Be Careful Of Fiscal Year Section 179 Issues!
Section 179 and bonus depreciation provisions are based upon a different set of dates for your asset purchases. Bonus depreciation on new equipment is based upon the date that you actually purchase and place in service the asset. For new assets bought between January 1, 2012 and December 31, 2012, you are entitled to use 50% bonus depreciation on these assets. After December 31, 2012, bonus depreciation is no longer scheduled to occur.
Section 179, however, is based upon when your fiscal year begins. For most individuals, you have a calendar fiscal year (there are some unique individuals that do not have a calendar year), but many entities such as corporations may have a fiscal year-end of any month in the year.
When you have fiscal year flow-through entities such as an S corporation, you must be careful to not pass through too much Section 179 to the individual. For fiscal years beginning in 2011, the maximum Section 179 was $500,000. For fiscal years beginning in 2012, this amount dropped to $139,000. Therefore, if you have an S corporation whose year began in 2011 but ends in 2012, they may elect to take the full $500,000 and pass it through to their shareholders. This may result in the shareholder getting a deduction greater than $139,000 and this excess is not deductible in 2012 on their personal return and the excess in almost all cases is completely lost.
For example, let’s assume Farm, Inc., an October 31, 2012 S corporation has two shareholders and passes through $250,000 of Section 179 to each. The excess over $139,000, or $111,000 is not allowed and is most likely lost.
Usually the farmer is involved with the preparation of the return, however, in many cases, they are not. If too much does get passed through to you, an amended tax return can be filed for the entity to reduce the Section 179 deduction. However, other shareholders may need the deduction and this may create issues between the owners.
If you have fiscal year S corporations, make sure you know how this affects all shareholders before finalizing the return. It may save you headaches later.
Paul Neiffer, CPA
Paul Neiffer is a certified public accountant and business advisor specializing in income taxation, accounting services, and succession planning for farmers and agribusiness processors. Paul is a principal with CliftonLarsonAllen in Walla Walla, Washington, as well as a regular speaker at national conferences and contributor at agweb.com. Raised on a farm in central Washington, he has been immersed in the ag industry his entire life, including the last 30 years professionally. Paul and his wife purchase an 180 acre ranch in 2016 and enjoy keeping it full of animals.
[…] taxpayers to amend a Section 179 deduction for any taxable year starting before January 1, 2014. We previously wrote a post about a week ago regarding being careful with Section 179 deductions from fiscal year flow through entities such as S […]