drewremedy[at]aol.com (Drewremedy) wrote:

- quote -

I think the question being asked is whether a deductible IRA
contribution, for example, reduces the amount the taxpayers
can claim as a section 179 deduction, by reducing their
section 179 income ['active trade or business income'] which
limits their section 179 deduction.

The section 179 regs say only that "...employees are
considered to be engaged in the active conduct of the trade
or business of their employment. Thus, wages, salaries,
tips, and other compensation (not reduced by unreimbursed
employee business expenses) derived by a taxpayer as an
employee are included in" the taxpayer's section 179 income
(income "derived from the active conduct by the taxpayer of
any trade or business...") without mentioning deductions for
IRAa and the like.

I would point out, however, that an employee's 401(k)
contributions reduce his taxable W-2 compensation, so, one
could argue, the deductions IRA contributions should reduce
his section 179 income, also.

On the other hand, the IRA deduction is allowed by Code
Section 219. Is Section 219 considered a "business" section?
Is the IRA deduction a "business" deduction? My gut
reaction is no.

I've dug my hole deeper than I can climb out of, so I'll
just ask: does someone know the answer?

--Harry B.

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- quote -

Correct.

But be careful since this can cost you money.

If your 179 property drops below 50% business use you may
have to recapture some of the 179 amount already claimed.

Which implies you have areasonable expectation that this
bnusiness will be profitable soon. We assume it is not
profitable yet or you would not be concerned about other
compensation.

The problem is if you are profitable next year, say you have
a $10,000 profit, and you also had Section 179 expense that
was $4000 above your Schedule C profit, you just lost the
chance to reduce your SE tax of up to 14.1% of that 4000.

Why?

Because had you not claimed that extra 4000 as first year
depreciation expense ot would have been available over the
next few years to reduce schedule C income and therefore
Schedule SE tax. By taking that extra 4000 as first year
depreciation expense you lost forever the ability to reduce
SE tax on that 4000.

When I show my clients the numbers, even without the long
explanation, they immediately agree to have me lower their
179 expense so the 179 expense lowers their Schedule C
profit to just $433, the "magic" number for not having to
file Schedule SE yet preserving the maximum amount of
depreciation expense over the next few years.

The new 30% (now 50%) special depreciation rule also has to
be taken into account, but here in Ohio, which does not
allow special depreciation when calculating Ohio AGI,
taxpayers often opt out of the special depreciation unless
the amount of credit is quite high.

__
Art Kamlet ArtKamlet [at] AOL.com Columbus OH K2PZH

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- quote -

You would use ALL earned income on the tax return, both
yours and your spouses.

Helen, EA in PA
Member of The Tax Gang
President, PA Society of Enrolled Agents
Campaigning for NAEA Board of Directors - Looking for YOUR vote

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If my modest amount of self employment income and and a good
bit of my spouses income is placed into defered retirement
plans like 401K, 403b, IRA's up to the max the rules permit
then for computation of income for the purposes of computing
what I can cover as a deduction via Sec 179 for my business
equipment, do I use my gross taxable earned income
(something of a double dip) or just my net taxable earned
income.

(We have a modest amount of investment income which doesn't
help with Sec 179 but we tend to max up our retirement
option's out of earned income.) The truck is almost 20 years
old and some other equipment is growning a beard so its time
to make use of Sec 179 if its there and I can still shelter
earned income .)

Thanks

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