(i) the aggregate bases of property to which this section applies placed in service during the last 3 months of the taxable year, exceed
(ii) 40 percent of the aggregate bases of property to which this section applies placed in service during such taxable year,
the applicable convention for all property to which this section applies placed in service during such taxable year shall be the mid-quarter convention.
(B) Certain property not taken into account
For purposes of subparagraph (A), there shall not be taken into account—
(i) any nonresidential real property, residential rental property, and railroad grading or tunnel bore, and
(ii) any other property placed in service and disposed of during the same taxable year.
(4) Definitions
(A) Half-year convention
The half-year convention is a convention which treats all property placed in service during any taxable year (or disposed of during any taxable year) as placed in service (or disposed of) on the mid-point of such taxable year.
(B) Mid-month convention
The mid-month convention is a convention which treats all property placed in service during any month (or disposed of during any month) as placed in service (or disposed of) on the mid-point of such month.
(C) Mid-quarter convention
The mid-quarter convention is a convention which treats all property placed in service during any quarter of a taxable year (or disposed of during any quarter of a taxable year) as placed in service (or disposed of) on the mid-point of such quarter.
(e) Classification of property
For purposes of this section—
(1) In general
Except as otherwise provided in this subsection, property shall be classified under the following table:
| Property shall be treated as: | If such property has a class life (in years) of: |
|---|---|
| 3-year property | 4 or less |
| 5-year property | More than 4 but less than 10 |
| 7-year property | 10 or more but less than 16 |
| 10-year property | 16 or more but less than 20 |
| 15-year property | 20 or more but less than 25 |
| 20-year property | 25 or more. |
(2) Residential rental or nonresidential real property
(A) Residential rental property
(i) Residential rental property
The term "residential rental property" means any building or structure if 80 percent or more of the gross rental income from such building or structure for the taxable year is rental income from dwelling units.
(ii) Definitions
For purposes of clause (i)—
(I) the term "dwelling unit" means a house or apartment used to provide living accommodations in a building or structure, but does not include a unit in a hotel, motel, or other establishment more than one-half of the units in which are used on a transient basis, and
(II) if any portion of the building or structure is occupied by the taxpayer, the gross rental income from such building or structure shall include the rental value of the portion so occupied.
(B) Nonresidential real property
The term "nonresidential real property" means section 1250 property which is not—
(i) residential rental property, or
(ii) property with a class life of less than 27.5 years.
(3) Classification of certain property
(A) 3-year property
The term "3-year property" includes—
(i) any race horse—
(I) which is placed in service before January 1, 2021, and
(II) which is placed in service after December 31, 2020, and which is more than 2 years old at the time such horse is placed in service by such purchaser,
(ii) any horse other than a race horse which is more than 12 years old at the time it is placed in service, and
(iii) any qualified rent-to-own property.
(B) 5-year property
The term "5-year property" includes—
(i) any automobile or light general purpose truck,
(ii) any semi-conductor manufacturing equipment,
(iii) any computer-based telephone central office switching equipment,
(iv) any qualified technological equipment,
(v) any section 1245 property used in connection with research and experimentation,
(vi) any property which—
(I) is described in subparagraph (A) of section 48(a)(3) (or would be so described if "solar or wind energy" were substituted for "solar energy" in clause (i) thereof and the last sentence of such section did not apply to such subparagraph),
(II) is described in paragraph (15) of section 48(l) (as in effect on the day before the date of the enactment of the Revenue Reconciliation Act of 1990) and has a power production capacity of not greater than 80 megawatts, or
(III) is described in section 48(l)(3)(A)(ix) (as in effect on the day before the date of the enactment of the Revenue Reconciliation Act of 1990), and
(vii) any machinery or equipment (other than any grain bin, cotton ginning asset, fence, or other land improvement) which is used in a farming business (as defined in section 263A(e)(4)), the original use of which commences with the taxpayer after December 31, 2017.
Nothing in any provision of law shall be construed to treat property as not being described in subclause (I) or (II) of clause (vi) by reason of being public utility property.
(C) 7-year property
The term "7-year property" includes—
(i) any railroad track,
(ii) any motorsports entertainment complex,
(iii) any Alaska natural gas pipeline,
(iv) any natural gas gathering line the original use of which commences with the taxpayer after April 11, 2005, and
(v) any property which—
(I) does not have a class life, and
(II) is not otherwise classified under paragraph (2) or this paragraph.
(D) 10-year property
The term "10-year property" includes—
(i) any single purpose agricultural or horticultural structure (within the meaning of subsection (i)(13)),
(ii) any tree or vine bearing fruit or nuts,
(iii) any qualified smart electric meter, and
(iv) any qualified smart electric grid system.
