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Questions to the tax desk.

Q. Two S Corporations have the same shareholders. Can each S Corporation take a Section 179 deduction?

A Section 179 states that if a corporation is a member of a controlled group, the $24,000 limitation and the $200,000 placed-in-service limitation must be apportioned among the members of the group. The controlled group is treated as one taxpayer for purposes of the taxable income limitations. IRC Section 1563 uses a 50 percent stock ownership test to define a controlled group. However, under Regulation 1.1563-1 an S Corporation is not clearly defined as a member of a controlled group and may be excluded. One author defined an included S Corporation as one that is subject to the built-in gains tax. The same author defined an excluded corporation as one that is not subject to the built-in gains tax and is not required to apportion the Section 179 limitations. There is not enough case law to follow and, therefore, proceed cautiously with applying the 179 to both S Corporations.

Q. Please explain further the details of the new, additional 30 percent deduction for depreciation included in the Job Creation and Worker Assistance Act of 2002.

A. The 30 percent additional allowance applies only to property that is depreciated under IRC Section 168 (MACRS property) with limited exception of software, Section 167. Intangibles do not qualify. A taxpayer may make an election not to take the additional depreciation. The deduction is taken before the regular deduction is applied. In the case of the Section 179 deduction being used, the 179 is deducted first, followed by the additional 30 percent, followed by the regular depreciation deduction.

Example: POR Company buys new machinery in January. The equipment is MACRS property with 5-year class life and half year convention applies. Property is bought at a cost of $ 100,000.

Year Deduction

2002 179 deduction $ 24,000
2002 bonus deduction 22,800
2002 $53,200 X 20% 10,640
2003 $53,200 X 32% 17,024
2004 $53,200 X 19.20% 10,214
2005 $53,200 X 11.52% 6,129
2006 $53,200 X 11.52% 6,129
2007 $53,200 X 5.76% 3,064

The bonus allowance is for property acquired after September 10, 2001 and before September 11,2004. It applies to new property and must be placed in service before January 1, 2005.

Q. There are new Net Operating Loss rules offering a longer carryback. Please explain them.

A. The new rules are part of the new law the Job Creation and Worker Assistance Act. For net operating losses (NOLs) arising in tax years ending 2001 and 2002, the two- and three-year carryback periods are extended to five years. The taxpayer can make an irrevocable election to waive the five-year period and still use the existing carryback periods. The limit on NOL deductions from Alternative Minimum Tax (AMT) income is increased from 90 percent of AMT income to 100 percent for NOLs generated or taken as carryforwards in tax years ending in 2001 and 2002.

The new rules do not change the election to carry forward and do not affect the NOLs that were in place prior to January 1, 2001.

Bernie Phillips, ATP

Tax Manager

National Society of Accountants
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Publication:The National Public Accountant
Date:Oct 1, 2002
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