Tax Guru – Ker$tetter Letter

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Sect 179 & Partnerships

Posted by taxguru on April 14, 2007

Q-1:

Subject: Section 179 Deductions

Tax Guru:

My partner and I each have a Section 179 depreciation deduction of 57,000 on our K1’s. The business had an ordinary loss of 7,500 for TY2006.  My wife and I have ordinary income of $125,000 for 2006.  Can I deduct the 57,000 on my tax return? 

A-1:

It sounds as if you tried to prepare your own 1065 because the size of that Section 179 in relation to the net income seems out of whack.  Unless you have properly addressed the Section 179 limit at the 1065 level, which does include adding back some things, such as guaranteed payments to partners, there is a good chance that the K-1 info is wrong.  You need to have a professional tax preparer bless that 1065 before you try to use its items on your 1040s. 

Assuming the $125,000 you mentioned was Earned Income (not from investments and capital gains), and the 1065 was prepared properly, you should be able to use the full amount of the pass-through Sec. 179 on your 1040.

Again, you need to have a professional tax preparer work on your 1040 as well.  If you try to do it all on your own. you are almost guaranteed to screw things up and get yourselves into trouble with IRS.

Good luck.

Kerry Kerstetter

Q-2:

Kerry: 
 
I may have confused you a little regarding my information. My wife and I have W-2 income from full time jobs.  I am a partner in an LLC which is a contracting company.  We purchased 8 new vehicles this year and our K-1 was prepared by a CPA (not mine).  The purchase of the vehicles has balooned our 179 deduction.  My question was posed because my accountant indicated that I could only use the 179 deduction to offset earnings in the LLC not against ordinary income. 

A-2:

Technically, any Section 179 you have can be used against any earned income on your 1040, even that from occupations other than those that produced the Sec. 179.

However, I am still concerned that the LLC’s 1065 may have been prepared incorrectly.  If it had been calculated properly, all of your pass through items should net out to zero, with your share of the Section 179 offsetting your share of the company’s net income and your guaranteed payments.  You really shouldn’t have a case where the other net income from the LLC wasn’t enough to soak up all of the Sec 179.

If the 1065 was prepared by hand, that points to your problem.  Most professional quality tax prep software wouldn’t allow too high of a Sec 179 to be taken for the year.  You should have your personal accountant review the LLC’s 1065 to see why the Sec. 179 expense is so much higher than your share of other income passed through.  I’m guessing that the LLC’s CPA screwed up and the 1065 will need to be amended.

This will obviously also affect the tax situation for your LLC’s co-owner; so neither of you should send in your 1040s until this is straightened out.

Another word of warning.  Because of the rise in the use of LLCs and S corps, IRS is paying much closer attention to what figures owners report on their 1040s.  So if you were to report an erroneously high pass-through Sec. 179 on your 1040, I would put the odds as very god that your entire 1040 would be pulled for an IRS audit.

Please let me know what your personal accountant finds when he reviews the 1065.

Kerry Kerstetter

 

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