Carry Over 179 with an S Corporation election

[tkamba]

It seems that the S Corporation can take the carryover 179 deduction that was limited on the C Corporation taxes but I just want to ask to see if anyone disagrees.

Client started a C Corporation to hold rental property in 2011 and never made the S Election, nor did they tell me about this company until recently. So, no extensions were filed so we are late filing both 2011 and 2012 taxes, so I believe too late to file for the S election with the 1st tax return (2011), correct?

Now, how did I find out about the corp existence? He sent me mortgage interest info for 2012.

So, no mortgage interest in 2011 and only 1/2 of 2012. No RE Tax for 2011 or 2012 because what the seller paid at closing is still more than they have paid so far.

The rental property does have some equipment that I can take 179 deduction that is limited to the income - so 2011 and 2012 $0 income. Now, I know that if I lower the 179 and create a carryover NOL because of normal depreciation, the NOL will be stuck in the C Corporation but they want to convert to an S Corporation ASAP.

I am thinking that if I create a carryover 179 deduction, that even if we convert to a S Corporation when filing the 2013 taxes that they will still be able to deduct the carryover 179 deduction on their 2013 personal taxes (subject of course to the combined total limited 179 deduction on their personal returns).

They of course do not want to have their losses stuck in the C Corporation. If I deduct $33,000 for 179 they have a carryover NOL in 2013 of about $3,000 but if I deduct $35,000 for 179, there is no NOL since the 179 only $0's out income and they have about $3,000 of 179 deduction carrying over from 2012 to their 2013 taxes and the owners can claim this excess 179 deduction on their personal 2013 taxes.

Am I looking at this correctly or am I off base?

Thanks for any advise!

[jklcpa]

I think that an S corp may not use a carryover of sec 179 deduction where that sec 179 deduction was created in a C corp. Check out sec 1371("b")(1). The quotes around the little "b" shouldn't be there, but I couldn't remember how to tell the forum not to post the "b" as a smiley.

[jklcpa]

You didn't specify what type of rental this is, but in general, sec 179 isn't allowed for rental acitivities unless that rental activity rises to the level of a trade or business.

[jainen]

>>The rental property does have some equipment that I can take 179 deduction<<

Not if it's a residential rental. Even for non-residential property, equipment used by tenants would probably not qualify. Anyway, the S-election will suspend the 179 carryover, though it won't time out the way an N.O.L. would.

[Lion EA]

I don't know if any fit your client, but aren't there about three different procedures for a late S election, including one when no return has been filed yet?

[Lee B]

Having rental real estate property in a corporation is not generally a very good idea.

The first step I would take is to review the whole incorporation process, the purchase of the property,

the issuance of the mortgage etc etc to see whether it meets all the requirements for being a corporation.

If it doesn't, consider your options.

If it does, then deal with it as best you can.

[kcjenkins]

Check out sec 1371("b")(1). The quotes around the little "b" shouldn't be there, but I couldn't remember how to tell the forum not to post the "b" as a smiley.

What you do to avoid the smiley is to place a space between the b and the ) Same for the c, which otherwise turns into the copyright symbol.

[tkamba]

Thank you for your responses, I thought I was pushing the envelope but hoping it would work. I guess I will go back to the drawing board.