How are Section 179 limitations allocated for a C Corporation that was a member of a brother-sister controlled group for only part of the 2025 fiscal year?
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For a C Corporation that was a member of a brother-sister controlled group for only part of the 2025 fiscal year, the allocation of Section 179 limitations is governed by a combination of Internal Revenue Code provisions, Treasury Regulations, and IRS guidance. Here is a comprehensive explanation of how the Section 179 limitations are allocated in this scenario:
1. Definition of a Controlled Group for Section 179 Purposes
- For Section 179, a "controlled group" is defined by reference to IRC §1563(a), but with a 50% stock ownership test instead of the usual 80% test.
- This means that two or more corporations are considered a controlled group for Section 179 purposes if the same five or fewer persons own more than 50% of the total combined voting power or value of each corporation.
2. Component Member Status and the Dec. 31 Test
- The allocation of Section 179 limitations is based on the group’s composition as of December 31 of the calendar year that falls within the corporation’s tax year.
- A corporation is a "component member" of a controlled group for a tax year if it is a member of the group on December 31 and is not an excluded member, or if it is not a member on December 31 but was a member for at least half of the days in its tax year preceding December 31 (an "additional member");.
3. Section 179 Limitation Must Be Shared
- The Section 179 dollar limitation (for 2025, $2,500,000) and the phase-out threshold ($4,000,000) must be apportioned among all component members of the controlled group as if the group were a single taxpayer.
- The taxable income limitation is also applied to the group as a whole, not to each member separately.
4. Allocation Method and Apportionment Plan
- The group may apportion the Section 179 limitation in any manner it chooses, provided all component members consent in writing to the apportionment plan (typically by filing IRS Form 1120, Schedule O, with their returns).
- If no apportionment plan is adopted, the limitation is divided equally among all component members.
5. Corporation a Member for Only Part of the Year
- If a corporation is a member of the controlled group for only part of its tax year, its status as a component member is determined as of December 31.
- If it is a member on December 31 and not an excluded member, it is a component member for the entire tax year and must share the Section 179 limitation for that year.
- If it is not a member on December 31, but was a member for at least half of the days in its tax year preceding December 31, it is treated as an "additional member" and must also share the limitation;.
Example: If a C Corporation with a calendar year is a member of a brother-sister controlled group from January 1 to July 1, 2025, but not on December 31, it will only be a component member if it was a member for at least half of the days in its tax year before December 31 (i.e., at least 183 days). If so, it is an "additional member" and must share the Section 179 limitation for the year. If not, it is not a component member and is not required to share the limitation.
6. Practical Steps for Allocation
- Determine component member status as of December 31 (or as an additional member).
- Calculate the group’s total Section 179 limitation (for 2025, $2,500,000, reduced dollar-for-dollar by the amount by which the cost of Section 179 property placed in service exceeds $4,000,000).
- File an apportionment plan (Schedule O) with each member’s return if the group wishes to allocate the limitation unequally.
- If no plan is filed, divide the limitation equally among all component members.
- Each member’s Section 179 deduction cannot exceed the cost of Section 179 property it placed in service during the year.
7. Special Notes
- Property purchased from another group member does not qualify for Section 179.
- If a consolidated return is filed for all component members, the allocation may not be revoked after the due date (including extensions) of the common parent’s return on which the Section 179 election is made.
8. Summary Table
In summary: A C Corporation that was a member of a brother-sister controlled group for only part of the 2025 fiscal year must share the Section 179 limitation with the other component members if it is a member on December 31 or was a member for at least half of its tax year before December 31. The limitation is apportioned among all component members, either equally or according to a filed apportionment plan. If the corporation is not a component member under these rules, it is not required to share the limitation for that year.
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