Sec.179 on 1065 but increases the loss

[Gretel]

I have a hard time wrapping my mind around this. I am dealing with a start up business with losses in 2014 & 2015 - no tax return filed yet. I try to minimize depreciation since it only will increase the loss and the NOL. There is no other income and since there is sufficient basis the loss will fully carry over to the 1040 hence creating the NOL. I am thinking of using Sec.179 as much as I can since that will carry-over for SE purposes on both, the 1065 & the 1040, right?

My question is in regard to the basis. Sec.179 reduces the basis but if it is carried forward then it only will reduce the basis in the year the partnership utilizes the Sec.179 deduction?

[BHoffman]

I have a hard time wrapping my mind around this. I am dealing with a start up business with losses in 2014 & 2015 - no tax return filed yet. I try to minimize depreciation since it only will increase the loss and the NOL. There is no other income and since there is sufficient basis the loss will fully carry over to the 1040 hence creating the NOL. I am thinking of using Sec.179 as much as I can since that will carry-over for SE purposes on both, the 1065 & the 1040, right?

My question is in regard to the basis. Sec.179 reduces the basis but if it is carried forward then it only will reduce the basis in the year the partnership utilizes the Sec.179 deduction?

The Sec. 179 will carry over on the 1065 in form 4562. As there is enough partnership income, the carryforward Sec 179 amount will be "distributed" to the partners. That is when it will affect their basis.

[Gretel]

The Sec. 179 will carry over on the 1065 in form 4562. As there is enough partnership income, the carryforward Sec 179 amount will be "distributed" to the partners. That is when it will affect their basis.

There is a misunderstanding. There is no partnership income but a loss before any depreciation. This is why I try to minimize regular depreciation, which in the end (1040) will created a NOL. I rather use 179 because that will carry forward and will effect SE income once there is income coming from the partnership. I am just not sure about when the basis reduction will happen. I don't think the basis will be reduced if Sec.179 could not be used by partnership/passed on to partners on K-1. This is the part I would like to have confirmation on. Somehow, it is counter intuitive to use Sec. 179 with losses like.

[BHoffman]

There is a misunderstanding. There is no partnership income but a loss before any depreciation. This is why I try to minimize regular depreciation, which in the end (1040) will created a NOL. I rather use 179 because that will carry forward and will effect SE income once there is income coming from the partnership. I am just not sure about when the basis reduction will happen. I don't think the basis will be reduced if Sec.179 could not be used by partnership/passed on to partners on K-1. This is the part I would like to have confirmation on. Somehow, it is counter intuitive to use Sec. 179 with losses like.

You are correct. The Section 179 will not affect the partners basis until it is actually allocated to the partner on his or her K-1 form. It will carry forward on the partnership's 4562 until there is enough income to offset the carryover.

The amount of currently available Section 179 is first determined at the partnership level. If there is a loss at the partnership, no Section 179 will be allocated to the partners on their K-1 forms and there will be no effect to the basis.

If Section 179 is allocated, but if for some reason the partner cannot take it at his or her personal level on form 1040, it will still reduce basis and it will carry over on form 4562 in the 1040.

[Snaggletooth]

Normally Advise against it

Gretel, there are two hoops to clear in order for s.179 to be taken. Firstly, s. 179 cannot create a loss at the partnership level. If this happens, the partnership has to reduce the amount of s179 or eliminate it altogether.

Then whatever amount is allocated to partners cannot create a loss on THEIR return. And yes, whatever is lost to these limits can be rolled forward to the next year, however you need to be aware that an NOL cannot be used to reduce SE earnings in rollforward years.

Most of the time when I encounter a situation where I am under pressure to take maximum deductions, I point out to the client how much can be wasted, and I haven't even mentioned the creation of AGIs under the filing threshold. Normally I advise against it.

[BHoffman]

[QUOTE=Snaggletooth;180291]Gretel, there are two hoops to clear in order for s.179 to be taken. Firstly, s. 179 cannot create a loss at the partnership level. If this happens, the partnership has to reduce the amount of s179 or eliminate it altogether.[QUOTE]

I concur that it isn't always the best thing to take Sec. 179. It's just an acceleration of the depreciation deduction, so this is only a timing issue.

Sec. 179 is limited to the partnership income, but is not deducted by the partnership, so agreed it cannot create a loss at the partnership level.

I'm a little curious about "the partnership has to reduce the amount of s179 or eliminate it altogether", but also a lot tired so might just be misunderstanding that.

[Gretel]

Gretel, there are two hoops to clear in order for s.179 to be taken. Firstly, s. 179 cannot create a loss at the partnership level. If this happens, the partnership has to reduce the amount of s179 or eliminate it altogether.

Then whatever amount is allocated to partners cannot create a loss on THEIR return. And yes, whatever is lost to these limits can be rolled forward to the next year, however you need to be aware that an NOL cannot be used to reduce SE earnings in rollforward years.

Most of the time when I encounter a situation where I am under pressure to take maximum deductions, I point out to the client how much can be wasted, and I haven't even mentioned the creation of AGIs under the filing threshold. Normally I advise against it.

Snag, this is not about a client wanting to take more deductions - this is me wanting to do real good tax planning is these unique circumstances.