(E) 15-year property
The term "15-year property" includes—
(i) any municipal wastewater treatment plant,
(ii) any telephone distribution plant and comparable equipment used for 2-way exchange of voice and data communications,
(iii) any section 1250 property which is a retail motor fuels outlet (whether or not food or other convenience items are sold at the outlet),
(iv) initial clearing and grading land improvements with respect to gas utility property,
(v) any section 1245 property (as defined in section 1245(a)(3)) used in the transmission at 69 or more kilovolts of electricity for sale and the original use of which commences with the taxpayer after April 11, 2005,
(vi) any natural gas distribution line the original use of which commences with the taxpayer after April 11, 2005, and which is placed in service before January 1, 2011, and
(vii) any qualified improvement property.
(F) 20-year property
The term "20-year property" means initial clearing and grading land improvements with respect to any electric utility transmission and distribution plant.
(4) Railroad grading or tunnel bore
The term "railroad grading or tunnel bore" means all improvements resulting from excavations (including tunneling), construction of embankments, clearings, diversions of roads and streams, sodding of slopes, and from similar work necessary to provide, construct, reconstruct, alter, protect, improve, replace, or restore a roadbed or right-of-way for railroad track.
(5) Water utility property
The term "water utility property" means property—
(A) which is an integral part of the gathering, treatment, or commercial distribution of water, and which, without regard to this paragraph, would be 20-year property, and
(B) any municipal sewer.
(6) Qualified improvement property
(A) In general
The term "qualified improvement property" means any improvement made by the taxpayer to an interior portion of a building which is nonresidential real property if such improvement is placed in service after the date such building was first placed in service.
(B) Certain improvements not included
Such term shall not include any improvement for which the expenditure is attributable to—
(i) the enlargement of the building,
(ii) any elevator or escalator, or
(iii) the internal structural framework of the building.
(f) Property to which section does not apply
This section shall not apply to—
(1) Certain methods of depreciation
Any property if—
(A) the taxpayer elects to exclude such property from the application of this section, and
(B) for the 1st taxable year for which a depreciation deduction would be allowable with respect to such property in the hands of the taxpayer, the property is properly depreciated under the unit-of-production method or any method of depreciation not expressed in a term of years (other than the retirement-replacement-betterment method or similar method).
(2) Certain public utility property
Any public utility property (within the meaning of subsection (i)(10)) if the taxpayer does not use a normalization method of accounting.
(3) Films and video tape
Any motion picture film or video tape.
(4) Sound recordings
Any works which result from the fixation of a series of musical, spoken, or other sounds, regardless of the nature of the material (such as discs, tapes, or other phonorecordings) in which such sounds are embodied.
(5) Certain property placed in service in churning transactions
(A) In general
Property—
(i) described in paragraph (4) of section 168(e) (as in effect before the amendments made by the Tax Reform Act of 1986), or
(ii) which would be described in such paragraph if such paragraph were applied by substituting "1987" for "1981" and "1986" for "1980" each place such terms appear.
(B) Subparagraph (A)(ii) not to apply
Clause (ii) of subparagraph (A) shall not apply to—
(i) any residential rental property or nonresidential real property,
(ii) any property if, for the 1st taxable year in which such property is placed in service—
(I) the amount allowable as a deduction under this section (as in effect before the date of the enactment of this paragraph) with respect to such property is greater than,
(II) the amount allowable as a deduction under this section (as in effect on or after such date and using the half-year convention) for such taxable year, or
(iii) any property to which this section (as amended by the Tax Reform Act of 1986) applied in the hands of the transferor.
(C) Special rule
In the case of any property to which this section would apply but for this paragraph, the depreciation deduction under section 167 shall be determined under the provisions of this section as in effect before the amendments made by section 201 of the Tax Reform Act of 1986.
(g) Alternative depreciation system for certain property
(1) In general
In the case of—
(A) any tangible property which during the taxable year is used predominantly outside the United States,
(B) any tax-exempt use property,
(C) any tax-exempt bond financed property,
(D) any imported property covered by an Executive order under paragraph (6),
(E) any property to which an election under paragraph (7) applies,
(F) any property described in paragraph (8), and
(G) any property with a recovery period of 10 years or more which is held by an electing farming business (as defined in section 163(j)(7)(C)),
the depreciation deduction provided by section 167(a) shall be determined under the alternative depreciation system.
