Do wages increase the business income limitation for Section 179 depreciation deductions?
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Yes, wages do increase the business income limitation for Section 179 depreciation deductions.
1. Legal Framework
Section 179(b)(3)(A) of the Internal Revenue Code provides that the amount allowed as a Section 179 deduction for any taxable year cannot exceed the aggregate amount of taxable income derived from the active conduct by the taxpayer of any trade or business during the taxable year. The business income limitation is applied after the dollar limitation and phase-out rules.
Treasury Regulation § 1.179-2(c)(1) further clarifies that the aggregate amount of taxable income derived from the active conduct of any trade or business is computed by aggregating the net income (or loss) from all trades or businesses actively conducted by the taxpayer during the taxable year. Items of income that are derived from the active conduct of a trade or business include section 1231 gains (or losses) from the trade or business and interest from working capital of the trade or business. Importantly, for individuals, this also includes wages, salaries, tips, and other compensation earned as an employee.
IRS Publication 946 confirms this interpretation, stating:
"Net income or loss from a trade or business includes the following items: Section 1231 gains (or losses), interest from working capital of your trade or business, and wages, salaries, tips, or other pay earned as an employee".
The Tax Adviser also notes:
"Individual taxpayers calculate their business income limitation by adding back Sec. 179 expense, the deduction for one-half of self-employment tax under Sec. 164(f), and NOL deductions. Additionally, individual taxpayers can include all wages and tips earned as an employee in determining their business income limitation".
2. Application
- For individuals: Wages, salaries, tips, and other compensation earned as an employee are included in the calculation of taxable income for purposes of the Section 179 business income limitation. This means that if an individual has wage income from employment, that amount increases the ceiling for the Section 179 deduction.
- For partnerships and S corporations: The business income limitation is applied at both the entity and partner/shareholder level. At the individual level, a partner or shareholder may include their wages in the calculation of their own business income limitation.
3. Example
Suppose an individual taxpayer has $50,000 in net income from a sole proprietorship and $40,000 in wages from a separate job as an employee. The business income limitation for Section 179 would be $90,000 ($50,000 + $40,000), assuming no other adjustments are required.
Summary: Wages do increase the business income limitation for Section 179 depreciation deductions. This inclusion allows taxpayers to maximize their Section 179 deduction by aggregating all active business income, including employee compensation, when calculating the limitation.
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