Tax Guru – Ker$tetter Letter

Q-1:

Subject: LLCs and 179 deduction

Hi Kerry,

I recently did a Google search on Section 179 deductions and LLCs.  Your site came up, but I was unable to find any reference to how LLCs handle the 179 deduction on the site.  Can you point me to the right section?  Basically, I want to know if the 179 deduction flows through the LLC to the members personal returns like other profits and losses do.

Thank you for any help.

Cheers,

A-1:

Back in February, I sent you a link to a previous blog post I did on Section 179 deductions with pass through entities.  

Nothing has changed since then.  The Section 179 deduction is one of the separately stated items required to be passed through to the members via their K-1s.  The actual amount of Section 179 deduction each member will be able to deduct on their 1040s may be quite different, based on their unique tax situations.

Your LLC’s professional tax preparer should have software to prepare the 1065 and its K-1s properly, while the members’ professional tax preparers’ software should handle their 1040 Section 179 properly.

I hope this helps.

Kerry Kerstetter

Q-2:

Hi Kerry,

Thank you so much for your note of September 6, 2009.  My accountant is adamant that a 179 deduction can only flow through to a single member LLC.  This opinion stands to cost me about $40k and beyond that logically drives me nuts.  Why would the deduction not flow to all the members, particularly in this case where the partners are my wife and I and we file a joint 1040?

Could you point me to something in the IRS or professional literature that clearly (a faint hope on my part) lays out the 179/llc ground rules?

You mentioned that you are thinking of setting up business related Webinars, I’m very interested.  Often those of us doing business are very interested in the deductions that are allowed in the conduct of business depending on the corporate form.  As you can see, from my own very painful situation, it would have helped to know that only single member LLCs can take the 179.

I would be very interested in being kept informed about your webinars and if there is any info on the multiple partner LLC (particularly husband and wife) I would be most appreciative.

Best Regards,

A-2:

There must be some kind of misunderstanding here because what you claim is your accountant’s statement makes absolutely no sense. To claim that only single member LLCs can use Section 179 is ridiculous. I have seen and prepared thousands of tax returns with multiple owners sharing Section 179 deductions.

With a multi-member LLC that is reporting its activity as a partnership on Form 1065 or as an S corp on Form 1120S, the treatment is exactly the same.  Just as the net operating income or loss is divided among the owners on their K-1s based on their ownership percentages, Section 179 deductions are similarly allocated among the members’ K-1s.

If your accountant uses professional software to prepare the 1065 or 1120S, it will handle that allocation automatically.

If your accountant prepares tax returns by hand and doesn’t understand how to properly handle Section 179, it sounds like it may be time to move on to someone with more experience.  If it’s a family member and you don’t want to hurt his/her feelings by switching to a more competent tax pro, only you can decide if that is worth $40,000.

You asked for documentation of this.  How about the official IRS instructions for Form 1065, which you can download here.  

From Page 28:

Line 12. Section 179 Deduction
A partnership can elect to expense part of  the cost of certain property the partnership purchased during the tax year for use in its trade or business or certain rental activities. See Pub. 946 for a definition of what kind of property qualifies for the section 179 expense deduction and the Instructions for Form 4562 for limitations on the amount of

Complete Part I of Form 4562 to figure the partnership’s section 179 expense deduction. The partnership does not claim the deduction itself but instead passes it through to the partners. Attach Form 4562 to Form 1065 and show the total section 179 expense deduction on Schedule K, line 12.

Note that it says “Partners” with an S, meaning that the Section 179 is to be split between all of the partners.

Also from Page 28 is this statement of a limitation on the only kinds of partners who may not claim Section 179 deductions.

Do not complete box 12 of Schedule K-1 for any partner that is an estate or trust; estates and trusts are not eligible for the section 179 expense deduction.

Notice that there is no restriction mentioned regarding multi-member LLCs.

Good luck.  I hope this helps. Fur future reference, when a tax pro presents you with some claim that seems to be wrong on its face, you should demand that s/he present you with documentation to prove his/her point.  I would be very interested in seeing something official that states that multi-member LLCs are not eligible to use Section 179.

If you keep tabs on my blog, we will be announcing the dates of the webinars there.

Kerry Kerstetter

Q:

Subject:  Sale of Primary Residence

I am trying to find out when the $500,000 ($250,000 per spouse) Exclusion expires; and what is the current thinking on how it would be changed.

Sincerely

A:

The current law allowing the tax free exclusion of some or all of the gain from the sale of a primary residence (aka Section 121) was enacted in May 1997 and does not have an expiration date.  It will be the law, with the exact same dollar amounts (unadjusted for inflation) until our rulers in DC explicitly change it.

While nobody can know for sure what changes, if any, this law will have in the future, I can guess at a few possible ones.  It is very likely that some provisions of this law will be trimmed back for home sellers.

Going back to a once in a lifetime usage, rather than the current once every two years, would probably be a politically acceptable change since that was how it applied for several decades prior to 1997.

Another likely change with the growing sentiment in DC to screw over the evil rich would be to completely or partially deny the exemption to those taxpayers with AGIs over a certain dollar figure that our rulers will establish to define them as evil rich who are unworthy of any more tax breaks.  Several other tax deductions and credits already have AGI eligibility thresholds; so this would be consistent with that.

Your own personal professional tax advisor should be up on the latest laws in regard to home sales; so any planned sale should be run by him/her first.

I hope this helps.  Good luck.

Kerry Kerstetter

Follow-Up:

Dear Kerry
 
Thank you so very much for the information … it is extremely helpful
 
Sincerely