Sharing the Expensing Election

Allocation rules determine how the benefits of the expensing deduction are to be split up between spouses, certain related corporations, partnerships and their partners, and S corporations and their shareholders. These rules are designed to make sure that a purchase of business equipment in a particular year cannot be used by related parties to gain more than the total allowed for expense deductions.

• Married taxpayers filing separate returns — are treated as one taxpayer for purposes of the expensing amount ceiling. Unless they elect otherwise, 50 percent of the cost of the property is allocated to each spouse.
• Related corporations — if you operate your business as a corporation, and this corporation controls other corporations, the corporations will be limited to one total deduction amount for business property purchased.
• Partnerships and S corporations — the deduction limit applies separately to the partnership or S corporation itself and to each partner or S corporation shareholder.

Example In 2002, Sam Smith and Linda Lane form a partnership to operate a bakery. The partnership buys an oven and a refrigerator for a total cost of $24,000. In addition, Lane also enters into a separate business venture, a flower shop, by herself, for which she buys $3,000 worth of equipment. Assuming the partnership has taxable income that exceeds $24,000, it can elect to expense up to $24,000 of the cost of the oven and refrigerator. If it does so, each partner's share of the expensing deduction is $12,000. In addition, Lane can elect to expense the entire $3,000 cost of her equipment, assuming her taxable income derived from the flower shop exceeds $3,000.