Question

General, a Section 179 deduction may not exceed total taxable business income. This year, XYZ Partnership claimed a Section 179 deduction for $10,000 of new equipment. Total taxable business income at the partnership level was $150,000. Alicia is a general partner in XYZ Partnership. Her share of the Section 179 deduction according to her Schedule K-1 (Form 1065) is $1,000. However, due to losses from other businesses, total taxable business income on Alicia's individual return is zero. How does Alicia treat her share of the Section 179 deduction from XYZ Partnership?

-Alicia: May deduct the full $1,000 on her individual return.
-May increase her outside basis by the amount of the disallowed deduction.
-Must carry the $1,000 deduction forward to the next year.
-Must inform XYZ Partnership of her ineligibility and request that the partnership amend its tax return.

Answer 1

Alicia cannot deduct the $1,000 Section 179 deduction on her individual return due to zero taxable income and must carry it forward. The partnership's tax return is not affected by her individual tax situation, and her outside basis remains unchanged.

Step-by-step explanation:

In the scenario where Alicia, a general partner in XYZ Partnership, receives a Schedule K-1 reflecting a $1,000 Section 179 deduction but has zero taxable income due to losses from other businesses, her treatment of this deduction is guided by tax laws pertaining to Section 179.

Generally, Section 179 deductions are limited to the taxpayer's business income, and any excess deduction cannot be used to create or increase a net operating loss.

Therefore, Alicia cannot deduct the full $1,000 on her individual tax return for the current year because her taxable income is zero. Instead, Alicia should carry the disallowed portion of the deduction forward to the next year. This carryforward allows her to potentially deduct it in a future year when she may have taxable income.

The partnership does not need to be informed of Alicia's individual tax situation, as the partnership tax return is separate from her personal income tax return.

Her inability to utilize the entire Section 179 deduction does not require an amendment to the partnership's tax return because her individual limitations do not affect the partnership's tax filings.

Additionally, Section 179 deductions do not impact a partner's outside basis in the partnership. The outside basis is adjusted for the partner's share of income, gain, loss, deduction, and credit.

However, a disallowed Section 179 deduction due to the basis limitations or the taxable income limitation would not change the partner's outside basis.