Where do I find Section 179 Expense Deduction that was disallowed in 2021?

[writermom3]

I have a vacation home that I rent out sometimes. I have previous years' losses on the property. Now, this year's TurboTax is asking, "Enter any section 179 expense deduction that was disallowed in 2021. Check last year's Form 4562 (Depreciation and Amortization) for this information."

I am looking at 2021 Form 4562 and have no idea where to find this information! Could someone please guide me to which line I need to be looking for? And what is the difference between "section 179 carryover" and "QBI section 179 carryover?"

Thanks in advance!

[Carl]

There are a total of three form 4562's for your rental. Two of them print in landscape format. One is titled "Depreciation and Amortization Report" and is most likely the one you need. The other is titled "Alternative Minimum Tax Depreciation"

[GeorgeM777]

This disallowed deduction amount is shown on line 13 of Form 4562. You may be able to use the carryover amount to determine your section 179 deduction for the 2022 tax year.  If you can use the carryover amount, enter that amount on line 10 of your Form 4562.

Section 179 allows for accelerated depreciation on certain types of business property.  It is an option for businesses that decide to expense an item in a given year rather than to capitalize the item over its depreciated life.  

Many individuals, including owners of businesses operated through sole proprietorships, partnerships, S corporations, trusts and estates may be eligible for a qualified business income deduction, also called the section 199A deduction. 

The deduction allows business to deduct up to 20 percent of their qualified business income (QBI), plus 20 percent of qualified real estate investment trust (REIT) dividends and qualified publicly traded partnership (PTP) income.  Income earned by a C corporation or by providing services as an employee isn't eligible for the deduction. Section 179 reduces taxable income and thus reduces the amount eligible for the qualified business income deduction. 

@writermom3

[charjean47]

It will not allow me to add the carryover amount on line 10 Form 4562.  How do I do this?  I have a carryover of disallowed deduction from 2021 to 2022 and it will not let me override it.

[Carl]

Line 10 of the 4562 is the amount carried over "from the prior year".

Line 13 show the amount to be carried over "to the next year".

[charjean47]

I know but the program will not let me enter the amount.

[charjean47]

I have an error message stating:  Schedule E Worksheet:  Sec 179 Carryforward-Reg should not be entered, because this rental property is not a commercial property.  The funny thing is that the program put the amount there in the first place; not me.  I was able to make the amount zero thinking the heck with this because of the error message.  I want to get my taxes done. However, I do now want to fix this and when I try to put the amount of carryover from 2021 to 2022, I cannot override it.  The amount gets shaded yellow and I have a red exclamation mark near the form.

[charjean47]

Line 10 of the 4562 is the amount carried over "from the prior year" but the program will not let me put the amount there.

[Carl]

 Sec 179 Carryforward-Reg should not be entered, because this rental property is not a commercial property.

Most likely, the asset is classified as residential rental real estate, which would be correct for property improvements to the structure. The MACRS classification of "Residential Rental Real Estate" does not qualify for either SEC179 deduction or the Special Depreciation Allowance for accelerated depreciation. This would be allowed if the property was classified as Commercial Rental Real Estate (which is depreciated over 39 years, instead of 27.5 years). But your property is not commercial rental property at all.

[charjean47]

Dear Carl,  My rental is a residential.  I took the Section 179 for a new refrigerator I bought for the home.  So, can I count Section 179 for the refrigerator?  If so, I am having problems entering the amount.  I am an amateur at this.  Appreciate your help.  Thank you.

[Carl]

@charjean47 when you enter the asset it's important to read the screens as you work it through. If the asset you enter qualifies for SEC179 or the Speical Depreciation Allowance, then one of the screens that appears after you enter the asset will give you the option to take the SEC179 and/or SDA *IF* that asset qualifies. Not all assets qualify. For example, the MACRS classification of "Residential Rental Real Estate" does not qualify for either SEC179 or the SDA. But the MACRS classification of "Appliances" does qualify *if* you meet other requirements.  So if the program does not give you the option to take the SEC179 or SDA for an appliance, it's usually because you did not indicate that you are an active participant in the rental activity.

Also note that for assets not classified as "Residential Rental Real Estate" that cost less than $2,500, you can just expense them under the Safe Harbor de-minimus Act instead of depreciating them, and be done with it forever. It's deducted from the taxable rental income, does *not* get added to the cost basis, and there's no having to deal with depreciation recapture when the asset breaks or the property is sold. Overall, if the asset qualifies (and a refrigerator would unless you paid more than $2,500 for it) I always recommend folks just expense those assets they can under the Safe Harbor Act, and be done with it once and for all.

