Q:

My accountant told me that as a C-Corp in the state of California, I do not qualify for the IRS code 179 immediate deduction of up to $100,000 and that I need to depreciate assets I buy this year (i.e. office furniture, computers, etc.).  He also said that in California S-Corps do qualify for the 179 deduction but C-Corps don't which makes no sense to me.  Is he correct?  I hope not.......personally, I would rather deduct the whole amount and reduce my tax burden.

A:

What your accountant is referring to is the fact that California tax law - for California income tax returns - does not match Federal tax law in regard to the Section 179 deduction. Similar differences exist in many other states as well.

A C corp does qualify for the up to $102,000 of Section 179 deduction on the Federal 1120.  However, there is no Section 179 expensing allowed for C corporations on the California 100.  Those assets would have to be depreciated normally.

On individual income tax returns, the Federal law allows up to $102,000 of Section 179 deduction on the 1040.  On the California 540, the annual maximum is only $25,000.  Anything above that would need to be depreciated normally.

Since S corps don't pay income tax, and their income and expenses are passed through to their shareholders via the K-1s, it is true that some of the of cost business equipment purchased by an S corp may be able to be deducted as Section 179 expense on the shareholders' 1040s and 540s with the same maximums as I mentioned above.

The real downside to this disparity between the Federal and State rules is that you need to keep two sets of depreciation schedules.  When assets are sold, the gain or loss will be different on the Federal and State tax returns.

Over time, you will still be able to claim the same over all cost for business assets on the Federal and State returns.  The difference is in the timing.  It would be nice if there were more consistency; but that isn't always possible.

I hope this clarifies the situation for you.

Good luck.

Kerry Kerstetter

Labels: 179

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 12/19/2004 06:00:00 PM Send this post: