Section 179 expense with a Loss

[hdulc]

I'm a musician and in 2019 I bought a couple of new instruments. My plan was to take them as Section 179 expenses, but this will result in the business having a loss. Answers to other questions about 179 say that section 179 isn't allowed to give a business a loss and it has to be carried over. For example - Sort of.  It depends. Yes, you can claim Section 179.  Ho...  

My question: Does TurboTax automatically recognize that I can't take the section 179 deduction? I've finished my schedule C with the 179 deductions. It shows a loss, I'm not getting an error message, and TurboTax seems happy.

[MinhT1]

You are correct. You cannot claim Section 179 deduction if you have a loss. The unclaimed portion of section 179 deduction will be carried over to future years. TurboTax will recognize this situation and carry over the surplus.

There is an alternative for you. If your musical instruments cost $2,500 or less each, you can deduct them entirely as expenses under the de minimis safe harbor election. This will allow to recognize a net operating loss (NOL) which can be used to offset your other income if any, or be carried over to future tears.

Please read this IRS document for more information.

[hdulc]

Thank you. Each instrument was about $7,000, so I can't deduct them entirely as expenses. At what point does TurboTax recognize this? I've completed the Schedule C, and when I look at it under Forms, it appears to show the full deduction. Similarly, when I look at the Asset Entry worksheets, it doesn't give any indication that the full amount won't be deducted.

[MinhT1]

Then you should take the 179 deduction. The deduction will be shown in full. The reduction will be calculated by TurboTax in Part I of form 4562.

[hdulc]

That's helpful, but I'm still seeing things that don't make sense. When I look at Form 4562, line 11 is a calculated value that's supposed to be the smaller of my business income or line 5 (or 0 if the business income is negative). The number listed there doesn't match my business income - I was showing a loss (even before entering the Section 179 property) and line 11 has a positive number - about 5x bigger than the gross income on my Schedule C. 

Two questions:

1. Why isn't line 11 $0?

2. Is there a way to see the source calculation for a calculated field?

[AmeliesUncle · Accepted solution]

Do you (or your spouse) have any other "earned" income on the tax return, such as a W-2?  As the link that you posted shows, that other "earned" income counts.

As a side note, are you sure you want to use Section 179 rather than 100% Bonus Depreciation (assuming they qualify for it)?

[hdulc]

Good point and thank you! Somehow I had missed that bit about W2 income (or I was thinking that the W2 had to apply to the business, which of course doesn't make sense in the context of a sole proprietor business). Now the numbers on Form 4562 add up.

Regarding Section 179 vs. Bonus Depreciation, given the amounts we're talking about (gross income in low 5 digits; net income usually in 3 digits - sometimes positive, sometimes negative, the assets in question cost about $15K), I think it doesn't matter (https://www.nationalfunding.com/blog/bonus-depreciation-section-179-difference/), but if I'm missing something, please let me know.

Ultimately, I was thinking that I'd just take a big loss this year and then go back to making small profits so that I avoid showing losses for more than 2 out of the last 5 years and getting classified as a hobby  business.