This article will assist you with calculating section 179 business income limitation in the Individual module of ProConnect Tax.
IRS Instructions for Form 4562, line 11
The program will limit the section 179 on Form 4562, line 11. Per the IRS Instructions for Form 4562:
The total cost you can deduct is limited to your taxable income from the active conduct of a trade or business during the year. You are considered to actively conduct a trade or business only if you meaningfully participate in its management or operations. A mere passive investor is not considered to actively conduct a trade or business...
Individuals. Enter the smaller of line 5 or the total taxable income from any trade or business you actively conducted, computed without regard to any section 179 expense deduction, the deduction for one-half of self-employment taxes under section 164(f), or any net operating loss deduction. Also include all wages, salaries, tips, and other compensation you earned as an employee (from Form 1040, line 7). Do not reduce this amount by unreimbursed employee business expenses. If you are married filing a joint return, combine the total taxable incomes for you and your spouse.
How does the program calculate the business income for the section 179 limitation?
ProConnect Tax uses entries throughout the program to calculate business income to be used for the Section 179 limitation on Form 4562, Part I. If the section 179 business income limitation applies, the program will generate a Section 179 Expense Limitation Worksheet showing the computation.
The program calculates business income for purposes of the section 179 business income limitation as follows:
Wages, salaries, tips, etc.
+ Business income
- Business loss
+ Farm income
- Farm loss
+ Rental real estate income **
- Rental real estate loss **
+/- Nonpassive Partnership, S corps, Estates, Trusts
+ Income for Real Estate professionals
- Loss for Real Estate Professionals
+Gain on sale of business property
- Loss on sale of business property
= Total taxable business income for 4562 Business income limitation, line 11 (line 10 in some prior years)
How do I override the income limitation amount?
If you disagree with the income limitation amount that the program calculates, you can override it.
Follow these step to override the taxable income for limitation amount:
- Go to the Input Return tab.
- From the left of the screen, select Deductions and choose Depreciation (Misc./Sec. 179[O]).
- Enter the Taxable income for limitation [O].
How does the program handle rental income?
The program considers rental income entered on the Rental and Royalty Income (Sch E) screen to be passive income with active conduct of a trade or business.
Follow these steps to exclude rental income from the section 179 income limitation calculation:
- Go to the Input Return tab.
- From the left of the screen, select Income and choose Rental & Royalty Income (Schedule E).
- Check the box labeled Did not actively participate.
- When you check this box,the program won't include the income or loss to figure the section 179 income limitation calculation.
How does the program handle Schedule K-1 income or loss?
For Schedule K-1 income or loss, ProConnect Tax adds (or subtracts) the following information for activity(s) marked as Not a passive activity, Actively participated in real estate, or Real estate professional:
Ordinary Income (Loss), Schedule K, Box 1
Net Income (Loss) Rental Real Estate, Schedule K, Line 2
Net Income (Loss) Other Rental Activities, Schedule K, Line 3c
Net Gain (Loss) Under Section 1231, Schedule K, Line 5
Section 179 Recapture, Schedule K, Line 21
Compensation Paid to Shareholder
(Foreign Taxes, Schedule K, Line 15f)
(Intangible Drilling Costs, Schedule K, Line 16b)
(Dry Hole Cost, Schedule K, Line 16b)
(Other Section 59(e) Expenses, Schedule K, Line 16b)
The program doesn’t include any of the items listed above that are from a passive activity or publicly traded partnership (PTP) in the calculation.