Section 179 deduction isn't having any effect (TurboTax Business 2022)

[tax_form_filer]

I can’t get TurboTax Business 2022 to do a Section 179 deduction for my business. The business, a vacation rental, bought a new heat pump last year after the previous one failed, and I can’t seem to deduct it despite the business earning a profit. I know I can’t deduct the whole amount this year, but I’d like to deduct the amount of profit this year and carry the remainder forward to future years. Here’s what I’m trying in TurboTax (all numbers are rounded off):

On the FEDERAL TAXES tab, when I click on Rental Real Estate, it shows income and expenses (which I have entered previously), with a Net Profit/Loss of $2,500 (i.e., a profit).

On the same FEDERAL TAXES tab, I click on Deductions, then under Rental Real Estate Expenses->Assets (associated with rental property), I click on Update. This brings up a table with Rental Income, where I click Edit. Then I click Add Another Rental Asset. I enter the description (heat pump) and date (spring 2022), then tick the box for “Asset used 100% for business”. On the next screen, I click Rental Real Estate Property and then “Roofs/HVAC/…” because it’s HVAC. Then I enter the cost ($10,000).

On the next screen it asks how I want to deduct it. I choose “Deduct all or part of the item’s value this year. (Take the Sec. 179 deduction.)”. On a following screen, it says “your net business income is $200”, even though the Net Profit/Loss from above was $2500. Under “How much of this amount do you want to deduct”, I enter the full cost ($10,000). A message pops up saying “Your total Section 179 deduction now exceeds your total business income”, with $0 listed for three different totals – including “Total entered for all assets placed in service this year” and “Total carried over for 2023”, which seems wrong. The same info is on the next screen, Total Asset Summary, including $0 for “Total Deduction in 2022”.

Then I finish the Assets part of and click through to the end, answering No to most of the questions since this business is pretty simple – I don’t pay employees, don’t have life insurance, etc. The business income is QBI so I do that part. On the “Your Qualified Business” page, I don’t do any “Other Deductions” because this doesn’t seem like the right place for Section 179 deductions.

A “Section 179 Carryover” page appears with a “199A Worksheet by Activity”, which has mostly 0’s except for “Total 179 deduction allowed for this activity in current year”, which has the $10,000 in the Section 179 Regular Tax column and nothing in the Section 179 QBI column. At the bottom, this worksheet also shows $0 at “Total carryforward to next year”, which seems wrong.

Finally, on another “You Qualified Business” page, it shows $2500 for “Rental Income/Loss” and $0 for “Section 179 Deduction”. Should I override that last $0 with $-2500 here to have it actually do a Section 179 deduction? Or did I do something wrong elsewhere in the step-by-step view?

This is an LLC that uses pass-through taxation to the LLC members , so the 1065 isn’t showing a profit but the Schedule K-1 does show profit of $2500, meaning I’ll have to pay tax on it.

What am I doing wrong that the Section 179 deduction isn't showing up?

[AliciaP1]

I cannot recreate your issue in a test return.  It would be helpful to have a TurboTax ".tax2022" file that is experiencing this issue.

You can send us a “diagnostic” file that has your “numbers” but not your personal information.  If you would like to do this, here are the instructions: 

At the top menu in the black line at the top of the page go to Online. 

1. From the menu, select Send Tax File to Agent. 
2. You will see a message explaining what the diagnostic copy is.  Click Send and then you will get a Token number. 
3. Reply to this thread with your Token number. This will allow us to open a copy of your return without seeing any personal information.  

We will then be able to see exactly what you are seeing and we can determine what exactly is going on in your return and provide you with a resolution.

@tax_form_filer 

[tax_form_filer]

Hello Alicia,

Thanks for your help. The token number is 1114637.

Dave

[AliciaP1]

Upon review, you probably do not want to take the Section 179 deduction for assets for your rental property owned by this partnership.  This is because the Section 179 deduction is limited to "net business income" which is not the same as "net rental income" and unless your partnership is going to expand and conduct business operations as well, the deduction would carry over until you sell the asset.

As for why the carryover isn't showing in your file with your entries, I am not experiencing that issue when I open your token file.  The full amount shows as the 2023 carryover for both regular tax and QBI.  

[tax_form_filer · Accepted solution]

Okay I think I finally get it. Our net rental income ($2500, summed up on form 8825) doesn't count as "business income" or QBI, mainly because we can't document 250 hours of work last year in support of the business. Our net business income is $0 even though our net rental income is $2500. We can't deduct anything since the deduction is limited to net *business* income. Better to take the heat pump cost as depreciation since at least that way we'll get something to lower taxes. (Don't get me started on my rant about heat pumps, which last 10-20 years, being required to go on a 39-year depreciation schedule!)