How can an individual use Section 179 losses from an LLC to reduce taxable income from an S corporation on their personal return?
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An individual cannot directly use Section 179 losses (deductions) from an LLC to reduce taxable income from an S corporation on their personal return. However, both Section 179 deductions from an LLC and from an S corporation can be aggregated at the individual level, subject to the overall Section 179 limitations, and used to offset the individual's aggregate taxable income from all active trades or businesses. Here’s a detailed explanation of how this works, with references to the relevant legal authorities and practical application:
1. Section 179 Deduction Overview
Section 179 allows a taxpayer to elect to expense the cost of qualifying property placed in service during the tax year, rather than recovering the cost through depreciation over several years. The deduction is subject to several limitations:
- Dollar Limitation: 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.
- Business Income Limitation: The Section 179 deduction cannot exceed the taxpayer’s aggregate taxable income derived from the active conduct of all trades or businesses during the year. Any disallowed amount due to this limitation can be carried forward to future years.
2. Pass-Through Entities and Section 179
Both LLCs (taxed as partnerships) and S corporations are pass-through entities. Section 179 deductions are determined at the entity level and then allocated to the owners (members or shareholders), who claim the deduction on their personal returns, subject to the overall Section 179 limitations.
- LLC (Partnership): The partnership determines its Section 179 deduction and allocates it to the partners. Each partner then combines their share of the partnership’s Section 179 deduction with any Section 179 deduction from other sources (e.g., S corporations, sole proprietorships) and applies the overall Section 179 limits on their personal return.
- S Corporation: The S corporation determines its Section 179 deduction and allocates it to the shareholders, who then apply the overall Section 179 limits on their personal return.
3. Aggregation at the Individual Level
The key point is that the Section 179 deduction is limited at the individual level, not at the entity level (except that the entity itself is also subject to the Section 179 limits before allocation). The individual taxpayer aggregates all Section 179 deductions allocated from all sources (LLCs, S corporations, sole proprietorships) and applies the dollar and business income limitations on their personal return.
- Example: If an individual is allocated a $50,000 Section 179 deduction from an LLC and a $30,000 Section 179 deduction from an S corporation, the individual combines these for a total of $80,000. The individual can deduct up to $80,000, subject to the overall Section 179 dollar and business income limitations.
4. Offsetting Income from Different Sources
The Section 179 deduction is used to offset the individual's aggregate taxable income from all active trades or businesses, regardless of whether the income is from an LLC, S corporation, or sole proprietorship. The deduction is not limited to offsetting only the income from the entity that generated the deduction. Instead, it can be used to offset any active trade or business income reported on the individual's return.
- Taxable Income Limitation: The total Section 179 deduction claimed in a year cannot exceed the individual's aggregate taxable income from all active trades or businesses. If the combined Section 179 deductions from all sources exceed this limit, the excess is carried forward to future years.
5. Practical Application
- Step 1: Each entity (LLC, S corporation) determines and allocates its Section 179 deduction to the owner.
- Step 2: The individual aggregates all Section 179 deductions from all sources.
- Step 3: The individual applies the overall Section 179 dollar limitation and the business income limitation.
- Step 4: The allowable Section 179 deduction is used to reduce the individual's aggregate taxable income from all active trades or businesses, including income from both the LLC and the S corporation.
6. Limitations and Carryforwards
- If the individual's Section 179 deduction is limited by the business income limitation, the disallowed amount is carried forward and can be used in future years, again subject to the Section 179 limitations in those years.
7. No "Loss" Carryover Between Entities
It is important to note that Section 179 does not create a "loss" that can be transferred between entities. Rather, it is a deduction that is limited at the individual level. The deduction is not entity-specific once allocated to the individual; it is applied against the individual's aggregate active business income.
8. Supporting Authority
- IRC §179(b)(3): The amount allowed as a deduction under Section 179 for any taxable year shall not exceed the aggregate amount of taxable income of the taxpayer for such taxable year which is derived from the active conduct by the taxpayer of any trade or business during such taxable year.
- Publication 946: The Section 179 deduction limits apply to each taxpayer, not to each business. The total cost you can deduct each year after you apply the dollar limit is limited to the taxable income from the active conduct of any trade or business during the year. Any cost not deductible in 1 year under Section 179 because of this limit can be carried to the next year.
9. Summary
An individual cannot directly use Section 179 losses from an LLC to reduce S corporation income. Instead, the individual aggregates all Section 179 deductions from all sources (LLCs, S corporations, sole proprietorships), applies the overall Section 179 limitations, and the allowable deduction reduces the individual's aggregate taxable income from all active trades or businesses, including both LLC and S corporation income. Any excess Section 179 deduction is carried forward.
In short: Section 179 deductions from an LLC and an S corporation are combined at the individual level and used to offset the individual's total active business income, not just the income from the entity that generated the deduction.
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