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.
In 2011, Sam Smith and Linda Lane form a partnership to operate a bakery. The partnership buys new ovens and a refrigerator for a total cost of $250,000. In addition, Lane also enters into a separate business venture, a flower shop, by herself, for which she buys $5,000 worth of equipment.
Assuming the partnership has taxable income that exceeds $250,000, it can elect to expense up to $250,000 of the cost of the oven and refrigerator. If it does so, each partner's share of the expensing deduction is $125,000. In addition, Lane can elect to expense the entire $5,000 cost of her equipment, assuming her taxable income derived from the flower shop exceeds $5,000.