What strategies can businesses use to optimize Section 179 deductions considering siblings are not included in the family definition?
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To optimize Section 179 deductions, businesses should carefully consider the related party rules, especially the definition of "family" for purposes of Section 179, which specifically excludes siblings. Here are the key strategies and legal considerations:
1. Understanding the Family Definition for Section 179
For Section 179, the term "family" is defined more narrowly than in some other parts of the tax code. It includes only the taxpayer’s spouse, ancestors (such as parents and grandparents), and lineal descendants (such as children and grandchildren), but does not include siblings (brothers and sisters).
This is codified in IRC § 179(d)(2)(A), which, for purposes of related party transactions, modifies the general related party rules of IRC § 267 to exclude siblings from the family definition for Section 179 purposes.
2. Related Party Purchase Rules
Section 179 property must be "acquired by purchase" for use in the active conduct of a trade or business. Property is not considered acquired by purchase if it is acquired from a related person as defined in IRC § 267, but with the modified family definition (excluding siblings).
3. Strategic Planning Opportunities
Given that siblings are not included in the family definition for Section 179, businesses can use the following strategies:
a. Purchases Between Siblings
- Permitted for Section 179: A business owner can purchase Section 179 property from a sibling, and the property will not be disqualified from Section 179 expensing solely because of the sibling relationship.
- Example: If one sibling owns a business and sells qualifying equipment to another sibling’s business, the purchasing business can claim the Section 179 deduction (assuming all other requirements are met), because siblings are not considered related for this purpose.
b. Avoiding Disqualification with Other Family Members
- Not Permitted: Purchases from a spouse, parent, child, grandparent, or grandchild are still considered related party transactions and will disqualify the property from Section 179 expensing.
c. Structuring Ownership
- Business Structuring: If siblings are involved in separate businesses, they can structure transactions between their businesses to take advantage of Section 179, provided the businesses are not otherwise related under the controlled group rules (i.e., not part of the same controlled group as defined in IRC § 1563, with the more-than-50% threshold for Section 179).
d. Controlled Group Considerations
- Controlled Groups: If siblings each own more than 50% of two corporations, those corporations may be considered a controlled group for Section 179 purposes, and the Section 179 dollar limits must be allocated among the group.
- However, the mere fact that two siblings own separate businesses does not, by itself, create a controlled group unless the ownership thresholds are met.
4. Documentation and Substantiation
- Maintain Records: Businesses should keep clear records of the purchase, including the relationship between buyer and seller, to substantiate that the transaction is not between related parties as defined for Section 179.
5. Other Section 179 Requirements
- Active Use: The property must be used more than 50% in the active conduct of a trade or business.
- Purchase Requirement: The property must be acquired by purchase (not by gift or inheritance).
- Income Limitation: The deduction cannot exceed the business’s taxable income from active conduct of a trade or business; any excess is carried forward.
6. Cautions
- Step Transaction Doctrine: The IRS may challenge transactions that are structured solely to avoid the related party rules if there is no bona fide business purpose.
- Other Related Party Rules: Be aware of other related party rules that may apply in different contexts (e.g., for like-kind exchanges, losses, etc.), which may have broader family definitions.
Summary of Strategies: Purchases of Section 179 property between siblings are not disqualified by the related party rules for Section 179. Avoid purchases from spouses, ancestors, or lineal descendants if Section 179 expensing is desired. Structure business ownership and transactions to avoid controlled group status where possible, if maximizing Section 179 limits is a goal. Maintain thorough documentation to support the eligibility of the deduction.
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