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Partner's sec 179 limit


David

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Multi-member LLC has $80K sec 179 deductions and only $20K profit allocated to a member.

The TP has over $80K wages on his 1040. However, the program is limiting the sec 179 to the LLC's profit and isn't considering the TP's wages.

I must have misunderstood the limitations for partners/LLC members. Is the sec 179 deduction fro the TP limited to the LLC's profit? If so, why do the instructions always say the partner's earnings are considered when applying the sec 179 deduction on form 1040?

Thanks.

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sec 1.179-2(c)(1):

 

Quote

 

(c)Taxable income limitation -

(1)In general. The aggregate cost of section 179 property elected to be expensed under section 179 that may be deducted for any taxable year may not exceed the aggregate amount of taxable income of the taxpayer for such taxable year that is derived from the active conduct by the taxpayer of any trade or business during the taxable year. For purposes of section 179(b)(3) and this paragraph (c), the aggregate amount of taxable income derived from the active conduct by an individual, a partnership, or an S corporation of any trade or business is computed by aggregating the net income (or loss) from all of the trades or businesses actively conducted by the individual, partnership, or S corporation during the taxable year. Items of income that are derived from the active conduct of a trade or business include section 1231 gains (or losses) from the trade or business and interest from working capital of the trade or business. Taxable income derived from the active conduct of a trade or business is computed without regard to the deduction allowable under section 179, any section 164(f) deduction, any net operating loss carryback or carryforward, and deductions suspended under any section of the Code. See paragraph (c)(6) of this section for rules on determining whether a taxpayer is engaged in the active conduct of a trade or business for this purpose.

 

and then as it pertains to the above regarding wages considered to be from the active conduct as trade or business income of the individual, that is covered in 1.179-2(c)(6)(iv):

Quote

(iv)Employees. For purposes of this section, employees are considered to be engaged in the active conduct of the trade or business of their employment. Thus, wages, salaries, tips, and other compensation (not reduced by unreimbursed employee business expenses) derived by a taxpayer as an employee are included in the aggregate amount of taxable income of the taxpayer under paragraph (c)(1) of this section.

# 7 under that same section states that if a joint return is filed, the spouse's w-2 income also is included for calculating the limitation at the individual level.

 

Save link to Cornell Law for this section: https://www.law.cornell.edu/cfr/text/26/1.179-2

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David, are you sure that all of your input is correct and complete?  Is there another limitation that is kicking this deduction out?   Have you input all of the data to correctly calculate basis, and is basis sufficient to allow the deduction?

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Yes, the TP also had wages from employment before she started her LLC business.

Judy, yes it appears all of the input is correct and complete. This is a H&W LLC and they both have enough basis to absorb the full sec 179 deduction. The LLC is their only business.

So even though the TP wages on their 1040 and the profit from the business are more than the amount of the sec 179 deduction are they still limited to the profit from the business and that is why they aren't able to take the full sec 179 deduction? In other words, the first hurdle is the business profit and if the profit isn't enough to cover the sec 179 deduction the deduction is limited to the profit and it doesn't matter that the TP has W-2 wages.

Is my understanding correct on this? Or should the W-2 wages also be considered when applying the sec 179 limitation?

Thanks. 

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