S-Corp K-1 for Rental Property with Section 179 deduction

[peggysioux]

I have a K-1 for an S-Corp with rental real estate income and a section 179 deduction. K-1 is for commercial real estate. Drake is not allowing the section 179 deduction. Drake is stating section 179 expense is disallowed for a passive investor in a trade or business and it cannot be taken against taxable income derived from that trade or business. It is my understanding that if taxpayer actively participated in real estate, the section 179 deduction should be able to be deducted if taxpayer has basis. Am I missing a box to check in Drake?? I also use Lacerte for more complex returns and Lacerte allows deduction and I have "actively participates in real estate" in both software programs. Am I incorrect in my understanding of the section 179 deduction?

Peggy Sioux

[TAXNJ]

Tax Preparation Software not the greatest for research!

Try Ref: 26 CFR § 1.179-2 Limitations on amount subject to section 179 election.

And

Ref: TTB Forum 7-25-06 post

http://forum.thetaxbook.com/showthread.php?2647-Limited-partner-K-1-and-Sec-179

You use two Tax Preparation Software packages?

[peggysioux]

S-Corp K-1 for Rental Property with Section 179 Deduction

Yes, I do use two tax software packages. I originally started with Lacerte many years ago but Lacerte has become so costly that I decided to use other tax software. However, I still use Lacerte for some more complex returns.

Peggy Sioux

[peggysioux]

S-Corp K-1 for Rental Property with Section 179 deduction

I have read both pieces of information you suggested but still am confused as to why the Section 179 deduction would not be allowed in my case. Your reference to the previous Tax Book discussion is spot on to the issue. I received the same message as the other tax preparer. Would someone be able to clarify for me?? It would be greatly appreciated.

Peggy Sioux

[Roland Slugg]

The §179 deduction is not allowed for passive real estate activities. (Code §212)

An activity in which the investor "actively participates" simply allows him to utilize the special $25k deduction if he otherwise qualifies.

[TAXNJ]

PeggyS. Hopefully you have enough references.

R. Slugg is this the Section 212 you are referencing? Thanks

§212. Expenses for production of income
In the case of an individual, there shall be allowed as a deduction all the ordinary and necessary expenses paid or incurred during the taxable year-
(1) for the production or collection of income;
(2) for the management, conservation, or maintenance of property held for the production of income; or
(3) in connection with the determination, collection, or refund of any tax.
(Aug. 16, 1954, ch. 736, 68A Stat. 69.)
Denial of Deduction for Amounts Paid or Incurred on Judgments in Suits Brought To Recover Price Increases in Purchase of New Principal Residence
No deductions to be allowed in computing taxable income for two-thirds of any amount paid or incurred on a judgment entered against any person in a suit brought under section 208(b) of Pub. L. 94–12, see section 208(c) of Pub. L. 94–12, set out as a note under section 44 of this title.

[TaxGuyBill]

The §179 deduction is not allowed for passive real estate activities. (Code §212)

I haven't heard that before. Do you have any citations?

From what I read, §179 applies if the item is (1) "tangible property", (2) "section 1245 property", and (3) "for use in the active conduct of a trade or business" (as long as it is not outside of the US and, in most cases, not used in connection with lodging).

https://www.law.cornell.edu/uscode/text/26/179#d

In some cases, the Tax Court has ruled that even one rental property was a "trade or business". For example, when calculating an NOL, losses from a rental property are allowed even though losses are only allowed from a "trade or business" in §172(d)(4).

[peggysioux]

S-Corp K-1 for Rental Property with Section 179 Deduction

If K-1 is from an LLC taxed as an S-Corp and the corporation is in the business of apartment rentals, would the S-Corp be eligible for the 179 deduction but the shareholder is not? I would think S-Corp would not be eligible for 179 deduction as well then. Am I correct in my thinking?

Peggy Sioux

[TAXNJ]

interesting article that may provide an answer. Here is an excerpt:

S Corps should beware how elections are made
Thursday, April 10, 2014 at 2:29 PM by Mark Hughes CPA CFE

..........., Passive investors in S corporations (or other flow-through entities) can also lose out on Section 179 benefits due to the taxable income limitation. The expense deduction cannot exceed the taxpayer’s aggregate taxable income derived from his or her active conduct of a trade or business–the limitation applies at the entity level as well as to each owner. An S corporation shareholder who does not meaningfully participate in the company does not include the company’s pass-through income in computing the taxable income limitation; absent other “active” income (e.g., wages, pass-through entities in which the taxpayer meaningfully participates), no deduction is currently available. Note: Whether or not a taxpayer actively conducts a trade or business is determined based on facts and circumstances. *

[peggysioux]

S-Corp K-1 for Rental Property with Section 179 Deduction

interesting article that may provide an answer. Here is an excerpt:

S Corps should beware how elections are made
Thursday, April 10, 2014 at 2:29 PM by Mark Hughes CPA CFE

..........., Passive investors in S corporations (or other flow-through entities) can also lose out on Section 179 benefits due to the taxable income limitation. The expense deduction cannot exceed the taxpayer’s aggregate taxable income derived from his or her active conduct of a trade or business–the limitation applies at the entity level as well as to each owner. An S corporation shareholder who does not meaningfully participate in the company does not include the company’s pass-through income in computing the taxable income limitation; absent other “active” income (e.g., wages, pass-through entities in which the taxpayer meaningfully participates), no deduction is currently available. Note: Whether or not a taxpayer actively conducts a trade or business is determined based on facts and circumstances

While I understand the taxable income limitation and passive investors who do not meaningfully participate in the company; the tax software is not allowing the Section 179 deduction at all strictly because (software's wording) "Section 179 expense is disallowed for a passive investor in a trade or business" even though I checked "active rental real estate". So, is it because rental real estate is always considered passive even if shareholder actively participates in corporate decisions?

Peggy Sioux

[peggysioux]

If the §179 deduction is not allowed for passive real estate activities (Code §212), is the S-Corp incorrect in taking the deduction? The other point as to the question of 179 deduction being taken by the S-Corp is in regards to:

The info from Cornell.edu and TMI regarding Section 179 not being available to furnish lodging such as residential real estate.

"From what I read, §179 applies if the item is (1) "tangible property", (2) "section 1245 property", and (3) "for use in the active conduct of a trade or business" (as long as it is not outside of the US and, in most cases,not used in connection with lodging." https://www.law.cornell.edu/uscode/text/26/179#d

So if the S-Corp placed an asset into use that was something other than to furnish lodging, S-Corp is eligible for the deduction, but being for shareholder, activity is considered passive real estate activity, no 179 deduction for him......does it sound like I have a grasp on the situation? I will be so happy when April 18th is here and all these tax issues are behind us!!

Peggy Sioux