A sec. 179 deduction trap.

• Author: Botkin, Jeffri
• Position: Brief Article

Lost Sec. 179 deductions can occur when a taxpayer receives Sec. 179 allocations from more than one passthrough entity.

Sec. 179 allows a taxpayer to elect to expense rather than capitalize the cost of qualifying Sec. 179 property placed in service during the year. The deduction is limited to the lesser of the taxpayer's taxable income or $17,500 in any tax year, and is reduced dollar for dollar for Sec. 179 property in excess of $200,000 placed in service during the year. Carryover of unused Sec. 179 expenses is allowed only when the expense is limited by the taxpayer's taxable income.

Since the Sec. 179 deduction limitations apply to both individuals and passthrough entities, a problem can arise when each passthrough entity allocates Sec. 179 deductions to an individual who can only deduct $17,500. If the taxpayer receives more than the annual $17,500 limitation from multiple passthrough entities, the excess is lost as a deduction to the taxpayer, and the excess amount cannot be carried forward.

Furthermore, Rev. Rul. 89-7 requires the taxpayer to reduce his basis in the passthrough entity by the full Sec. 179 deduction passed through to him as if full benefit was allowed.

Example: T, a taxpayer with...