S Corp. Members Are Not Subject to Controlled Group Sec. 179 Limitations

Editor: Mark G. Cook, CPA, MBA

S Corporations

On June 28, the IRS issued Information Letter 2013-0016, which provides that S corporation members of a controlled group may use the Sec. 179 election up to the maximum election amount as if they were separate entities, and are not subject to the controlled group’s overall limit. Although not explicitly stated, the same line of reasoning can be used to determine that the reduction in limitation is also applied on an entity-by-entity basis.

The information letter determined that S corporations that are members of a controlled group are not component members under Regs. Sec. 1.1563-1(b)(2)(ii)(C). Sec. 179(d)(6)(A) applies the controlled group rules of Sec. 1563(a) by taking into account only the component members of a controlled group. Therefore, S corporations are treated as separate entities for purposes of applying the Sec. 179(d)(6) limitations on controlled groups.

Before Information Letter 2013-0016 was issued, many practitioners believed that a controlled group with eligible property placed in service greater than the maximum election amount from Sec. 179(b)(1) allocated the available election amount among all its members, including S corporations. The aggregate cost of property placed in service from each member would also be factored in when considering the reduction in limitation in Sec. 179(b)(2).

Background

Sec. 179(a) states that a taxpayer may elect to treat the cost of eligible property (defined in Sec. 179(d)(1)(A)) as an immediate expense that is not chargeable to a capital account. Any cost so treated is allowed as a deduction for the tax year in which the Sec. 179 property is placed in service.

Under Sec. 179(b), for tax years 2010–2013, the aggregate cost that may be taken into account under Sec. 179(b) for any tax year cannot exceed $500,000, reduced dollar for dollar by the amount of Sec. 179 property placed in service that exceeds $2 million.

Regs. Sec. 1.1563-1(b)(2)(ii)(C) states that an S corporation, for purposes of any tax benefit item described in Sec. 1561(a) to which it is not subject, is an excluded member. However, under Regs. Sec. 1.1563-1(a)(1)(ii), while S corporations are excluded as component members, they are still considered members of the controlled group. This distinction becomes particularly important when considering the application of Sec. 179(d)(6)(A), which applies the controlled group rules of Sec. 1563(a) by taking into account only the component members of a controlled group. As such, it can be concluded, and the information letter confirms, that an S corporation may make the Sec. 179 election up to the maximum election amount as if it were a separate entity, even though it may still otherwise be a member of the controlled group for purposes of Sec. 1563(a).

Impact on Taxpayers

As exempt members of a controlled group for purposes of Sec. 179(d)(6)(A), S corporation members of a controlled group may substantially increase their Sec. 179 expense elections.

Example 1: Companies A, B, and C are S corporation members of a controlled group under the definition in Sec. 1563. During the 2013 tax year, Company A placed $500,000 of eligible Sec. 179 property into service, Company B placed $200,000 of eligible Sec. 179 property into service, and Company C placed $2.3 million of eligible Sec. 179 property into service.

Previously, it appeared that the controlled group and its members would not be allowed to take any Sec. 179 expense ($500,000 maximum election reduced by the $1 million over the $2 million threshold). However, Information Letter 2013-0016 made clear that Company A would be allowed the maximum election of $500,000; Company B would be allowed $200,000; and Company C would be allowed $200,000 ($500,000 reduced by the $300,000 over the $2 million threshold).

Example 2: Assume the same facts as Example 1. During the 2013 tax year, Companies A, B, and C each placed $500,000 of eligible Sec. 179 property into service.

Previously, it appeared that the controlled group and its members would be allowed to take a combined $500,000 Sec. 179 expense since they are under the $2 million limitation threshold. However, Information Letter 2013-0016 made clear that each company would be allowed to make the maximum $500,000 election, resulting in combined Sec. 179 expenses of $1.5 million.

Conclusion

Previously, it appeared that controlled groups with multiple S corporation members were required to determine which member would use the Sec. 179 deduction. Since it is now clear that S corporation members in a controlled group are considered separate entities for purposes of the Sec. 179(b) limitations, these taxpayers do not have to make that determination and have greater flexibility with regard to asset acquisition.

Taxpayers may also consider tax planning opportunities since, under current law, the maximum Sec. 179 election will be reduced to $25,000 (with the reduction in limitation starting at $200,000) for tax years beginning after 2013. It may be beneficial to increase the amount of assets placed in service in 2013 regardless of profitability, as Sec. 179(b)(3)(B) permits unused deductions to be carried forward for an unlimited number of years.

For a more extensive discussion of this issue, see “Controlled Groups and the Sec. 179 Election for S Corporations.”

EditorNotes

Mark Cook is a partner with SingerLewak LLP in Irvine, Calif.

For additional information about these items, contact Mr. Cook at 949-261-8600, ext. 2143, or mcook@singerlewak.com.

Unless otherwise noted, contributors are members of or associated with SingerLewak LLP.