Sec. 179 deduction limitation applied to S corps. in a controlled group.

• Author: Schonig, Michael

The IRS recently released Information Letter 2013-0016 (6/28/13) to clarify the treatment of the Sec. 179 limitations applied to members of a controlled group, in which certain members had made an election to be treated as an S corporation under Sec. 1362(a)(1). This pro-taxpayer letter makes clear the proper (beneficial) treatment of S corporations under Sec. 179.

In practice, many taxpayers may have erroneously applied controlled group limitations to the Sec. 179 deduction for S corporations in a controlled group. This may necessitate a "call to action" by practitioners. Even a major tax research publication concluded that S corporations should be subject to controlled group limitations on the Sec. 179 deduction. This conclusion was based on the interpretation that S corporation exclusion as a component member of a controlled group under Regs. Sec. 1.1563-1(b)(2)(ii)(C) applied only to items that would have been apportioned among C corporations under Sec. 1561(a). The IRS's information letter clarifies its interpretation of the law on the definition of "component member."

Sec. 179 permits taxpayers to recover 100% of a newly purchased asset's cost in the year of acquisition, up to a specified maximum dollar amount ($500,000 for 2013). If property acquired during the year exceeds the specified investment amount ($2 million for 2013), the Sec. 179 deduction is limited under Sec. 179(b)(2). Each dollar of acquired Sec. 179 property in excess of the specified investment amount reduces the permitted Sec. 179 deduction dollar for dollar until it is eliminated.

Deductions permissible under Sec. 179(b) are restricted under Sec. 179(d) (6) by rules governing controlled groups. Since component members of a controlled group under Sec. 179(d)(6) are treated as a single taxpayer, the deduction and associated limitation must be apportioned among the members. A controlled group is defined under Sec. 179(d)(7) by reference to the same term as it is used under Sec. 1563(a), "except that, for such purposes, the phrase 'more than 50 percent' shall be substituted for the phrase 'at least 80 percent' each place it appears in section 1.563(a)(1)."

There are four types of controlled groups defined under Sec. 1563(a) (i.e., the parent-subsidiary, brother-sister, combined group, and certain insurance companies). The two types of controlled groups that are most likely to have an S corporation as a member are parent-subsidiary and brother-sister groups. An S...