Section 179 allows taxpayers to elect to expense qualifying property rather than depreciate it over time. When those deductions arise from an LLC and exceed that LLC’s income, the excess can offset S corporation profits on the individual’s return, subject to several limitations.
1. Section 179 Deduction Limits
Dollar Limitation and Phase-out: For 2025, the maximum Section 179 deduction is $2,500,000, reduced dollar-for-dollar when total qualifying property placed in service exceeds $4,000,000.
Taxable Income Limitation: Section 179 deductions are further limited to the taxpayer’s aggregate taxable income from the active conduct of all trades or businesses for the year. Any amount disallowed due to this limitation is carried forward to future years.
2. Aggregation of Income for the Taxable Income Limitation
Key Rule: Limitation Applies at the Individual Level
The Section 179 taxable income limitation is applied at the individual taxpayer level, not separately by entity. This means income and losses from all active businesses are aggregated when determining how much Section 179 can be deducted.
Practical Effect
If one business generates a Section 179 deduction that exceeds its income, that excess can be absorbed by profits from another active business (such as an S corporation), assuming all other requirements are met.
3. How This Applies to LLCs and S Corporations
LLC Taxed as a Partnership
- The allowable deduction is allocated to members
- Section 179 is first limited at the entity level
- Each member then applies the taxable income limitation at the individual level, aggregating income and losses from all active businesses
S Corporation
- The S corporation applies the Section 179 limitation at the entity level
- The deduction passes through to shareholders
- Shareholders again apply the individual-level taxable income limitation
4. Other Loss Limitations Rules Still Apply
Before a Section 179 deduction can offset income from another entity, the taxpayer must also satisfy:
- Basis limitations
- At-risk rules
- Passive activity loss rules
To offset S corporation income, the LLC activity must be active, meaning the taxpayer materially participates. Passive losses generally cannot offset active income.
5. Can an LLC’s Section 179 Loss Offset S Corporation Income?
Yes, provided all of the following conditions are met:
- The taxpayer actively participates in both the LLC and the S corporation
- The Section 179 deduction is not limited by basis, at-risk, or passive activity rules
- The total Section 179 deduction claimed does not exceed the taxpayer’s aggregate taxable income from all active trades or businesses
- Overall Section 179 dollar and phase-out limits are satisfied
Any Section 179 amount disallowed solely due to the taxable income limitation is carried forward.
6. Example
- Taxpayer A is a member of ABC, LLC (taxed as a partnership) and a shareholder in DEF S Corporation
- ABC, LLC allocates a $40,000 Section 179 deduction, but has no net income
- DEF S Corporation allocates $50,000 of active business income
- Taxpayer A materially participates in both entities
Result:
- A aggregates all active business income and losses
- The $40,000 Section 179 deduction from ABD LLC can offset the $50,000 of DEF S corporation income
- The allowable Section 179 deduction is limited to $50,000
- The offset is permitted assuming sufficient basis, at-risk amount, and no passive activity limitation