I have passive income on a K-1, and an amount for Sec 179. TT is netting the Sec 179 amount against the income (Sch E, line 28h). Why is it treating it this way?

Forum|Forum|1 year ago
October 6, 2024
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My understanding is that Sec 179 deductions are not allowed for investors who do not actively participate in the conduct of the business (i.e., passive)

TurboTax Online

Anonymous_

Employee

No text available

mkossmanAuthor

I do have a c/o on 4562 but TT is ALSO reducing the K-1 income by that amount on line 28h, effectively deducting it in the current year. Seems like a programming problem in TT? I am getting incomprehensible error messages from TT saying I need to “reallocate the Sec 179” to one or more activities. huh?!

Anonymous_

Employee

No text available

Mike9241

from reg 1.179-2(c)(6)(iii)

In the context of section 179, the purpose of the active conduct requirement is to prevent a passive investor in a trade or business from deducting section 179 expenses against taxable income derived from that trade or business.

notice the word "that"

becuase under the 179 rules business taxable income does not have to be generated by the business in which the 179prperty is used to count towards the the business taxable income limit. in fact, the trade or business in which the 179 property is used can generate a loss, as long as business taxable income is positive.

this is an example from the REGS

Example.

A owns a salon as a sole proprietorship and employs B to operate it. A periodically meets with B to review developments relating to the business. A also approves the salon's annual budget that is prepared by B. B performs all the necessary operating functions, including hiring beauticians, acquiring the necessary beauty supplies, and writing the checks to pay all bills and the beauticians' salaries. In 1991, B purchased, as provided for in the salon's annual budget, equipment costing $9,500 for use in the active conduct of the salon. There were no other purchases of section 179 property during 1991. A's net income from the salon, before any section 179 deduction, totaled $8,000. A also is a partner in PRS, a calendar-year partnership, which owns a grocery store. C, a partner in PRS, runs the grocery store for the partnership, making all the management and operating decisions. PRS did not purchase any section 179 property during 1991. A's allocable share of partnership net income was $6,000. Based on the facts and circumstances, A meaningfully participates in the management of the salon. However, A does not meaningfully participate in the management or operations of the trade or business of PRS. Under section 179(b)(3)(A) and this paragraph (c), A's aggregate taxable income derived from the active conduct by A of any trade or business is $8,000, the net income from the salon.

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now let me change it by changing salon's taxable income to $20,000 and that PRS purchased $5000

of 179 property

A's taxable income from the active conduct of the trade or business is $20K. While the PRS, a passive activity purchase $5K of 179 equipment that, deduction is allowed because the total 179 purchases are $14,500 which is less than the income from the active conduct of all businesses.

what are some items that constitute business taxable income from an active trade or business

1) wages, salary tips and other compensation even if not earned from the business that acquired the 179 asset

2) 1231 gains less losses from a trade or business

3) 1245 and 1250 recapture from a trade or business

however, Turbotax has an issue when there is a 179 deduction on a k-1 but no business taxable income

line 11 of form 4562. then it will reduce, as in your case, the k-1 income by the 179 for schedules/forms E/8582 purposes but form 4562 will show the 179 as a carryforward. an obvious inconsistency (MODS bug). (line 12 of 4562 will show 0 in red). the only way I could find to avoid the red flag and correct reporting for schedule E/8582 was to remove the 179 deduction from the k-1.

just as bad for you, even though you get no tax benefit from the 179 your tax basis goes down by the amount

mkossmanAuthor

SUPER helpful @Mike9241 ! I really appreciate the example, and totally get the underlying tax rules (I'm a reformed CPA 😀). And I'm glad to hear you agree that it's a TT bug; it should not be reducing K-1 Line 1 income on Sched E by the disallowed 179 deduction.

Took forever, but I found a way to fix it, which seems to be the fix intended by TT: you go to the "Schedule K-1 S Corp [or p/ship] Additional Information and manually input the allowed 179 deduction (zero in my case). That corrected the income error but retained the carryforward on Form 4562. It also got rid of that red 0 you mentioned.

4837662D-153D-485E-A61C-9CC8ABEBDCDF.jpeg

The only way I could figure out how to get to this form was to use the QuickZoom to enter additional information about the Sec 179 deduction (see pic below). Note that if you change it in box pictured below, the carryforward is then wrong, but if you drill down with the QuickZoom and change it to zero there, it seems to all work.