Expensing business property for S corporation shareholders
TAX BLOG |
As we enter the fourth quarter, it’s important to keep in mind a favorable expensing opportunity that was made permanent by the Protecting Americans from Tax Hikes Act of 2015 (PATH Act). It is also important to plan carefully to avoid permanently losing the benefit of the deduction.
Many businesses can now immediately expense up to $500,000 of the cost of qualified business property, defined generally as depreciable tangible property purchased for use in a trade or business (referred to as the section 179 deduction). In the past, phase-outs meant that the section 179 deduction primarily benefited smaller taxpayers. However, it is now much more widely available—taxpayers who acquire less than $2 million of qualified business property will generally qualify for the maximum deduction.
Claiming this deduction does require some planning, particularly for passthrough entities such as S corporations and partnerships. The section 179 election is made by the business, and the deduction passes through to the owners. However, each shareholder is also separately subject to a $500,000 limitation. Failure to adequately plan for this can cause a permanent loss of the deduction.
For example, consider an individual who owns interests in two S corporations, and is allocated $500,000 of section 179 expense from the first S corporation, and $100,000 from the second ($600,000 total). The individual’s total deduction will be limited to the $500,000 maximum, and the excess deduction will be permanently lost. Worse yet, the underlying property’s basis will still be reduced, and the shareholder’s tax basis in the entity will also be reduced—as if the deduction had been taken. For this reason, as we approach year end it is important that taxpayers coordinate to avoid inadvertently exceeding the limitation. This can be often be a complicated undertaking in situations where individuals own interests in many entities, several of which may qualify for the section 179 deduction. It is nonetheless critical.