Are Section 179 losses from an LLC allowed to offset S corporation profits on a personal tax return?
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Section 179 allows taxpayers to elect to expense the cost of qualifying property, subject to certain limitations, rather than depreciate it over time. When considering whether Section 179 losses (i.e., deductions in excess of income from a particular activity) from an LLC can offset S corporation profits on an individual’s personal tax return, several key legal principles and limitations must be considered:
1. Section 179 Deduction Limits
Dollar Limitation and Phase-Out:For 2025, the maximum Section 179 deduction is $2,500,000, reduced dollar-for-dollar by the amount by which the cost of Section 179 property placed in service during the year exceeds $4,000,000.
Taxable Income Limitation:The Section 179 deduction is further limited to the aggregate amount of taxable income derived from the active conduct of any trade or business during the year. Any amount not deductible due to this limitation can be carried forward to future years.
2. Aggregation of Income for the Taxable Income Limitation
Aggregation Rule:The taxable income limitation is applied at the individual taxpayer level, not at the entity level. This means that an individual aggregates net income (or loss) from all trades or businesses in which they actively participate, including those conducted through partnerships (such as LLCs taxed as partnerships), S corporations, and sole proprietorships.
Regulatory Guidance:Reg. § 1.179-2(c)(1) states:
"For purposes of section 179(b)(3) and this paragraph (c), the aggregate amount of taxable income derived from the active conduct by an individual, a partnership, or an S corporation of any trade or business is computed by aggregating the net income (or loss) from all of the trades or businesses actively conducted by the individual, partnership, or S corporation during the taxable year."
Practical Example:If a taxpayer has a Section 179 deduction from an LLC (taxed as a partnership) that exceeds the LLC’s income (i.e., a Section 179 loss), and also has profits from an S corporation, the taxpayer aggregates the net income and losses from both the LLC and the S corporation (and any other active businesses) to determine the maximum allowable Section 179 deduction for the year.
3. Application to LLCs and S Corporations
- LLC (taxed as a partnership): The Section 179 deduction is first limited at the entity level (the LLC cannot allocate more Section 179 deduction to its members than its own taxable income from active business). The deduction is then allocated to the members, who apply their own taxable income limitation at the individual level, aggregating all active business income and losses.
- S Corporation: The S corporation applies the Section 179 limitation at the entity level, and then the deduction is passed through to shareholders, who again apply the limitation at the individual level, aggregating all active business income and losses.
4. Loss Limitations
- Basis, At-Risk, and Passive Activity Loss Rules:
Before a Section 179 deduction (or any loss) from an LLC can offset other income, the taxpayer must have sufficient basis, be at risk for the amount, and not be limited by the passive activity loss rules (i.e., the taxpayer must materially participate in the LLC’s business).
5. Offset of Section 179 Losses Against S Corporation Profits
Yes, Section 179 losses from an LLC can offset S corporation profits on a personal tax return, subject to the following conditions:
- The taxpayer actively participates in both the LLC and the S corporation (i.e., both are active trades or businesses).
- The Section 179 deduction from the LLC is not limited by basis, at-risk, or passive activity loss rules.
- The total Section 179 deduction claimed on the individual return (from all sources) does not exceed the taxpayer’s aggregate taxable income from all active trades or businesses for the year.
- Any Section 179 deduction not allowed due to the taxable income limitation is carried forward to future years.
Example:
- Taxpayer A is a member of LLC X (taxed as a partnership) and a shareholder in S Corporation Y.
- LLC X allocates a $30,000 Section 179 deduction to A, but LLC X has no net income (i.e., the deduction creates a loss).
- S Corporation Y allocates $50,000 of net income to A.
- A’s allowable Section 179 deduction for the year is limited to $50,000 (the sum of all active business income, including the S corporation’s profit).
- The Section 179 deduction from LLC X can offset the S corporation’s profit, subject to the overall Section 179 dollar and phase-out limits, and provided A has sufficient basis, is at risk, and is not limited by passive activity rules.
6. Supporting Authority
- Reg. § 1.179-2(c)(1): Aggregation of all active business income and losses for the Section 179 taxable income limitation.
- Reg. § 1.179-2(c)(6): Active conduct requirement and aggregation rules.
- Publication 946: Confirms that the Section 179 deduction is limited to the aggregate taxable income from all active trades or businesses, and that losses from one business can offset profits from another for this purpose.
7. Conclusion
Section 179 losses from an LLC can be used to offset S corporation profits on a personal tax return, provided the taxpayer actively participates in both businesses, is not limited by basis, at-risk, or passive activity rules, and the total Section 179 deduction does not exceed the aggregate taxable income from all active trades or businesses for the year.
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