S Corporation Members are not Subject to Controlled Group Sec. 179 Limitations

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In information letter 2013-0016, the IRS determined that S corporations of a controlled group are not subject to the Section 179 limitations of a controlled group. For tax years beginning in 2013, the maximum amount that can generally be taken as a Section 179 expense deduction, which is split among all of the members of a controlled group, is $500,000. This dollar limit is scheduled to fall to $25,000 for tax years beginning after 2013. S Corporation members are treated as separate entities for purposes of that limit and can make Section 179 elections up to the maximum election amount, without considering the amount already expensed by other members in the controlled group, which could result in greater current year tax savings.

The Section 179 expense deduction allows a taxpayer to elect to treat the entire cost of any “Section 179 property” as an expense deduction for the tax year in which the property is placed in service, as opposed to expensing the cost of the property over time. Section 179 property includes most tangible personal property and certain other property used in the active conduct of a trade or business.  

The IRS reasoned that the Section 179 limitation for controlled groups applies only to the “component members” of a controlled group. S corporations are one of the types of corporations that are treated as excluded members. However, even though a corporation that is treated as an excluded member is not a component member, it is nevertheless treated as a member of the group if the relevant stock ownership test is satisfied for other purposes. Since S Corporations are not component members of a controlled group, they are not subject to the controlled group’s overall Section 179 limitation. 

It is important to remember that although S corporations are not subject to the limitations of the controlled group’s Section 179 usage; this might not be the year to fully utilize the Section 179 expense deduction. A more traditional depreciation method to expense part of the cost in future years may keep a business out of a higher tax bracket in the future, which would result in greater long-term tax savings. 

Amber White