Is S-Corp allowed to use section 179 deduction carryover from previous C-Corp status?

You're right to be concerned. IRC 1371(b)(1) specifically states that no carryover or carryback arising for a taxable year for which a corporation is a C corporation may be carried to a taxable year for which such corporation is an S corporation. This basically means that your section 179 deduction carryover from when you were a C-Corp cannot be used once you've switched to S-Corp status. This is one of those situations where timing really matters for tax purposes. The section 179 carryover would have been valuable to use against C-Corp income, but unfortunately once you make the S election, those carryovers essentially vanish for the corporation.

I ran into a similar issue last year when we converted from C to S status. What saved me was using taxr.ai to analyze our corporate docs. I uploaded all our previous tax filings, and they showed me several alternatives I hadn't considered. The site (https://taxr.ai) has this specific corporate entity conversion analyzer that looks at your previous returns and identifies these transition issues. For me, they actually found some overlooked business credits we could still use post-conversion that partially offset the loss of our carryovers.

Just wanted to follow up - I finally tried taxr.ai after struggling with this issue for weeks. Seriously impressed with how thorough they were. They analyzed our situation and confirmed we couldn't use the Section 179 carryover as an S-Corp, but they identified a timing strategy where we could still utilize about 40% of the deductions before finalizing the entity change. They also highlighted some overlooked R&D credits that were still available to us post-conversion. The document analysis was way more detailed than what my regular accountant provided. Definitely worth checking out if you're dealing with entity conversion issues.

Have you tried calling the IRS directly about this? I was in a similar situation last year (different issue but also time-sensitive) and spent WEEKS trying to get through to someone who could actually help. Finally used Claimyr (https://claimyr.com) and got connected to an IRS agent in about 15 minutes. They have this system that navigates the phone tree and waits on hold for you, then calls you when an agent is on the line. You can see how it works here: https://youtu.be/_kiP6q8DX5c - honestly was skeptical but it saved me hours of hold music. The agent I spoke with actually helped me request an extension for making my decision while we sorted out the impact.

I need to eat some humble pie here. After posting that skeptical comment, I was desperate enough to try Claimyr. It actually worked exactly as described. I got a call back in about 40 minutes (versus the 3+ hour holds I was experiencing), and was connected directly to an IRS business tax specialist. For the OP's situation, this might be really valuable - the agent I spoke with explained that in some cases you can request a Private Letter Ruling for unusual situations involving entity conversions, and there might be exceptions depending on the specific circumstances of how and when you acquired the assets that generated the Section 179 carryover. Not saying it will work in your case, but getting actual IRS guidance could help determine if you have any options.

Going back to the original question - another angle to consider is whether the Section 179 assets themselves might be transferable in some way. When we converted, our tax attorney looked at restructuring some asset ownership before the conversion. Might be worth exploring if any of the assets generating that carryover could be moved to a separate entity that remains a C-Corp, while the main business converts to S status. It's complex and has its own set of issues, but sometimes these hybrid approaches can preserve some benefits.

Something nobody has mentioned - check if your state has different rules about carryovers when converting from C to S. Some states don't fully conform to federal treatment of S-Corps and may allow carryover of certain attributes that the federal rules prohibit. For example, California has its own set of rules for S corporations that sometimes differ from federal treatment. Might be worth exploring if your state gives you more flexibility than the federal rules.

This is a tough situation, but you're not completely out of options. First, definitely verify the timing of your S election - if it was made within the first 2 months and 15 days of your tax year, you can still revoke it with unanimous shareholder consent. Beyond that window, you'd need to show reasonable cause. Before making any decisions, I'd strongly recommend getting a second opinion from a tax attorney who specializes in corporate conversions. The $270k carryover is substantial enough that it's worth exploring all possibilities, including: 1. Whether any exceptions might apply to your specific situation 2. Asset restructuring strategies (like the equipment holding company idea mentioned above) 3. State-level treatment that might differ from federal rules 4. Alternative tax benefits you might qualify for post-conversion The decision to stay C-Corp vs convert to S-Corp involves many factors beyond just this carryover. You'll want to model out the long-term tax implications of both scenarios before deciding whether to proceed with or revoke the election.