The definition of active participation per the IRS:

Active participation. Active participation isn’t the same as material participation (defined later). Active participation is a less stringent standard than material participation. For example, you may be treated as actively participating if you make management decisions in a significant and bona-fide sense. Management decisions that count as active participation include approving new tenants, deciding on rental terms, approving expenditures, and similar decisions. Only individuals can actively participate in rental real estate activities. However, a decedent's estate is treated as actively participating for its tax years ending less than 2 years after the decedent's death, if the decedent would have satisfied the active participation requirement for the activity for the tax year the decedent died

[PatriciaV]

You cannot enter an amount on Form 4562 Line 10 because any Section 179 carryover from last year should be instead entered on the Smart Worksheet of the related activity. Generally, the carryover amount is entered during the interview for the activity. 

As others have said, you cannot elect Section 179 for a residential rental property. If you try to enter an amount on the Carryover Worksheet for Schedule E, you will receive an error message that the rental property is not a commercial property. This message relates to the activity (residential rental) and not the asset that may have Section 179 applied. In this case, any carryover amount you had last year is lost (the IRS retroactively changed this rule). Do not enter a carryover amount, instead leave the box blank.

However, if you have a carryover on Form 4562, check the Business to which the form relates in the form header. If the form relates to Schedule C, you may be able to enter the carryover amount if it was not transferred from last year's return.

First try to enter this using the step-by-step interview for the activity. Look for the carryover topic near the bottom of the Business Summary page. If not there, click Done and follow the prompts until you reach the carryover questions.

If you're unable to find carryovers in the interview, go to Forms Mode (click the Forms icon in the TurboTax header).

1. Look for the Schedule C that relates to this activity in the forms list on the left. Click to open in the large window.
2. Scroll down to the Carryovers to 2022 Smart Worksheet. Section 179 carryover is the first line.
3. Enter amounts for Regular Tax and QBI (if any).
4. Click the Errors icon above the forms list if the form has a red exclamation mark next to it in the forms list.
5. Any form errors will appear in a box below the form. Be sure you fix all errors before you leave forms.
6. Click Step-by-Step in the header to return to the main screens.

[edited 3/22/2023 | 8:17 AM PDT to add Schedule E carryover info]

[annsatterly]

It appears that Turbo Tax 2021 did not handle my Section 179 Deduction properly in order for me to get my $8000 mini split system improvement to my residential rental property deduction.  It seems the software should have recommended depreciation over useful life of the system rather than disallowing the section 179 deduction.  Now, here we are in 2022 and your expert is telling me I can't carryover on my form 4562 my section 179 deduction from last year.  That is unacceptable for an accounting software to say all is lost!  Please come up with a better solution so I can submit my Federal Taxes this year.

Thank you in advance!

[Carl]

Since long term residential rental property almost always operates at a loss on paper, at tax filing time, I find taking either the SEC179 or SDA to be a waste, as it makes no difference in the tax liability unless you actually show a profit on the SCH E in the year you take the SEC179 or SDA.  But like I said, showing a profit on long term residential rental property on the SCH E is not very common at all.

It seems the software should have recommended depreciation over useful life of the system rather than disallowing the section 179 deduction.

When you first enter an asset, the program will assume regular depreciation, and if the asset qualifies for SEC179 the program will ask you if you want to take that option. If you take that option, the SEC 179 appears on the 4562 that prints in landscape format, titled "Depreciation and Amortization Report" under the "Section 179" column. The amount will appear under that column every single year. Just be aware it's only "taken/deducted" in the first year you took it.

Depending on one's specific and explicit situation, the SEC179 deduction may or may not appear on the other 4562 titled "Alternative Minimum Tax Depreciation Report".

As for carry overs, they are on the IRS Form 8582. The 8582 is only produced if you actually have any PAL carry overs. You may, or may not since the allowance of up to a 25K deduction of passive income against other ordinary income, if conditions are met.

[annsatterly]

Thank you Carl, I did have Form 8582 in 2021, I also had depreciation Form 4562.  I think the QBI last year may have screwed this up.  My passive deductions are below the cap. No AMT either.

What's the best approach to recover the carryover deduction for the Section 179  deduction from 2021?

Thanks,

Ann