With the increased Section 179 deduction of $500,000 available in 2011, farmers need to be very careful if they have ownership in multiple partnerships and S corporations that will be purchasing large amounts of used equipment and deducting it under Section 179. The partnership and S corporation have an overall $500,000 Section 179 limitation on deducting at their entity level and when this amount flows through to the farmer, there is another $500,000 limitation level on his tax return.
If more than $500,000 of Section 179 expense flows through to the farmer, the excess amount is permanently lost as a deduction. In this case, the farmer should have one or more of the entities look at amending their tax return to take a lower amount of Section 179 or if it is new equipment, the 100% bonus depreciation rules would apply and it would result in the same deduction to the entity.
Another trap to watch out for is if the farmer has multiple C corporations that he controls, the Section 179 rules require the $500,000 limitation to be allocated among all of the C corporations that he controls. This will result in only $500,000 being able to be deducted among all the C corporations.
If you think these limitations may apply to you, make sure to review it with your tax adviser. The worst thing that can happen from a tax standpoint is to permanently lose a tax deduction that can be prevented.