Q:

Subject: Section 179 deduction

 

Mr. Kerstetter, In your opinion, can I use my salary (wages, salaries, tips) that I earn from a separate company to meet the Business Income Limit for taking the Section 179 deduction? My situation is:

 

I work for separate Company A and I earned $120,000 in 2005.  My wife and I opened a small business (LLC) partnership (Company B) in May of 2005.  My wife purchased $60,000 of new equipment to be used 100% in the new business and we were going to depreciate the $60,000 over time but we want to take a Section 179 deduction for the entire amount of $60,000 for the tax year of 2005.  Even without using the one time deduction, the new business did not show a profit for 2005 and if fact, in had a small loss.  My wife and I had no income from the new Company B, however, I had my salary from the separate Company A.

 

As I interpret the IRS regs I may use my salary to pass the “Business Income Limit” and I feel I can take the $60,000 deduction, even tho the new business did not show a profit, because my Taxable Income of $120,000 is more than the 179 deduction.

 

Do you agree?

 

Thank you very much.

A:

You really should be working with a competent professional tax advisor with something like this. 

From the way you described the situation, you may have screwed yourself out of the larger Sec. 179 deduction.  It hinges on who actually bought the equipment.

If you and/or your wife had bought the equipment in your own personal name and set it up on Schedule C or E of your 1040, you would be able to use your W-2 income to justify a Section 179 deduction for the full $60,000 cost.

However, if the LLC actually bought the equipment, the income limit for Sec. 179 is first applied at the LLC’s 1065 level.  If there is no net profit, no Sec. 179 can be deducted on this year’s tax return.

A tax pro may find something else after thoroughly analyzing the facts here; but it looks like you may be learning an expensive lesson by not consulting with a tax pro prior to purchasing that equipment.

Good luck.

Kerry Kerstetter

Follow-Up:

Thank you for you opinion on this.  Appreciate you taking the time to get back me.

R/