(2) Alternative depreciation system
For purposes of paragraph (1), the alternative depreciation system is depreciation determined by using—
(A) the straight line method (without regard to salvage value),
(B) the applicable convention determined under subsection (d), and
(C) a recovery period determined under the following table:
| In the case of: | The recovery period shall be: |
|---|---|
| (i) Property not described in clause (ii) or (iii) | The class life. |
| (ii) Personal property with no class life | 12 years. |
| (iii) Residential rental property | 30 years |
| (iv) Nonresidential real property | 40 years |
| (v) Any railroad grading or tunnel bore or water utility property | 50 years |
(3) Special rules for determining class life
(A) Tax-exempt use property subject to lease
In the case of any tax-exempt use property subject to a lease, the recovery period used for purposes of paragraph (2) shall (notwithstanding any other subparagraph of this paragraph) in no event be less than 125 percent of the lease term.
(B) Special rule for certain property assigned to classes
For purposes of paragraph (2), in the case of property described in any of the following subparagraphs of subsection (e)(3), the class life shall be determined as follows:
| If property is described in subparagraph: | The class life is: |
|---|---|
| (A)(iii) | 4 |
| (B)(ii) | 5 |
| (B)(iii) | 9.5 |
| (B)(vii) | 10 |
| (C)(i) | 10 |
| (C)(iii) | 22 |
| (C)(iv) | 14 |
| (D)(i) | 15 |
| (D)(ii) | 20 |
| (E)(i) | 24 |
| (E)(ii) | 24 |
| (E)(iii) | 20 |
| (E)(iv) | 20 |
| (E)(v) | 30 |
| (E)(vi) | 35 |
| (E)(vii) | 20 |
| (F) | 25 |
(C) Qualified technological equipment
In the case of any qualified technological equipment, the recovery period used for purposes of paragraph (2) shall be 5 years.
(D) Automobiles, etc.
In the case of any automobile or light general purpose truck, the recovery period used for purposes of paragraph (2) shall be 5 years.
(E) Certain real property
In the case of any section 1245 property which is real property with no class life, the recovery period used for purposes of paragraph (2) shall be 40 years.
(4) Exception for certain property used outside United States
Subparagraph (A) of paragraph (1) shall not apply to—
(A) any aircraft which is registered by the Administrator of the Federal Aviation Agency and which is operated to and from the United States or is operated under contract with the United States;
(B) rolling stock which is used within and without the United States and which is—
(i) of a rail carrier subject to part A of subtitle IV of title 49, or
(ii) of a United States person (other than a corporation described in clause (i)) but only if the rolling stock is not leased to one or more foreign persons for periods aggregating more than 12 months in any 24-month period;
(C) any vessel documented under the laws of the United States which is operated in the foreign or domestic commerce of the United States;
(D) any motor vehicle of a United States person (as defined in section 7701(a)(30)) which is operated to and from the United States;
(E) any container of a United States person which is used in the transportation of property to and from the United States;
(F) any property (other than a vessel or an aircraft) of a United States person which is used for the purpose of exploring for, developing, removing, or transporting resources from the outer Continental Shelf (within the meaning of section 2 of the Outer Continental Shelf Lands Act, as amended and supplemented; (
(G) any property which is owned by a domestic corporation or by a United States citizen (other than a citizen entitled to the benefits of section 931 or 933) and which is used predominantly in a possession of the United States by such a corporation or such a citizen, or by a corporation created or organized in, or under the law of, a possession of the United States;
(H) any communications satellite (as defined in section 103(3) of the Communications Satellite Act of 1962,
(I) any cable, or any interest therein, of a domestic corporation engaged in furnishing telephone service to which section 168(i)(10)(C) applies (or of a wholly owned domestic subsidiary of such a corporation), if such cable is part of a submarine cable system which constitutes part of a communication link exclusively between the United States and one or more foreign countries;
(J) any property (other than a vessel or an aircraft) of a United States person which is used in international or territorial waters within the northern portion of the Western Hemisphere for the purpose of exploring for, developing, removing, or transporting resources from ocean waters or deposits under such waters;
(K) any property described in section 48(l)(3)(A)(ix) (as in effect on the day before the date of the enactment of the Revenue Reconciliation Act of 1990) which is owned by a United States person and which is used in international or territorial waters to generate energy for use in the United States; and
(L) any satellite (not described in subparagraph (H)) or other spacecraft (or any interest therein) held by a United States person if such satellite or other spacecraft was launched from within the United States.
For purposes of subparagraph (J), the term "northern portion of the Western Hemisphere" means the area lying west of the 30th meridian west of Greenwich, east of the international dateline, and north of the Equator, but not including any foreign country which is a country of South America.
