The Section 179 Business Income Limitation
For small business owners, one of the best deductions available is known as the Section 179. This tax rule allows you to deduct the full cost of business equipment in the year of purchase, rather than expensing the cost over several years through depreciation. Usually, it is better to take the full deduction in one year than to take a partial deduction over many years. As good as this deduction is, however, there are situations in which the Section 179 may not be the way to go. The purpose of this article is to alert you to the types of situations that would prevent you from taking this deduction.
Just about every tax law has its limitations. Section 179 is no exception. One of those limitations is known as the “Business Taxable Income Limit”, which means that you cannot use the Section 179 deduction to create a loss or increase a loss. In other words, you can only use the Section 179 up to the amount of your business profit. Let’s take a closer look at this by reviewing several “what-if” scenarios.
Scenario #1. Let’s say your business profit, before consideration of any Section 179 deduction, as reported on Schedule C, Line 31, is $ 20,000. And let’s say you bought $ 10,000 of business equipment during the year. Since your Section 179 deduction would reduce your profit from $ 20,000 to $ 10,000, you are entitled to take the full Section 179 deduction of $ 10,000. In other words, as long as your property purchases are less your business profit, you can take the Section 179 deduction (provided you meet the other conditions).
Scenario #2. Your Schedule C profit is $ 20,000 and your business equipment purchases were $ 25,000. You cannot deduct the full $ 25,000 as a Section 179 deduction. You could take a Section 179 deduction for $ 20,000, however, and reduce your profit to zero. The remaining $ 5,000 can either be depreciated over the useful life of the property, per the complex deprecation rules, or it can be carried over to the next year and fully deducted as a Section 179 deduction, provided you have the profit in a future year to absorb the $ 5,000 expense.
Scenario #3. You don’t have a profit on Schedule C. You have a loss of $ 10,000 and your business property purchases were $ 25,000. You cannot take any Section 179 deduction. You can depreciate the $ 25,000 or carry over the $ 25,000 and take the Section 179 deduction whenever you have enough profit.