Section 179 Business Income Limit for Single Member LLC

[downunder301]

Section 179 depreciation deduction is usually limited to the income that the business generates and you can carry forward the loss. In the case of a single member LLC (Disregarded Entity) is the section 179 deduction income limit calculated at the business income level or individual taxpayer level. For example:

Section 179 Deduction: $100K

Single Member LLC Business Income Before Section 179 Deduction: $50K

Taxpayer taxable income including W2 Income: $300K

Can I deduct the full $100K or just $50K?

[Mike9241]

 you did not tell us what the make up of the $300K is. portfolio income, pensions, and social security are not business income.  k-1 income from partnerships and s-corps are business income if you materially participate even if the entity itself has no sec 179 (k-1 losses from those entities in which you materially participate would reduce business income). w-2 wages are business income 

[tagteam · Accepted solution]

There is a business income limitation, per Section 179(b)(3)(A):

The aggregate amount of taxable income of the taxpayer for such taxable year which is derived from the active conduct by the taxpayer of any trade or business during such taxable year.

How much of the $300,000 is W-2 income?

[AmeliesUncle]

$100,000.  For purposes of §179, the W-2 wages of you and your spouse are considered as business income.

However, you might not want to do that, and you might want to elect out of the Special Depreciation Allowance.  While that 'extra' $50,000 will create a loss and save income tax, if you 'save' the other $50,000 of depreciation for future profitable years, it will save both income tax AND self employment tax.

[downunder301]

More details on the tax situation:

- I have 2 single member LLC's that will each generate a loss if I deduct the full section 179 allowance

- My other income (I.e. $300K in this example) that will exceed any losses from these two LLC's including any section 179 allowances is W2 salary income from my full time job. This $300K in income is unrelated to the two LLC's. I am in a management position at a large company and ideally would like to offset the W2 taxes I have paid in that position with the unrelated LLC losses due to section 179.

- I read some guidance that the first check is whether the LLC made income and you were capped in this deduction. However, I might be able to offset my W2 income with these LLC losses from section 179 because these are disregarded entities.

Thanks

[downunder301]

Isn't this just deferring the benefit of paying less self employment tax? Also, I am capped out on the social security portion through my employer W2 income whether I defer or not and it would just apply to the medicare portion. However, deferral might make sense if Biden raises taxes. But then again the new administration might change the rules of the game on who can take this deduction based on my income so I run risk on that side if I defer these tax deductions to future years. 

[Mike9241]

it's an overall computation. 179 is allowed to the extent of business income determined before the 179 deductions.   a way around the 179 deduction limit is to use bonus deprecition (168(k) - specialdepreciation. however, some states have different bonus rules than the IRS so you may not be able to expense 100% of the cost using 168 (k) for some states.   however, some states may have a different limit than the federal for the 179 deduction.  the best advice if you have a state return read the instructions and look at the forms to see if any lines mention 179 or 168(k)

[downunder301]

Isn't this just deferring the benefit of paying less self employment tax? Also, I am capped out on the social security portion through my employer W2 income whether I defer or not and it would just apply to the medicare portion. However, deferral might make sense if Biden raises taxes. But then again the new administration might change the rules of the game on who can take this deduction based on my income so I run risk on that side if I defer these tax deductions to future years. 

[downunder301]

Mike - Is unrelated W2 income classified as business income? 

[Critter-3]

You should review all your options before you file the return both for the current tax year and future ones.  What Biden will do or not do should be known sometime before the filing deadline.  If you are using the downloaded version then you have the tools you need to make this decision ...

This is my mini version of  a tutorial  that should be in the downloaded program: 

What is Forms Mode?

Forms Mode lets you view and make changes to your tax forms "behind the scenes."

If you're adventurous, you can even prepare your return in Forms Mode, but we don't recommend it. You may miss obscure credits and deductions you qualify for, and you may forget to report things that will come back and haunt you later.

Forms Mode is exclusively available in the TurboTax CD/Download software. It is not available in TurboTax Online.

Related Information:

• Why would I use Forms Mode?
• How do I switch to Forms Mode in the TurboTax for Windows software?
• How do I switch to Forms Mode in the TurboTax for Mac software?

If you want to play around with different figures and tax scenarios without affecting your original return you can ….

• >>>In the TurboTax CD/Download software by creating a test copy: 
• 1.  Open your return in TurboTax. 
• 2.  From the File menu, choose Save As. 
• 3.  Give the copy a new name to distinguish it from the original (for example, by adding "Test" or "Example" to the file name). 
• 4. Click  Save. You are now safely working in the test copy and anything you do here will not affect the original. 
•  https://ttlc.intuit.com/questions/1900642-how-to-make-a-test-copy-of-your-return

• >>  use the WHAT IF tool: 
• - Click Forms Icon (upper right of screen) or Ctrl 2 (forms view) 
• - Click on the Open Form Icon 
• - In the “Type a form name.” area type What-If (with the dash), click on the name of the worksheet - click on Open Form 
• - You will see the worksheet on the right side of the screen; enter the information right into the form 
• - To get back to interview mode - click on the Step-by-Step Icon (upper right of screen) or Ctrl 1

It's always a good idea to make a backup copy of your tax data file, in case your original gets lost or corrupted. Here's how:

1. From the File menu in the upper-left corner of TurboTax, choose Save As (Windows) or Save (Mac).
2. Browse to where you want to save your backup.
   • Tip: If you're saving to a portable device, save it to your computer first to prevent data corruption. Then, after completing Step 4, copy or move the backup file to your device.
3. In the File name field, enter a name that will distinguish it from the original tax file (for example, add "Backup" or "Copy" to the file name)
4. Click Save and then close TurboTax.
5. Restart TurboTax and open the backup copy to make sure it's not corrupted. If you get an error, delete the backup and repeat these steps.

If you make changes to your original tax return file, repeat these steps to ensure your original and backup copies are in-synch.

Related Information:                             

• Retrieve a Tax File from a Portable Device
• What's the difference between the tax data file and the PDF file?

AND save it as a PDF so you have access to a copy even if you don’t have the program still installed and operational :

• How do I save my return as a PDF in the TurboTax software for Windows?
• How do I save my return as a PDF in the TurboTax software for Mac?

AND protect the files :

• How can I protect the tax files on my computer?

Always remember to shut off the auto update function once you have filed your returns and do not do any updates unless you have safeguarded the PDF & .taxfiles to a removable storage unit for safekeeping.  Click on ONLINE then Update Preferences.... don't be afraid to click on all the  menu headings to find all the goodies that are hiding. 

[tagteam]

@downunder301 W-2 income is considered business income for this purpose.