How does IRS Section 179 affect self-employed taxpayers compared to corporations?
Ask Blue J any tax question, then go deeper. Follow up, add client-specific context, and explore the sources behind every answer with Blue J’s generative AI solution for tax research.
IRS Section 179 allows taxpayers to elect to expense the cost of qualifying property in the year it is placed in service, rather than recovering the cost through depreciation over several years. The rules for Section 179 apply to both self-employed individuals (sole proprietors, single-member LLCs, and partners in partnerships) and corporations (including S corporations and C corporations), but there are important similarities and differences in how the deduction is applied and limited for each type of taxpayer.
1. Eligibility and Qualifying Property
Self-Employed Taxpayers:- Eligible to claim Section 179 for property acquired by purchase for use in the active conduct of a trade or business.- Qualifying property includes tangible personal property, certain improvements to nonresidential real property (qualified improvement property, roofs, HVAC, fire protection, and security systems), off-the-shelf computer software, and certain other property used in business.- Property must be used more than 50% for business in the year placed in service.- Property acquired by gift or inheritance, or from related parties, does not qualify.
Corporations:- Corporations (C and S) are also eligible to claim Section 179 for qualifying property used in their trade or business.- The same types of property qualify as for individuals.- Estates and trusts are not eligible for Section 179.
2. Dollar Limits and Phase-Out
For 2025 (as adjusted by recent law):- Maximum Section 179 deduction: $2,500,000.- Phase-out threshold: $4,000,000. The deduction is reduced dollar-for-dollar by the amount by which the cost of qualifying property placed in service exceeds $4,000,000.
Application:- These limits apply per taxpayer, not per business or per asset.- For married individuals filing separately, the limits must be allocated between spouses unless they elect otherwise.- For corporations, the limits apply at the entity level.
Controlled Groups:- All members of a controlled group (more than 50% common ownership) are treated as a single taxpayer for purposes of the Section 179 limits, and the deduction must be allocated among the group.
3. Business Income Limitation
Self-Employed Taxpayers:- The Section 179 deduction cannot exceed the taxpayer’s aggregate taxable income from the active conduct of any trade or business during the year.- Taxable income for this purpose includes wages, salaries, tips, and other earned income, as well as net income from sole proprietorships, partnerships, and S corporations.- If the deduction is limited by business income, the excess can be carried forward to future years.
Corporations:- The deduction is limited to the corporation’s taxable income from the active conduct of any trade or business.- For S corporations and partnerships, the limitation applies at both the entity and shareholder/partner level. The entity computes the allowable deduction, which is then allocated to shareholders/partners, who must also apply the business income limitation at their level.
4. Special Rules for Partnerships and S Corporations
- The Section 179 deduction is computed at the entity level and then allocated to the partners or shareholders.
- Each partner or shareholder adds their share of the entity’s Section 179 deduction to their own Section 179 property and applies the dollar and business income limitations at their level.
- Estates and trusts cannot claim Section 179, nor can partners or shareholders that are themselves estates or trusts.
5. Noncorporate Lessors
- Noncorporate lessors (including self-employed individuals) generally cannot claim Section 179 for property they lease to others, unless:
- The property was manufactured or produced by the lessor, or
- The lease term is less than 50% of the class life of the property, and for the first 12 months, the lessor’s Section 162 deductions (other than rent and reimbursed amounts) exceed 15% of the rental income.
- This restriction does not apply to corporations.
6. Recapture Rules
- If, in any year during the property’s recovery period, business use drops to 50% or less, a portion of the Section 179 deduction must be recaptured as ordinary income.
7. Interaction with Bonus Depreciation
- Section 179 expensing is applied before bonus depreciation and regular MACRS depreciation.
- Both self-employed taxpayers and corporations may use Section 179 and bonus depreciation in the same year, subject to their respective limitations.
8. Reporting and Elections
Self-Employed:- The election is made on Form 4562, attached to the taxpayer’s return (e.g., Schedule C for sole proprietors).
Corporations:- The election is made on Form 4562, attached to Form 1120 (C corporations) or Form 1120-S (S corporations).
9. Key Differences Summarized
10. Practical Planning Considerations
- Section 179 cannot create a net loss; bonus depreciation can. This is a key distinction: self-employed taxpayers and corporations cannot use Section 179 to reduce taxable income below zero, but can carry forward any unused amount.
- Section 179 provides flexibility to select which assets to expense, while bonus depreciation must be applied to all assets in a class unless the taxpayer elects out for a class of property.
