Limited partner K-1 and Sec 179

[JG EA]

I was reviewing a return today that I didn't have time to understand before and took the software note at face value.

In 2004 the software netted the (say) $1000 K-1 line 1, with the K-1 179 deduction of (say) $600 and put the net of $400 on E and line 17 on page 1 of the 1040. This tax season there was also a line 1 positive number, a 179 deduction, and it netted to a positive number, but the 179 was not allowed at all. The notice on the software said it is not allowed, has to be deducted from basis and could be saved up until disposing of the Partnership interest. It then recommended keeping careful records so as to have the deduction when disposing of the interest.

I’ve been trying to find some information on this. Is it just so obvious because it is passive that you can’t take a 179 deduction? (It wasn’t obvious to the developers in 2004 though.)
I haven’t found any information that spells this situation out. Is that because there usually isn’t a 179 deduction for limited partners? Or am I overlooking the right places to look?

[OldJack]

Basis problem?

I would suggest that you might have an "input error" regarding basis or business profit as code §179 is allowed a limited partner the same as a general partner.

[John of PA]

179 Ltd Ptrs

Yes indeed limited partners can take the 179 deduction. The 179 deduction is limited to the taxable income of the business for the year, so if there is a business loss, then the 179 ded. cannot be taken and must be carried fwd to a future year. As long as you enter the K-1 info on your 1040 software's K-1 input screen in detail (not netting all the amts as one); the software at the 1040 level should automatically apply the limits to the 179 ded. and automatically carryforward the excess. Hope this helps.

[JG EA]

Note from return:

Thank you for your responses.

Here is an exact wording of the software Notes:

“A Section 179 expense deduction has been keyed on a K-1 that is a passive activity. Section 179 expense is disallowed for a passive investor in a trade or business and cannot be taken against taxable income derived from that trade or business. Section 179 expense allocated to a partner by the partnership or to a shareholder by a Sub-S Corporation must reduce the partner’s/shareholder’s basis even if it is disallowed on the partner’s/shareholder’s individual return. When the partner/shareholder disposes of or transfers his or her interest in the entity in a transaction in which a gain or loss is not recognized in whole or in part may use the disallowed Section 179 expense to increase the basis in the entity immediately before the transaction occurs. We recommend that detailed records be maintained about the partner’s/shareholder’s disallowed Section 179 expense in the event of a sale or transfer of interest. See IRC Section 179 for more information.”

By reading this can’t you see why I was/am confused? I did key passive as opposed to active. Is that right?

[Unregistered]

It appears that the software is correct. Pub. 946, page 19 states that the deduction is available from the "active" business participation.

So, limited partners cannot take advantage of the Sec. 179.

[jimmcg]

Does the t/p have any other active trade or business income besides the passive activity?

[veritas]

I recall a case where a limited partner liked to stop by the business and visit in the office and maybe take the mail to the post office regularly. Since he was actively participating in the business he was no longer a limited partner and lost the liability shield.

[JG EA]

W-2

Does the t/p have any other active trade or business income besides the passive activity?

Just his W-2 job.

[jimmcg]

Without any furthur research I don't know why the 179 deduction can not be taken against the W-2 income as this too constitutes income from an active trade or business. I'll have some time tonight and do a little furthur research on it.

[Gretel]

W-2 income is considered business income for purpose of 179 deduction. Don't have any backup handy, but researched this some months ago. Was surprised that W-2's count.

[John of PA]

Passive hours test

Thank you for your responses.

Here is an exact wording of the software Notes:

“A Section 179 expense deduction has been keyed on a K-1 that is a passive activity. Section 179 expense is disallowed for a passive investor in a trade or business and cannot be taken against taxable income derived from that trade or business. Section 179 expense allocated to a partner by the partnership or to a shareholder by a Sub-S Corporation must reduce the partner’s/shareholder’s basis even if it is disallowed on the partner’s/shareholder’s individual return. When the partner/shareholder disposes of or transfers his or her interest in the entity in a transaction in which a gain or loss is not recognized in whole or in part may use the disallowed Section 179 expense to increase the basis in the entity immediately before the transaction occurs. We recommend that detailed records be maintained about the partner’s/shareholder’s disallowed Section 179 expense in the event of a sale or transfer of interest. See IRC Section 179 for more information.”
So exactly what is the nature of the buiness that the K-1 is from. If your client had some participation in the business, and the # hours were inputed on the screen, the software may allow the 179 deduction. If i'ts just a sort of publicly traded investment, then 179 cannot be taken. Sorry if I misled you earlier. Quickfinder/Deprecition has a tab on the 179 dedcution but it does not address this question.
By reading this can’t you see why I was/am confused? I did key passive as opposed to active. Is that right?

Maby input the # hours put into the business

[jimmcg]

Sorry for the delay. Checked it out. W-2 income does qualify as income from a trade or business for purposes of utilizing the Sec 179 deduction. Was a Rev Rul or interpretation on this a few years ago. Don't have a specific cite.

[JG EA]

Please explain.

Maby input the # hours put into the business

I don't understand. By definition a limited partner is passive right?

So, I guess, since it was not well known, it doesn't come up too often. I couldn't find a reference in TTB for instance.

Jimmcg - if you run across that revenue ruling sometime during off season, please let me know. Thanks,

JG

[Black Bart]

Don't have the RR on

Jimmcg - if you run across that revenue ruling sometime during off season, please let me know. Thanks,

this (W-2 wages qualifying as income for 179 purposes), but if you just want to know whether or not to count it, Gabriele and Jimmcg are right; it's true enough. It's in the "Depreciation" pub (#946--pages 19-20). Here's the quote:

"TAXABLE INCOME. In general, figure taxable income for this purpose by totaling the net income and losses from all trades and businesses you actively conducted during the year. Net income or loss from a trade of business includes the following items.

* Section 1231 gains (or losses).
* Interest from working capital of your trade or business.
* Wages, salaries, tips, or other pay earned as an employee.

For Information about section 1231 gains and losses, see chapter 3 in Publication 544."

Funny how many people don't know it. A lady at a tax seminar told me several years ago. I hadn't a clue since I figured (like everybody else, I guess) that business income is business income and that's that. I was skeptical about it at first, so I came home and looked it up. Sure enough, she was right.

Lots of people still don't know this, although not as much as in previous years because it's sort of gotten around. But I've been to many seminars and never heard it mentioned by a speaker. Bring it up in one of those small "standing-around" groups during a seminar break and I guarantee you somebody won't know about it. I've told it to two people (including a CPA) who were clueless.

Everybody thinks the same way; "Wages? What's W-2 wages got to do with anything?"

[OldJack]

Everybody thinks the same way; "Wages? What's W-2 wages got to do with anything?"

Well here I go again disagreeing with Black Bart. I have know about W2 gross as business income for many, many years and all preparers/CPA's that I know have know such. I expect those that don't know are in the minority. The application of the principle is common with tax returns for clients that have small business investments. However, seldom do you see this determination needed with laborers walking in off the street with their W2.

Regarding the limited partner as management passive, yes but, a limited partner (definition not in the code) may still have an active interest and spend some active time with his investment. The only guidance regarding this is that old "proposed" reg that says so many hours per year is active. I understand the code, but the fact is the code is not clear and I would consider all the facts of the limited partner's activity before making a call on disallowing §179 even if I checked the box for limited partner status. Who is to say that the software programmer is correct to disallow (just to be save) because of the terminology.