Tax Guru – Ker$tetter Letter

Helping real people win the tax game.

Sec. 179 With Pass-Through Entities

Posted by taxguru on February 21, 2009

Q:

Subject: 179 Question

There is a question which falls through the cracks of the answer provided below.  It’s pretty clear from your answer that Corporations can not reduce income below zero using a 179 deduction, but that a Schedule C business can (provided that there is sufficient wage income to produce a total taxable income > 0.00).  However, what about a Partnership or LLC?  Can they have a loss based on a 179 deduction, and have the partner use it on their 1040 via a K-1, provided that they have sufficient wage income to have a taxable income remain > 0.00?

Thanks,

 

A:

I have discussed this point on a few occasions, but it has been a while.

With pass-through entities, such as S corps and partnerships, the Section 179 limit is tested against taxable income at both levels; that of the 1065 or 1120S and again at the owners’ 1040 level.

One big difference is the fact that, for this test, the 1065 or 1120S income can be increased by any owner compensation that has been deducted, such as wages or guaranteed payments.  This could result in a Section 179 deduction giving the business a net loss.

From a logistical perspective, a 1065 K-1 would most likely net out to zero when taking into account the entries for net loss, Section 179 and Guaranteed Payments.  This contrasts with the K-1 from an 1120S, which could have a net overall loss because the W-2 income isn’t shown on the K-1.

The interplay of these kinds of tests are why it is important to be working with an experienced professional tax advisor with up to date tax prep software.

I hope this isn’t too confusing to follow.  You should work with your own tax pro to see how it would look with your own businesses.

Good luck.

Kerry Kerstetter

 

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