Brad is a shareholder and full-time employee of an S corporation. During 2007, he earns a $50,000 salary from the S corporation and is allocated $12,000 as his share of its net operating loss. In addition, Brad owns a limited partnership interest from which he earns $12,000 during 2007. Kanika, Brad’s wife, operates a small business as a sole proprietorship. During 2007, she spends $65,000 on equipment for use in her business, which has a taxable income of $17,000 before the Section 179 deduction.
- What is Brad and Kanika’s maximum Section 179 deduction for 2007?
2
Assume that Brad is allocated $12,000 in Section 179 expense from the S corporation for 2008 and Kanika spends an additional $14,000 on equipment for use in her business. Also, assume that their taxable active business income is $35,000 for 2008. What is Brad and Kanika’s maximum Section 179 deduction for 2008?
- What is Brad and Kanika’s maximum Section 179 deduction for 2007?
The maximum Section 179 deduction for 2007 is $112,000. However, this amount is limited to Brad and Kanika’s trade or business income (i.e., his salary, share of S corporation income and Kanika’s business income) during the year. In this case, Brad and Kanika have $55,000 of income from their individual business interests:
Brad’s salary $ 50,000
Brad’s share of NOL of S corporation (12,000)
Kanika’s business income 17,000
Total trade or business income $ 55,000
The limited partnership income is not trade or business income (limited partnerships are always passive and are never a trade or business).
For 2007, married taxpayers are only allowed to expense a total of $112,000 between them. Kanika purchased $65,000 of qualifying property, so she may expense $55,000 of the cost of the property, leaving a depreciable basis of $10,000. Alternatively, she could elect to expense the maximum $65,000 (i.e., amount of equipment acquired), although her deduction is limited to $55,000. The $10,000 ($65,000 – $55,000) excess election to expense is carried forward to 2008 for deduction as a Section 179 expense. This would leave a zero depreciable basis in the equipment.
- Assume that Brad is allocated $12,000 in Section 179 expense from the S corporation for 2008 and Kanika spends an additional $14,000 on equipment for use in her business. Also, assume that their taxable active business income is $35,000 for 2008. What is Brad and Kanika’s maximum Section 179 deduction for 2008?
They have $26,000 of qualifying purchases in 2008 – the $12,000 election to expense from the S corporation and the $14,000 of equipment purchased. The calculation of the Section 179 deduction depends on whether Kanika elected to expense only $55,000 of the maximum $65,000 in 2007. If she did, there would be no carryforward and if she chooses to expense the maximum in 2008, the Section 179 deduction is $26,000 and the basis of the equipment is $0 ($14,000 – $14,000):
179 Election from S corporation $ 12,000
Equipment purchased 14,000
Maximum section 179 expense deduction $ 26,000
If Kanika had elected to expense the full $65,000 in 2007, the $10,000 carryforward is deducted first in 2008. If she chooses to expense the full amount of the equipment in 2007, the $35,000 Section 179 deduction consists of: the $10,000 carryforward from 2007, the Section 179 election from the S corporation and $13,000 from the Section 179 election in 2008. The basis in the equipment is $-0-.
179 Election carryforward from 2007 $ 10,000
179 Election from S corporation 12,000
Equipment purchased 14,000
Total Section 179 elected $ 36,000
Maximum section 179 expense deduction (35,000)
Section 179 carryforward to 2009 $ 1,000
