Section 179 - Form 1040, Schedule C Question

[momona]

TP is MFJ and has taxable wages, investment income, etc. totaling over $100K. He also has only one Schedule C that has a profit of $3,483 before depreciation. He has a total of $51,000 of assets that qualify for section 179. He has no other business income.

When I put in the $51,000., it is my understanding that the section 179 loss is limited by the business income of $3,483 but the software is allowing the total $51,000 deduction and is carrying the loss to the appropriate line on the 1040.

The software company is saying he can take the loss because his total income is $100K. It's been a while, but I always thought that the amount of section 179 was limited by the income of the business (Schedule C).

[abctax]

W-2 is...

The W-2 income is considered "business" income for the purpose of limiting the § 179 deduction.

[New York Enrolled Agent]

TP is MFJ and has taxable wages, investment income, etc. totaling over $100K. He also has only one Schedule C that has a profit of $3,483 before depreciation. He has a total of $51,000 of assets that qualify for section 179. He has no other business income.

When I put in the $51,000., it is my understanding that the section 179 loss is limited by the business income of $3,483 but the software is allowing the total $51,000 deduction and is carrying the loss to the appropriate line on the 1040.

The software company is saying he can take the loss because his total income is $100K. It's been a while, but I always thought that the amount of section 179 was limited by the income of the business (Schedule C).

Software is correct.

From Reg. §1.179-2
(iv) Employees. For purposes of this section, employees are considered to be engaged in the active conduct of the trade or business of their employment. Thus, wages, salaries, tips, and other compensation (not reduced by unreimbursed employee business expenses) derived by a taxpayer as an employee are included in the aggregate amount of taxable income of the taxpayer under paragraph (c)(1) of this section.

[Roland Slugg]

The above responses are correct, and I am only adding this reply to say that if the Schedule C business happens to be a passive activity, then the PAL rules will apply, thus delaying the deduction of the $47,500 Schedule C loss.

[DaveinTexas]

Think about next year

I will add this comment. Too often when someone starts a business, it is like a honeymoon. The first 2 years, typically, are capital expenditure heavy and the client loves when you can wipe out their income with accelerated depreciation (Bonus, 179, etc).

But come year 3/4, the honeymoon shifts to (what do you mean I have to do the dishes, etc) hey, no more depreciation means I have a higher tax bill, that's no good.

So, I will tell you just to consider holding off on Sec 179 to wipe out $100K in wages, wages not subject to SE Tax. This might save the client 25 cents for every dollar.

Maybe the client could use some depreciation next year, and subsequent years, to save himself employment income (which is subject to SE tax). This might save the client about 40 cents for every dollar (25% Fed Tax, plus SE Tax of 14.12%), plus State tax if that applies.

Use Macrs or Straight Line depreciation, see what that does to his income for the current year, then look at your software's "Next Year's Depreciation" estimate and that's when it will make clear what decision might be best for the client.

[Rapid Robert]

I will add this comment. Too often when someone starts a business, it is like a honeymoon. The first 2 years, typically, are capital expenditure heavy and the client loves when you can wipe out their income with accelerated depreciation (Bonus, 179, etc).

But come year 3/4, the honeymoon shifts to (what do you mean I have to do the dishes, etc) hey, no more depreciation means I have a higher tax bill, that's no good.

I totally agree. The main beneficiaries of Sec 179 and bonus depreciation are the firms that hire the lobbyists in D.C.