How does the sale of a C Corporation and its exit from a brother-sister controlled group during the fiscal year affect the allocation of Section 179 deductions for that year?
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The allocation of Section 179 deductions for a C corporation that exits a brother-sister controlled group during the fiscal year is governed by the rules in Section 179 and Section 1561, as well as the definitions and operating rules in Section 1563.
1. Section 179 Deduction Limits and Controlled Groups
Section 179 allows a taxpayer to elect to expense the cost of qualifying property, subject to annual dollar limits and a phase-out threshold. For 2025, the maximum Section 179 deduction is $2,500,000, and the phase-out threshold is $4,000,000.
Controlled Group Rule:Section 179(b)(6) provides that all component members of a controlled group (as defined in Section 1563(a), but substituting "more than 50 percent" for "at least 80 percent") are treated as a single taxpayer for purposes of the Section 179 dollar limitation and phase-out. The Secretary is to apportion the dollar limitation among the component members by regulation.
2. Definition of Controlled Group and Component Members
Section 1563(a) defines a controlled group of corporations, including brother-sister groups, as two or more corporations where five or fewer persons who are individuals, estates, or trusts own more than 50% of the total combined voting power or value of all classes of stock of each corporation.
3. Allocation of Section 179 Deduction When a Corporation Exits the Group
Section 1561(a) provides that the component members of a controlled group on December 31 are limited to one $250,000 (or $150,000) amount for the accumulated earnings credit, divided equally unless otherwise allocated by regulation. For Section 179, the relevant rule is that the group is treated as one taxpayer for the deduction limit, and the limit is apportioned among the members.
Short Taxable Years:Section 1561(b) addresses short taxable years not including December 31. In such cases, the amount is divided by the number of component members on the last day of the short taxable year, applying Section 1563(b) as if that day were December 31.
4. Effect of Sale and Exit During the Year
- If the C corporation is a component member of a brother-sister controlled group for part of the year and then is sold and leaves the group:
- For the portion of the year it is a member, the Section 179 limit must be allocated among all component members of the group, as if the group were a single taxpayer.
- The allocation is based on the number of component members on the last day of the corporation’s taxable year (if it is a short year due to the sale), not on December 31, per Section 1561(b).
- After the sale, if the corporation is no longer part of any controlled group, it is treated as a stand-alone entity for Section 179 purposes for the remainder of the year (or for its new short taxable year, if applicable).
- If the corporation’s taxable year ends due to the sale (e.g., because it joins a consolidated group or changes ownership):
- The Section 179 limit for that short year is determined by the number of component members on the last day of that short year.
- The deduction must be apportioned among all component members of the group as of that date.
5. Practical Example
Suppose Corporation A and Corporation B are in a brother-sister controlled group at the start of 2025. On June 30, Corporation A is sold to an unrelated party and leaves the group, resulting in a short taxable year for Corporation A (January 1–June 30).
- For the short year ending June 30, the Section 179 limit for Corporation A and Corporation B is determined by the number of component members on June 30.
- The $2,500,000 limit (for 2025) is apportioned between A and B for the period up to June 30.
- After June 30, Corporation A is no longer in the group and, for any subsequent short year or new tax year, is not subject to the controlled group allocation for Section 179.
6. Summary of Key Points
- The Section 179 dollar limit and phase-out are applied to the entire controlled group as a single taxpayer.
- The limit is apportioned among component members based on the number of members on the last day of the taxable year (or short year, if applicable).
- If a corporation exits the group during the year, the allocation for its short year is based on the group composition as of the last day of that short year.
- After exit, the corporation is no longer subject to the controlled group allocation for Section 179 for subsequent periods.
In summary: The sale of a C corporation and its exit from a brother-sister controlled group during the fiscal year requires the Section 179 deduction limit to be allocated among all component members of the group as of the last day of the corporation’s taxable year (including short years caused by the sale). After the exit, the corporation is treated as a separate taxpayer for Section 179 purposes for any subsequent period.
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