(5) Tax-exempt bond financed property
For purposes of this subsection—
(A) In general
Except as otherwise provided in this paragraph, the term "tax-exempt bond financed property" means any property to the extent such property is financed (directly or indirectly) by an obligation the interest on which is exempt from tax under section 103(a).
(B) Allocation of bond proceeds
For purposes of subparagraph (A), the proceeds of any obligation shall be treated as used to finance property acquired in connection with the issuance of such obligation in the order in which such property is placed in service.
(C) Qualified residential rental projects
The term "tax-exempt bond financed property" shall not include any qualified residential rental project (within the meaning of section 142(a)(7)).
(6) Imported property
(A) Countries maintaining trade restrictions or engaging in discriminatory acts
If the President determines that a foreign country—
(i) maintains nontariff trade restrictions, including variable import fees, which substantially burden United States commerce in a manner inconsistent with provisions of trade agreements, or
(ii) engages in discriminatory or other acts (including tolerance of international cartels) or policies unjustifiably restricting United States commerce,
the President may by Executive order provide for the application of paragraph (1)(D) to any article or class of articles manufactured or produced in such foreign country for such period as may be provided by such Executive order. Any period specified in the preceding sentence shall not apply to any property ordered before (or the construction, reconstruction, or erection of which began before) the date of the Executive order unless the President determines an earlier date to be in the public interest and specifies such date in the Executive order.
(B) Imported property
For purposes of this subsection, the term "imported property" means any property if—
(i) such property was completed outside the United States, or
(ii) less than 50 percent of the basis of such property is attributable to value added within the United States.
For purposes of this subparagraph, the term "United States" includes the Commonwealth of Puerto Rico and the possessions of the United States.
(7) Election to use alternative depreciation system
(A) In general
If the taxpayer makes an election under this paragraph with respect to any class of property for any taxable year, the alternative depreciation system under this subsection shall apply to all property in such class placed in service during such taxable year. Notwithstanding the preceding sentence, in the case of nonresidential real property or residential rental property, such election may be made separately with respect to each property.
(B) Election irrevocable
An election under subparagraph (A), once made, shall be irrevocable.
(8) Electing real property trade or business
The property described in this paragraph shall consist of any nonresidential real property, residential rental property, and qualified improvement property held by an electing real property trade or business (as defined in 163(j)(7)(B)).
(h) Tax-exempt use property
(1) In general
For purposes of this section—
(A) Property other than nonresidential real property
Except as otherwise provided in this subsection, the term "tax-exempt use property" means that portion of any tangible property (other than nonresidential real property) leased to a tax-exempt entity.
(B) Nonresidential real property
(i) In general
In the case of nonresidential real property, the term "tax-exempt use property" means that portion of the property leased to a tax-exempt entity in a disqualified lease.
(ii) Disqualified lease
For purposes of this subparagraph, the term "disqualified lease" means any lease of the property to a tax-exempt entity, but only if—
(I) part or all of the property was financed (directly or indirectly) by an obligation the interest on which is exempt from tax under section 103(a) and such entity (or a related entity) participated in such financing,
(II) under such lease there is a fixed or determinable price purchase or sale option which involves such entity (or a related entity) or there is the equivalent of such an option,
(III) such lease has a lease term in excess of 20 years, or
(IV) such lease occurs after a sale (or other transfer) of the property by, or lease of the property from, such entity (or a related entity) and such property has been used by such entity (or a related entity) before such sale (or other transfer) or lease.
(iii) 35-percent threshold test
Clause (i) shall apply to any property only if the portion of such property leased to tax-exempt entities in disqualified leases is more than 35 percent of the property.
(iv) Treatment of improvements
For purposes of this subparagraph, improvements to a property (other than land) shall not be treated as a separate property.
(v) Leasebacks during 1st 3 months of use not taken into account
Subclause (IV) of clause (ii) shall not apply to any property which is leased within 3 months after the date such property is first used by the tax-exempt entity (or a related entity).
(C) Exception for short-term leases
(i) In general
Property shall not be treated as tax-exempt use property merely by reason of a short-term lease.
(ii) Short-term lease
For purposes of clause (i), the term "short-term lease" means any lease the term of which is—
(I) less than 3 years, and
(II) less than the greater of 1 year or 30 percent of the property's present class life.
In the case of nonresidential real property and property with no present class life, subclause (II) shall not apply.
(D) Exception where property used in unrelated trade or business
The term "tax-exempt use property" shall not include any portion of a property if such portion is predominantly used by the tax-exempt entity (directly or through a partnership of which such entity is a partner) in an unrelated trade or business the income of which is subject to tax under section 511. For purposes of subparagraph (B)(iii), any portion of a property so used shall not be treated as leased to a tax-exempt entity in a disqualified lease.
