Does the inclusion of wages impact the allowable Section 179 depreciation deduction based on business income?
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Yes, the inclusion of wages can impact the allowable Section 179 depreciation deduction when applying the business income limitation.
1. Legal Framework
Section 179 allows a taxpayer to elect to expense the cost of qualifying property, subject to certain limitations. One of these is the "business income limitation," which restricts the Section 179 deduction to the amount of taxable income derived from the active conduct of any trade or business during the taxable year. Any amount not deductible due to this limitation can be carried forward to future years.
2. Statutory and Regulatory Guidance
- IRC §179(b)(3)(A): The amount allowed as a deduction under Section 179 for any taxable year (after applying the dollar and phase-out limits) cannot exceed the aggregate amount of taxable income derived from the active conduct by the taxpayer of any trade or business during such taxable year.
- Treas. Reg. §1.179-2(c)(1): Taxable income for this purpose 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) and interest from working capital of the trade or business. Taxable income is computed without regard to the Section 179 deduction, any net operating loss carryback or carryforward, and certain other deductions.
- Treas. Reg. §1.179-2(c)(6)(iv): Wages, salaries, tips, and other compensation derived by a taxpayer as an employee are included in the aggregate amount of taxable income for purposes of the Section 179 business income limitation.
3. IRS Publications and Instructions
- Publication 946 (2024): When calculating the business income limit for Section 179, you must include all wages, salaries, tips, or other pay earned as an employee. This is in addition to net income from sole proprietorships, partnerships, S corporations, and other active businesses. The business income limit is the total of net income and losses from all trades or businesses you actively conducted during the year, plus wages and similar compensation.
- Instructions for Form 4562 (2024): For individuals, the business income limit is the smaller of the Section 179 dollar limit or the total taxable income from any trade or business actively conducted, computed without regard to the Section 179 deduction, the deduction for one-half of self-employment taxes, or any net operating loss deduction. You must include all wages, salaries, tips, and other compensation you earned as an employee (from Form 1040, line 1). 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.
4. Practical Application
- If you are a sole proprietor, partner, S corporation shareholder, or employee, you aggregate all net business income and all wages, salaries, tips, and other compensation earned as an employee to determine the business income limitation for Section 179.
- For example, if you have $30,000 in net business income from a sole proprietorship and $40,000 in wages from employment, your business income for Section 179 purposes is $70,000. This means you could deduct up to $70,000 under Section 179, subject to the other Section 179 limits (dollar cap and phase-out).
Summary: Yes, 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 inclusion can increase the allowable Section 179 deduction, as the deduction is limited to the aggregate amount of taxable income from all active trades or businesses, including employee compensation.
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