Question

Andy has operated his moving company , MoveOn, as a sole proprietorship for several years. In the current tax year, MoveOn placed into service$700,000 of real property improvements eligible for immediate expensing under $179(but not eligible for bonus sepreciation). Andy also joined with another local mover to form and operate a storage partnership, The Attic LLC. Andy holds a 90% capital and profits interest in the Attic.

This year, the Attic purchased and placed into service $2,900,000 of property eligible for expensing under 179(and not eligible for bonus depreciation). Andy has 800,000 of taxable income from MoveOn and a $750,000 share of ordinary income from his 90% ownership of The Attic, both before considering any 179 expense. Assuming that Andy his current deductions (without sacrificing future deductions), how much can he elect to deduct under 178? How are any remaining expenditures treated? Note: For simplification, disregard inflation adjustments that may be in effect, and simply use the information shown in the code.

Answer 1

Rules for section 179 it is applicable to newly purchased qualfird business use property that includes:

A. New / old tangible personal property

B. Off the shelf computer software

Generally it doesnot apply to real property but after TAX AND JOBS CUTS ACT this section applies to qualified improvements to non- residential real property as mention in the questions.

The maximum limit for business is upto $1,000,000.

Reduce $ by $ for amount placed during the year exceeding $2,500,000.

Maximum asset value $3,500,000 to get the deductions.

Deductions not permitted if net loss or deductions creates net loss for the business.

Andy has two business and two assets both assets are qualified business property.

Asset 1.

Taxable income from sole proprietorship $ 800,000.

Value of improvement $ 700,000.

As it satisfies both the conditions

A. Deductions less than $ 1,000,000.

B. Asset value is less than $3,500,000.

Section 179 deductions will be $700,000.

Asset 2

Partnership share 90%

Income from partnership $ 750,000.

Total Value of assets $ 2,900,000.

Eligible value of asset $2,900,000×90% = 2,610,000.

Above asset also satisfies the both conditions BUT as one see the deductions will result in net loss in that case No section 179 can be applied.

As mention in the question partnership asset is not subject to bonus depreciation. Andy has to follow MACRS system that is modified accelerated cost recovery system.

In MACRS is based on different class of assets on bases of classification like personal or real property. The same can be further classified into 5 years 200% declining class etc.

Deductions available for section 179 will be $ 700,000 without taking inflation as mention in the question