- For S corporations and partnerships, the Section 179 deduction is limited at both the entity and owner level, and cannot be claimed by shareholders or partners that are estates or trusts.
Summary: Section 179 provides a valuable opportunity for both self-employed taxpayers and corporations to accelerate deductions for qualifying property. The main differences are in the application of the business income limitation, the treatment of controlled groups, and the noncorporate lessor rule. Both types of taxpayers must be mindful of the annual dollar and phase-out limits, the business income limitation, and the recapture rules. For S corporations and partnerships, the deduction is subject to limitations at both the entity and owner level, and cannot be claimed by estates or trusts. Section 179 cannot create a net loss, but any unused deduction can be carried forward. Bonus depreciation, by contrast, is not subject to a business income limitation and can create a net loss.
For detailed planning, taxpayers should consider their current and projected business income, the composition of their business entities, and the nature of their asset acquisitions to maximize the benefit of Section 179 and bonus depreciation.
Was this answer helpful?
What Blue J customers are saying
“We are excited to use Blue J to elevate the initial work product our team is able to produce."
"We’re incorporating Blue J to ensure our people are well-equipped with a research tool that delivers on both ease of use and quality of deliverable. It will save us a lot of time as a starting point, so we can focus our efforts on the analysis. Ultimately, it helps us get to the right answer, faster.”
"We’re incorporating Blue J to ensure our people are well-equipped with a research tool that delivers on both ease of use and quality of deliverable. It will save us a lot of time as a starting point, so we can focus our efforts on the analysis. Ultimately, it helps us get to the right answer, faster.”
"We had used Checkpoint for a long time but found it wasn’t particularly well-used in our practice."
"A lot of our practitioners would have to turn to Google to find what they were looking for, which of course isn’t ideal. Blue J is a real game-changer when it comes to this, since it combines the efficiency of Google with the authoritative tax materials our people really need to serve their clients best. At ELO, we pride ourselves on providing services that are focused on value for clients and exceeding their expectations. Adding Blue J to our toolbox will enable us to do just that, as we continue to evolve our service offerings to better serve our clients’ needs.”
"A lot of our practitioners would have to turn to Google to find what they were looking for, which of course isn’t ideal. Blue J is a real game-changer when it comes to this, since it combines the efficiency of Google with the authoritative tax materials our people really need to serve their clients best. At ELO, we pride ourselves on providing services that are focused on value for clients and exceeding their expectations. Adding Blue J to our toolbox will enable us to do just that, as we continue to evolve our service offerings to better serve our clients’ needs.”
"We find this tool to be a game-changer for us and our clients.”
“We had the opportunity to pilot some other AI solutions in the market, and found that the improvement over traditional search was limited - except in Blue J’s case, where the efficiency gain over traditional research methods is significant."
“We had the opportunity to pilot some other AI solutions in the market, and found that the improvement over traditional search was limited - except in Blue J’s case, where the efficiency gain over traditional research methods is significant."
“Blue J is an exciting technology because it enables the practitioner to remain in the driver’s seat of the analysis."
"Thoughtful functions are included to encourage and facilitate deeper analysis, not to replace or reduce it. We’ll continue to find new and impactful ways to leverage the technology, which has benefited our clients and staff alike. At RSM we strive to be compelling to our clients and to be digital by embracing new technologies to fulfill that promise.”
"Thoughtful functions are included to encourage and facilitate deeper analysis, not to replace or reduce it. We’ll continue to find new and impactful ways to leverage the technology, which has benefited our clients and staff alike. At RSM we strive to be compelling to our clients and to be digital by embracing new technologies to fulfill that promise.”
"We wanted to have a tool that people were using at all staff levels."
"We wanted something that lived up on their third screen - something that would be available and helpful to them every day. What we've found is it's been easy to get people to get into the habit of using Blue J because it helps people. Blue J allows us to quickly respond to client questions in a way that they can understand it, which helps us deal with the volume of client questions that come in. We were up and running very quickly with Blue J - within 5 minutes, our staff understood how this will be helpful, and the rest of the training program is refining prompting skills and building use cases and best practices."
"We wanted something that lived up on their third screen - something that would be available and helpful to them every day. What we've found is it's been easy to get people to get into the habit of using Blue J because it helps people. Blue J allows us to quickly respond to client questions in a way that they can understand it, which helps us deal with the volume of client questions that come in. We were up and running very quickly with Blue J - within 5 minutes, our staff understood how this will be helpful, and the rest of the training program is refining prompting skills and building use cases and best practices."
