How does a taxable loss in an LLC affect the maximum federal depreciation deduction for $6,000 equipment acquired in 2024 with both bonus depreciation and Section 179 under MACRS?
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A taxable loss in an LLC directly impacts the ability to claim federal depreciation deductions for equipment under both Section 179 and bonus depreciation rules. Here’s a detailed analysis for $6,000 of equipment acquired in 2024, considering the Modified Accelerated Cost Recovery System (MACRS), Section 179 expensing, and bonus depreciation:
1. Section 179 Expensing
Section 179 allows a taxpayer to elect to expense the cost of qualifying property (such as most tangible personal property, including equipment) up to an annual limit, rather than depreciating it over several years. For 2024, the maximum Section 179 deduction is $1,220,000, reduced dollar-for-dollar if total qualifying property placed in service exceeds $3,050,000.
However, Section 179 is subject to a taxable income limitation:- The deduction cannot exceed the aggregate amount of taxable income derived from the active conduct of any trade or business during the year.- If the business (here, the LLC) has a taxable loss for the year, the Section 179 deduction is limited to $0 for that year.- Any disallowed Section 179 deduction due to the income limitation is carried forward to the next year(s) and can be used when there is sufficient taxable income.
Example:If the LLC has a taxable loss in 2024, the entire $6,000 cost of the equipment cannot be deducted under Section 179 in 2024. The $6,000 would be carried forward to future years and may be deducted when the LLC has sufficient taxable income.
2. Bonus Depreciation (Section 168(k))
Bonus depreciation allows a taxpayer to deduct a percentage of the cost of qualifying property in the year it is placed in service. For property acquired and placed in service in 2024, the bonus depreciation rate is 60%.
Key differences from Section 179:- Bonus depreciation is not limited by taxable income. It can create or increase a net operating loss (NOL).- There is no annual dollar cap for bonus depreciation.- Any remaining basis after bonus depreciation is depreciated under MACRS.
Example:If the LLC has a taxable loss in 2024, it can still claim 60% bonus depreciation on the $6,000 equipment:- Bonus depreciation deduction: $6,000 × 60% = $3,600- Remaining basis: $6,000 – $3,600 = $2,400 (to be depreciated under MACRS)
This $3,600 deduction is allowed even if it increases the LLC’s loss for the year.
3. MACRS Depreciation
After applying Section 179 and bonus depreciation, any remaining basis is depreciated under MACRS. For most equipment (5-year property), the 200% declining balance method is used, switching to straight line when advantageous.
- If Section 179 is not allowed due to a loss, and bonus depreciation is claimed, only the remaining basis is depreciated under MACRS.
- The MACRS deduction is not limited by taxable income, but the deduction is smaller because the basis has been reduced by any bonus depreciation taken.
4. Order of Application
The order is:1. Section 179 expensing (limited by taxable income; not allowed if there is a loss)2. Bonus depreciation (not limited by taxable income; allowed even if there is a loss)3. MACRS depreciation on the remaining basis
5. Summary Table for $6,000 Equipment (LLC with Taxable Loss in 2024)
6. Additional Considerations
- Section 179 carryforward: The $6,000 not allowed in 2024 due to the loss can be carried forward and used in a future year when the LLC has taxable income.
- Bonus depreciation: The $3,600 deduction is allowed in 2024, even if it increases the loss.
- MACRS: The remaining $2,400 basis is depreciated over the asset’s recovery period, starting in 2024.
7. Relevant Code Sections
- Section 179(b)(3): Limits the deduction to taxable income from the active conduct of a trade or business; excess is carried forward.
- Section 168(k): Allows bonus depreciation, not limited by taxable income.
Conclusion: A taxable loss in an LLC prevents any Section 179 deduction for equipment in that year, but does not limit bonus depreciation or MACRS deductions. For $6,000 of equipment acquired in 2024, the LLC can claim $3,600 of bonus depreciation and depreciate the remaining $2,400 under MACRS. The Section 179 deduction is not allowed in 2024 but is carried forward to future years when the LLC has taxable income.
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