#### § 1.48-5 Electing small business corporations.

(a) *In general.*

(1) In the case of an electing small business corporation (as defined in section 1371(b)), the basis of “new section 38 property” and the cost of “used section 38 property” placed in service during the taxable year shall be apportioned pro rata among the persons who are shareholders of such corporation on the last day of such corporation's taxable year. Section 38 property shall not (by reason of such apportionment) lose its character as new section 38 property or used section 38 property, as the case may be. The estimated useful life of such property in the hands of a shareholder shall be deemed to be the estimated useful life of such property in the hands of the electing small business corporation. The bases of all new section 38 properties which have a useful life falling within a particular useful life category shall be aggregated; likewise, the cost of all used section 38 properties which have a useful life falling within a particular useful life category shall be aggregated. The total bases of new section 38 properties within each useful life category and the total cost of used section 38 properties within each useful life category shall be apportioned separately. The useful life categories are:

(i) 3 years or more but less than 5 years; (ii) 5 years or more but less than 7 years; and (iii) 7 years or more. There shall be apportioned to each person who is a shareholder of the electing small business corporation on the last day of the taxable year of such corporation, for his taxable year in which or with which the taxable year of such corporation ends, his pro rata share of the total bases of new section 38 properties within each useful life category, and his pro rata share of the total cost of used section 38 properties within each useful life category. In determining who are shareholders of an electing small business corporation on the last day of its taxable year, the rules of paragraph (d)(1) of § 1.1371-1 and of paragraph (a)(2) of § 1.1373-1 shall apply.

(2) The total cost of used section 38 property that may be apportioned by an electing small business corporation to its shareholders for any taxable year of such corporation shall not exceed $50,000. If the total cost of used section 38 property placed in service during the taxable year by the electing small business corporation exceeds $50,000 such corporation must select, under paragraph (c)(4) of § 1.48-3, the used section 38 property the cost of which is to be apportioned to its shareholders.

(3) A shareholder to whom the basis (or cost) of section 38 property is apportioned shall, for purposes of the credit allowed by section 38, be treated as the taxpayer with respect to such property. Thus, the total cost of used section 38 property apportioned to him by the electing small business corporation must be taken into account as cost of used section 38 property in determining whether the $50,000 limitation on the cost of used section 38 property which may be taken into account by the shareholder in computing qualified investment for any taxable year is exceeded. If a shareholder takes into account in determining his qualified investment any portion of the basis (or cost) of section 38 property placed in service by an electing small business corporation and if such property subsequently is disposed of or otherwise ceases to be section 38 property in the hands of the corporation, such shareholder shall be subject to the provisions of section 47. See § 1.47-4.

(b) *Summary statement.* An electing small business corporation shall attach to its return a statement showing the apportionment to each shareholder of the total bases of new, and the total cost of used, section 38 properties within each useful life category.

(c) *Example.* This section may be illustrated by the following example:

# Example.

1 X Corporation, an electing small business corporation which makes its return on the basis of the calendar year, acquires and places in service on June 1, 1962, three new assets which qualify as new section 38 property and three used assets which qualify as used section 38 property. The basis of each new, and the cost of each used, section 38 property and the estimated useful life of each property are as follows:

| Asset No. | Basis (or cost) | Estimated useful life |
| --- | --- | --- |
| 1 (new) | $30,000 | 4 years. |
| 2 (new) | 30,000 | 4 years. |
| 3 (new) | 30,000 | 8 years. |
| 4 (used) | 12,000 | 6 years. |
| 5 (used) | 12,000 | 6 years. |
| 6 (used) | 12,000 | 8 years. |

On December 31, 1962, X Corporation has 10 shares of stock outstanding which are owned as follows: A owns 3 shares, B owns 2 shares, and C owns 5 shares.

(2) Under this section, the total bases of the new, and the total cost of the used, section 38 properties are apportioned to the shareholders of X Corporation as follows:

| Useful life category | New—4 to 6 years | New—8 years or more | Used—6 to 8 years | Used—8 years or more |
| --- | --- | --- | --- | --- |
| Total bases or total cost | $60,000 | $30,000 | $24,000 | $12,000 |
| Shareholder A (3/10) | 18,000 | 9,000 | 7,200 | 3,600 |
| Shareholder B (2/10) | 12,000 | 6,000 | 4,800 | 2,400 |
| Shareholder C (5/10) | 30,000 | 15,000 | 12,000 | 6,000 |

Assume that shareholders A, B and C did not place in service during their taxable years in which falls December 31, 1962 (the last day of X Corporation's taxable year) any section 38 property and that such shareholders did not own any interests in other electing small business corporations, partnerships, estates, or trusts. Under section 46(c), the qualified investment of shareholder A is $23,400, of shareholder B is $15,600, and of shareholder C is $39,000, computed as follows:

| Basis (or cost) | Applicable percentage | Qualified investment |
| --- | --- | --- |
| **Shareholder A** |
| $18,000 (new) | 331/3 | $6,000 |
| $9,000 (new) | 100 | 9,000 |
| $7,200 (used) | 662/3 | 4,800 |
| $3,600 (used) | 100 | 3,600 |
| Total | | 23,400 |
| **Shareholder B** |
| $12,000 (new) | 331/3 | $4,000 |
| $6,000 (new) | 100 | 6,000 |
| $4,800 (used) | 662/3 | 3,200 |
| $2,400 (used) | 100 | 2,400 |
| Total | | 15,600 |
| **Shareholder C** |
| $30,000 (new) | 331/3 | $10,000 |
| $15,000 (new) | 100 | 15,000 |
| $12,000 (used) | 662/3 | 8,000 |
| $6,000 (used) | 100 | 6,000 |
| Total | 39,000 |

[T.D. 6731, 29 FR 6082, May 8, 1964, as amended by T.D. 6931, 32 FR 14040, Oct. 10, 1967; T.D. 7203, 37 FR 17133, Aug. 25, 1972]