What documentation and reporting steps are required for a C Corporation's partial year membership in a brother-sister controlled group, specifically regarding Section 179 allocation on the 2025 tax return?
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For a C Corporation that was a member of a brother-sister controlled group for only part of the 2025 tax year, the documentation and reporting requirements for Section 179 allocation on its 2025 tax return are governed by both the Internal Revenue Code and Treasury Regulations, with specific attention to the controlled group rules and the timing of group membership.
1. Controlled Group Rules and Section 179 Allocation
- Controlled Group Definition: Under IRC §1563 and Treas. Reg. §1.1563-1, a brother-sister controlled group exists when five or fewer individuals, estates, or trusts own at least 80% of the stock (by vote or value) of each corporation, and more than 50% of the stock (by vote or value) is owned identically across the corporations. For Section 179 purposes, the controlled group rules are modified to use a "more than 50%" threshold instead of "at least 80%".
- Section 179 Dollar Limitation: The Section 179 expensing limit ($2,500,000 for 2025, subject to inflation adjustment) must be shared among all members of a controlled group, including brother-sister groups, as if they were a single taxpayer (IRC §179(b)(6); Treas. Reg. §1.179-2(b)(7)).
- Partial Year Membership: If a corporation is a member of a controlled group for only part of the year, the Section 179 limitation applies to the group as it existed on December 31 of the tax year (the "testing date"), regardless of whether the corporation was a member for the entire year. The limitation is not prorated for partial-year membership; instead, the group as constituted on December 31 is treated as one taxpayer for the entire year for purposes of the Section 179 limit.
2. Required Documentation
- Statement of Allocation: Each member of the controlled group must attach a statement to its tax return specifying the allocation of the Section 179 expense deduction among the group members. This statement must include:
- The name, address, and EIN of each component member of the controlled group.
- The taxable year of each component member.
- A copy of the allocation agreement signed by authorized persons for each member.
- A description of how the Section 179 deduction was divided among the members.
- Filing Requirements: If a consolidated return is filed, the common parent must file the statement. If separate returns are filed, each member not included in a consolidated return must file the statement with its own return.
- Irrevocability: Once the allocation is made and the return is filed, the allocation among members cannot be revoked after the due date (including extensions) of the return for the year in which the election is made.
3. Reporting on the 2025 Tax Return
- Form 4562: The corporation must complete Form 4562, "Depreciation and Amortization," to report the Section 179 deduction. The form requires the total Section 179 expense elected and the amount allocated to the corporation.
- Attachment of Statement: The required allocation statement (as described above) must be attached to the corporation’s 2025 tax return.
- Coordination with Other Members: The corporation must coordinate with all other group members to ensure the total Section 179 deduction claimed by all members does not exceed the group limit.
4. Special Considerations for Partial Year Membership
- Testing Date Rule: The group composition on December 31, 2025, determines the controlled group for Section 179 purposes for the entire year. If the corporation was a member for only part of the year but is not a member on December 31, it is not considered part of the group for Section 179 allocation for that year. Conversely, if it is a member on December 31, it is included for the full year.
- Interim Closings: If the corporation joins or leaves a group during the year, an interim closing of the books may be required to determine the proper allocation of the Section 179 deduction for the periods before and after the change in group status.
5. Summary of Steps
- Determine group membership as of December 31, 2025.
- Coordinate with all group members to allocate the Section 179 limit.
- Prepare and sign an allocation agreement among all group members.
- Attach the required statement to the corporation’s 2025 tax return (and, if applicable, to the consolidated return).
- Report the Section 179 deduction on Form 4562, consistent with the allocation.
- Retain records of the allocation agreement and supporting documentation.
In summary: For a C Corporation that was a member of a brother-sister controlled group for only part of 2025, the Section 179 limit is determined based on group membership as of December 31, 2025. The corporation must coordinate with all group members to allocate the Section 179 deduction, attach a detailed allocation statement to its tax return, and report the deduction on Form 4562. The allocation, once made, is irrevocable after the return due date.
If you need a sample statement or further details on the allocation process, please specify.
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