2014 - 1065 loss 20k before any depreciation, even a bigger loss for 2015. This is there only income (well not yet), living of own funds and loans at the moment. They will make money down the road. That is why I do not want to take the regular depreciation since that would go towards a bigger NOL. I want to create a Sec. 179 (of which none will be allocated to partners in 2014 or 2015) carry forward, so they will have the deduction available for SE once they make money.

[Snaggletooth]

For Beth

I'm a little curious about "the partnership has to reduce the amount of s179 or eliminate it altogether", but also a lot tired so might just be misunderstanding that.

Yes, best to paint the picture with an example:
Partnership has otherwise income of $8,000, and eligible capital expenditures of $20,000 for s179. Taxpayer may reduce the available $20,000 by up to $12K, leaving $8,000 to reduce the partnership income to zero. Or he may simply not use ANY of the $20,000 and depreciate it conventionally, saving more of it for future deductions.

I also don't think I brought home the idea of the filing thresholds. For 2014, husband/wife could have reported $20,000 before paying one red cent in income taxes. For 2015, husband/wife could have reported $20,600 before paying one red cent. Total $40,600. (And this doesn't include children, if any)

For tax planning, if we choose to maximize deductions such that a no income is reported for either year, then the opportunity to report $40,600 of income at a zero rate is lost forever. In 2016 the combination of exmps/stddeduc has to start all over again and the opportunity for zero tax rate income has to begin anew. Additionally, Self-employment tax will be assessed against 2016 income without the benefit of the NOL.

All of us have different approach to elements of tax planning, and I've tried to explain mine with respect to similar situations. Gretel is one of our original members of the forum and highly intelligent, and I've made no intent to second-guess her, regardless what it sounds like.

[BHoffman]

Gretel - I get what you want to do: You want to use currently available Sec. 179 to reduce SE tax in the future, right?

If that's your plan and barring unforeseen issues with your partners being unable to take the Sec. 179 on their 1040 forms, I think it will work.

Remember that this is a timing issue, as Snags reminds us. The depreciation deduction you take now will not be available in the future.

HTH

[taxea]

I don't use 179 unless the client needs it to lower their liability. Have you ever figured out how little difference taking 179 makes on the return. It is not a dollar for dollar deduction. I prefer to get the total basis of depreciation, whenever possible, over the depreciation term.

[Snaggletooth]

Doesn't Work

Gretel - I get what you want to do: You want to use currently available Sec. 179 to reduce SE tax in the future, right?

Beth/Gretel, this doesn't work. SE tax is applied on current year SE earnings only. Maximizing s.179 to create an NOL cannot reduce future SE tax. Maybe an illustration with two people MFJ? (Example includes no other income or deduction)

2014 $20,000 LOSS - AGI ($20,000), Taxable Income $0, SE Earnings $0, SE Tax $0.
2015 $25,000 LOSS - AGI ($25,000), Taxable Income $0, SE Earnings $0, SE Tax $0.
2016 $75,000 PROFIT -AGI $30,000 minus $5299 for 1/2 SE tax, or $24,701.
Taxable income: $24,701 minus $20,700, or $4,001.
SE Earnings: $75,000 X .9235, or $69,263
SE Tax: $10,597.
Self-employment earnings are not reduced by the prior losses of $45,000.

[BHoffman]

Oh for pity sake, the Sec 179 does not reduce SE tax and I'm staying off the inter webs until after April and can think straight.

Gretel, If I'm unsure of how things will work out sometimes I set up a sample entity in the software, make my entries, see what it looks like, and go from there. It's easier if you're actually looking at it.

Good luck and listen to your Uncle Snags!

[Gretel]

You are dense, I believe.....smile, expanded your example

Beth/Gretel, this doesn't work. SE tax is applied on current year SE earnings only. Maximizing s.179 to create an NOL cannot reduce future SE tax. Maybe an illustration with two people MFJ? (Example includes no other income or deduction)

2014 $20,000 LOSS - AGI ($20,000), Taxable Income $0, SE Earnings $0, SE Tax $0. PLUS $30,000 SEC 179, NOT ALLOWED, CARRIED FORWARD TO 2015
2015 $25,000 LOSS - AGI ($25,000), Taxable Income $0, SE Earnings $0, SE Tax $0. PLUS $20,000 SEC 179, NOT ALLOWED, CARRIED FORWARD TO 2016 ALONG WITH $30,OOO
2016 $75,000 PROFIT -AGI $30,000 minus $5299 for 1/2 SE tax, or $24,701. NOW SEC 179 CAN BE TAKEN AND WILL REDUCE PROFIT TO $25,000
Taxable income: $24,701 minus $20,700, or $4,001.
SE Earnings: $75,000 X .9235, or $69,263
SE Tax: $10,597.
Self-employment earnings are not reduced by the prior losses of $45,000.

I have used this technique on a 1040 tax return in another unique situation and it has benefited my client greatly. I just was confused with the additional layer of the 1065. My 1065 client probably will generate another small loss in 2016, and a profit in 2017 starting to use up the 179 deduction. At this time we are in year 4 already and they have used up all there own funds and will desperately need any $$ they can hold on to and not have to pay SE taxes if they can avoid it. Saving future depreciation deductions is not of any concern.

Thanks for bearing with me, both of you.