Equipment Leasing: Section 179 Stacking and Form 3115 Catch-Up

The Problem

This equipment leasing company owned a fleet of construction equipment, aerial lifts, generators, and specialty tools valued at $1.4 million with $1.8 million in annual lease revenue and net income of approximately $640,000. The owner had operated as a sole proprietorship for 8 years.

The prior accountant had been using straight-line depreciation for all equipment, had never elected Section 179 or bonus depreciation, and had never converted to an S-Corp. The owner was paying SE tax on the full $640,000 and had accumulated approximately $480,000 in missed depreciation deductions.

AE Tax Strategy

1. Form 3115 Catch-Up Depreciation Under IRC §446(e) and §481(a)

We filed Form 3115 to correct the depreciation method from straight-line to MACRS accelerated schedules. The Section 481(a) adjustment totaled $480,000, deducted entirely in the year of change. Tax savings from the one-time catch-up: approximately $134,000.

2. Section 179 Stacking on New Acquisitions Under IRC §179

The company acquired $320,000 in new equipment. We elected Section 179 expensing on the full amount, producing approximately $42,000 in additional tax savings.

3. Bonus Depreciation Under IRC §168(k)

For equipment not covered by Section 179, we ensured proper bonus depreciation classification, producing an additional $18,000 in current-year deductions.

4. S-Corp Election Under IRC §1362

We filed Form 2553 for S-Corp taxation. Reasonable compensation was set at $140,000, removing $500,000 from the SE tax base. This produced approximately $34,000 in annual employment tax savings.

Before & After Comparison

*After column reflects total tax benefit value across all strategies combined.

Key Takeaways

• Form 3115 is the mechanism for correcting depreciation errors from prior years — there is no statute of limitations, and the catch-up deduction can produce six-figure tax savings in a single year.
• Equipment-intensive businesses should evaluate Section 179 expensing every year on new acquisitions — the annual limit covers most small to mid-size purchases entirely.
• Switching from a sole proprietorship to an S-Corp eliminates self-employment tax on distributions above reasonable compensation — for profitable businesses, this alone can save $20,000 to $50,000 per year.
• These strategies stack: the 3115 catch-up, Section 179, bonus depreciation, and S-Corp conversion all compound to produce transformative tax savings in the transition year.