A sec. 179 deduction trap.Lost Sec. 179 deductions can occur when a taxpayer receives Sec. 179 allocations from more than one passthrough entity. Sec. 179 allows a taxpayer to elect to expense rather than capitalize the cost of qualifying Sec. 179 property placed in service during the year. The deduction is limited to the lesser of the taxpayer's taxable income Under the federal tax law, gross income reduced by adjustments and allowable deductions. It is the income against which tax rates are applied to compute an individual or entity's tax liability. The essence of taxable income is the accrual of some gain, profit, or benefit to a taxpayer. or $17,500 in any tax year, and is reduced dollar for dollar for Sec. 179 property in excess of $200,000 placed in service during the year. Carryover carryover n. in taxation accounting, using a tax year's deductions, business losses or credits to apply to the following year's tax return to reduce the tax liability. (See: carryback) of unused Sec. 179 expenses is allowed only when the expense is limited by the taxpayer's taxable income. Since the Sec. 179 deduction limitations apply to both individuals and passthrough entities, a problem can arise when each passthrough entity allocates Sec. 179 deductions to an individual who can only deduct de·duct v. de·duct·ed, de·duct·ing, de·ducts v.tr. 1. To take away (a quantity) from another; subtract. 2. To derive by deduction; deduce. v.intr. $17,500. If the taxpayer receives more than the annual $17,500 limitation from multiple passthrough entities, the excess is lost as a deduction to the taxpayer, and the excess amount cannot be carried forward. Furthermore, Rev. Rul. 89-7 requires the taxpayer to reduce his basis in the passthrough entity by the full Sec. 179 deduction passed through to him as if full benefit was allowed. Example: T, a taxpayer with taxable income of $50,000 for 1994, has an interest,in ABC ABC in full American Broadcasting Co. Major U.S. television network. It began when the expanding national radio network NBC split into the separate Red and Blue networks in 1928. partnership, XYZ XYZ interj. Informal Used to indicate to someone that the zipper of his or her pants is open. [ex(amine) y(our) z(ipper).] partnership and JKL JKL Jyväskylä (Finland) JKL Jammu Kashmir and Ladakh (Indian State) S corporation. In 1994, the Schedule K-is for these entities reported a Sec. 179 deduction of $6,500 from ABC; $9,000 from XYZ; and $5,000 from JKL. Additionally, assume T has no Sec. 179 property placed in service directly in 1994. T would be able to deduct only the maximum $17,500 for 1994, although the total flowthrough deduction was $20,500. T will lose the benefit of the additional $3,000 in deductions and will be required to reduce his basis in each of the entities by the full amount of deduction reported to T. A Sec. 179 expense election is a binding election and cannot be changed on an amended return Amended Return A return filed in order to make corrections to a tax return from a previous year. It can be used to correct errors and claim a more advantageous filing. Notes: An amended return is filed using Form 1040X. . To avoid this trap, practitioners must consider the allocation of Sec. 179 expense at the partnership and S corporation levels. Proper planning will maximize the benefits to the individual taxpayer and minimize lost benefits. |
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