S corp. members are not subject to controlled group sec. 179 limitations.

• Author: Joe, David

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...