Gary Bode, Form 1120-S CPA: it’s not always best to fully expense or depreciate an asset off in the year of purchase. (910) 399-2705.
Form 1120-S CPAs finally have resolution on whether both a parent S Corporation and its controlled S Corporation subsidiaries can claim the full $139,000 (2012) Section 179 deductions. The answer is yes; both S Corporations can claim their own $139,000 Section 179 deduction.
Why is the Section 179 limit $139,000 when I’m reading $125,000 in Form 1120-S Internet posts?
$139,000 is the inflation adjusted figure based on the original $125,000 established in 2006. Note the limit was $500,000 last year and will decrease again in 2013.
Many potential rationales exist for setting up S Corporation subsidiaries, here’s a few:
- Sometimes it makes sense to separate different business components instead of running them under a single S Corporation. A new business opportunity is one example.
- To prepare for the sale of a business component.
- To insulate the parent S Corporation from potential liability of the subsidiary.
- To increase the $139,000 Section 179 deduction. Remember this amount decreases in 2013.
Section 179 Example
Talk to your Form 1120-S CPA about whether your 2012 purchase qualifies for Section 179. But let’s assume that it does, and you bought a $239,000 piece of equipment before 2013. Section 179 allows you to immediately expense off $139,000 of it on your 2012 Form 1120-S. Note the alternative is depreciating this deduction across multiple tax years. But wait there’s more. You then get a 50% bonus depreciation on the remaining $100,000 (239-139). Next you apply “normal” depreciation to the remaining $50,000 (239-139-50). So here it is.
- $239,000 qualified purchase before 2013.
- Section 179 2012 amount is $139,000.
- 2012 Bonus depreciation is $50.000.
- Standard deprecation is $10,000.
- Total deduction is $199,000 for the 2012 Form 1120-S.
- True tax savings? It depends on your situation. Could be $60,000.
“With heavily financed assets, it may not be best to Section 179, and/or depreciate off the maximum allowed amounts on Form 1120-S.”
- Gary Bode, Form 1120-S CPA
Is expensing as much as possible a good idea?
Sometimes. Your CPA should run some alternative tax scenarios to ascertain wheter taking the entire $199,00o in 2012.
- Do you need the entire $199,000 deduction now?
- Will a higher depreciation expense be better in the future for your expected circumstances?
One common example every Form 1120-S CPA sees? The purchase is heavily financed. A larger immediate deduction sounds great, but what about next year when you’re paying off the loan and can only deduct interest?
I’m a Form 1120-S CPA with a virtual office to serve your S Corporation wherever it’s located. Our firm operates as an S Corporation so you know I watch Form 1120-S issues closely. For a free phone consult call (910) 399-2705.
