Trust planning opportunity: Sec. 179(d)(4) provides that trusts (other than grantor trusts) and estates are not permitted to deduct Sec. 179 expense. Regs. Sec. 1.179-1(f ) (3) provides that a partner or S corporation shareholder that is a trust or estate shall not deduct its allocable share of the entity’s Sec. 179 expense that would otherwise have been allocated to it. The entity may claim a depreciation deduction under Sec. 168 (including bonus depreciation, if applicable) for the depreciable basis that is a result of the trust or estate’s inability to claim its portion of the Sec. 179 expense. If the depreciable property is expected to be held short term, then the higher property basis will result in a lower gain when the property is eventually sold. Alternatively, if the property is expected to be held long term, the taxpayer can use bonus depreciation rather than Sec. 179 on qualifying assets, which may result in a more rapid deduction of the asset cost.
Observations regarding lessors: Sec. 179(d)(5) provides that Sec. 179 expensing is not available to noncorporate lessors unless:
- The property subject to the lease has been manufactured or produced by the lessor, or
- The term of the lease (taking into account options to renew) is less than 50% of the class life of the property (as defined in Sec. 168(i)(1)), and for the first 12 months after the date the property is transferred to the lessee, the sum of the Sec. 162 deductions, other than rents and reimbursed amounts with respect to such property, allowable to the lessor exceeds 15% of the rental income produced by the property.
The provisions of Sec. 179(d)(5) are often difficult for taxpayers to meet. Most taxpayers do not manufacture or produce rental property. Additionally, Sec. 162 expenses do not include interest, taxes, and depreciation expense. In many situations, the remainder of the rental expenses do not exceed 15% of the rent income. Therefore, bonus depreciation will often provide a more favorable tax result in these circumstances.
Another important provision, Sec. 179(d)(6), states that all members of a controlled group shall be treated as one taxpayer. In defining a “controlled group,” Sec. 179(d)(7) refers to Sec. 1563(a). However, Sec. 179(d)(7) provides that the 80% test in Sec. 1563(a) be replaced with a 50% test for voting power and value of stock shares in a parent-subsidiary structure for purposes of determining if the definition of a “controlled group” is met.
Practitioners should carefully evaluate commonly owned entities to determine if the controlled-group provisions apply before finalizing tax returns and deducting Sec. 179 expense. If the entities meet the definition of a controlled group, then the practitioner should evaluate the assets of all entities simultaneously and carefully choose which assets to take Sec. 179 expensing on to maximize the group’s overall tax savings.
Comparing tax savings
As bonus depreciation continues to phase out, Sec. 179 expensing will play a more significant role in maximizing deductions for fixed-asset purchases. It will be important for practitioners to understand the differences between the rules for bonus depreciation and Sec. 179 expensing to avoid tax return errors and maximize tax savings. Practitioners will also need to analyze and compare the tax savings between bonus depreciation vs. Sec. 179 expensing deductions to determine the best outcome for taxpayers.
Editor Notes
Brian Hagene, CPA, CGMA, is partner/owner at Mathieson, Moyski, Austin & Co. LLP in Lisle, Ill., with CPAmerica. Mark G. Cook, CPA, CGMA, MBA, is the lead tax partner with SingerLewak LLP in Irvine, Calif.
For additional information about these items, contact [email protected].
Contributors are members of or associated with CPAmerica or SingerLewak LLP.
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