(E) Nonresidential real property defined
For purposes of this paragraph, the term "nonresidential real property" includes residential rental property.
(2) Tax-exempt entity
(A) In general
For purposes of this subsection, the term "tax-exempt entity" means—
(i) the United States, any State or political subdivision thereof, any possession of the United States, or any agency or instrumentality of any of the foregoing,
(ii) an organization (other than a cooperative described in section 521) which is exempt from tax imposed by this chapter,
(iii) any foreign person or entity, and
(iv) any Indian tribal government described in section 7701(a)(40).
For purposes of applying this subsection, any Indian tribal government referred to in clause (iv) shall be treated in the same manner as a State.
(B) Exception for certain property subject to United States tax and used by foreign person or entity
Clause (iii) of subparagraph (A) shall not apply with respect to any property if more than 50 percent of the gross income for the taxable year derived by the foreign person or entity from the use of such property is—
(i) subject to tax under this chapter, or
(ii) included under section 951 in the gross income of a United States shareholder for the taxable year with or within which ends the taxable year of the controlled foreign corporation in which such income was derived.
For purposes of the preceding sentence, any exclusion or exemption shall not apply for purposes of determining the amount of the gross income so derived, but shall apply for purposes of determining the portion of such gross income subject to tax under this chapter.
(C) Foreign person or entity
For purposes of this paragraph, the term "foreign person or entity" means—
(i) any foreign government, any international organization, or any agency or instrumentality of any of the foregoing, and
(ii) any person who is not a United States person.
Such term does not include any foreign partnership or other foreign pass-thru entity.
(D) Treatment of certain taxable instrumentalities
For purposes of this subsection, a corporation shall not be treated as an instrumentality of the United States or of any State or political subdivision thereof if—
(i) all of the activities of such corporation are subject to tax under this chapter, and
(ii) a majority of the board of directors of such corporation is not selected by the United States or any State or political subdivision thereof.
(E) Certain previously tax-exempt organizations
(i) In general
For purposes of this subsection, an organization shall be treated as an organization described in subparagraph (A)(ii) with respect to any property (other than property held by such organization) if such organization was an organization (other than a cooperative described in section 521) exempt from tax imposed by this chapter at any time during the 5-year period ending on the date such property was first used by such organization. The preceding sentence and subparagraph (D)(ii) shall not apply to the Federal Home Loan Mortgage Corporation.
(ii) Election not to have clause (i) apply
(I) In general
In the case of an organization formerly exempt from tax under section 501(a) as an organization described in section 501(c)(12), clause (i) shall not apply to such organization with respect to any property if such organization elects not to be exempt from tax under section 501(a) during the tax-exempt use period with respect to such property.
(II) Tax-exempt use period
For purposes of subclause (I), the term "tax-exempt use period" means the period beginning with the taxable year in which the property described in subclause (I) is first used by the organization and ending with the close of the 15th taxable year following the last taxable year of the applicable recovery period of such property.
(III) Election
Any election under subclause (I), once made, shall be irrevocable.
(iii) Treatment of successor organizations
Any organization which is engaged in activities substantially similar to those engaged in by a predecessor organization shall succeed to the treatment under this subparagraph of such predecessor organization.
(iv) First used
For purposes of this subparagraph, property shall be treated as first used by the organization—
(I) when the property is first placed in service under a lease to such organization, or
(II) in the case of property leased to (or held by) a partnership (or other pass-thru entity) in which the organization is a member, the later of when such property is first used by such partnership or pass-thru entity or when such organization is first a member of such partnership or pass-thru entity.
(3) Special rules for certain high technology equipment
(A) Exemption where lease term is 5 years or less
For purposes of this section, the term "tax-exempt use property" shall not include any qualified technological equipment if the lease to the tax-exempt entity has a lease term of 5 years or less. Notwithstanding subsection (i)(3)(A)(i), in determining a lease term for purposes of the preceding sentence, there shall not be taken into account any option of the lessee to renew at the fair market value rent determined at the time of renewal; except that the aggregate period not taken into account by reason of this sentence shall not exceed 24 months.
(B) Exception for certain property
(i) In general
For purposes of subparagraph (A), the term "qualified technological equipment" shall not include any property leased to a tax-exempt entity if—
(I) part or all of the property was financed (directly or indirectly) by an obligation the interest on which is exempt from tax under section 103(a),
(II) such lease occurs after a sale (or other transfer) of the property by, or lease of such property from, such entity (or related entity) and such property has been used by such entity (or a related entity) before such sale (or other transfer) or lease, or