How does Section 179 expensing apply to an LLC that is in a loss position?
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Section 179 expensing allows a taxpayer to elect to deduct the cost of qualifying property in the year it is placed in service, rather than depreciating it over time. However, there are important limitations and special rules that apply when the taxpayer is an LLC (limited liability company) that is in a loss position.
1. Section 179 Deduction and the Taxable Income Limitation
Core Rule:The Section 179 deduction is limited to the aggregate amount of taxable income derived from the active conduct of any trade or business during the taxable year. This means that if the LLC is in a loss position (i.e., it has no taxable income or has a net loss), it cannot currently deduct any Section 179 expense for that year. The deduction cannot create or increase a net operating loss.
Practical Effect:- If the LLC’s taxable income from all active trades or businesses is zero or negative, the Section 179 deduction for that year is zero.- The unused Section 179 deduction is not lost; it is carried forward indefinitely to future years, where it can be used to the extent of taxable income in those years.
2. Application in the Context of an LLC
LLC Taxation:- Most LLCs are taxed as partnerships (unless they elect to be taxed as a corporation). The Section 179 deduction is determined at the entity level and then allocated to the members (owners) on their Schedule K-1s.- Each member then applies their own taxable income limitation at the individual level. If a member does not have sufficient taxable income from active trades or businesses, their share of the Section 179 deduction is carried forward at the individual level.
IRS Guidance:- PLR 9126014 confirms that the Section 179 deduction is limited by the aggregate taxable income from all active trades or businesses, including income from employment, sole proprietorships, partnerships, S corporations, and certain rental activities, provided the taxpayer is actively involved in those activities.- If the LLC is in a loss position, the Section 179 deduction is not allowed for that year but is carried forward.
3. Carryforward of Unused Section 179 Deduction
- The carryforward is unlimited in duration; it can be used in any future year in which the LLC (or the member, if the LLC is a partnership) has sufficient taxable income from active trades or businesses.
- The carryforward amount is reported on the appropriate line of Form 4562 and tracked until fully utilized.
4. Example
Suppose an LLC purchases $100,000 of qualifying equipment in 2025 and elects Section 179 expensing. However, the LLC has a net taxable loss for the year. The entire $100,000 Section 179 deduction is disallowed for 2025 due to the income limitation and is carried forward to 2026. If in 2026 the LLC has $60,000 of taxable income from active trades or businesses, it may deduct $60,000 of the carryforward, and the remaining $40,000 is carried forward to subsequent years.
5. Additional Considerations
- The Section 179 deduction is also subject to annual dollar limits and phase-outs based on the total amount of qualifying property placed in service during the year. For 2025, the maximum deduction is $1,250,000, reduced dollar-for-dollar for purchases exceeding $3,130,000.
- The deduction cannot be claimed by tax-exempt organizations, estates, or trusts.
- If the property is disposed of or its business use drops to 50% or less before the end of its recovery period, a recapture of the Section 179 deduction as ordinary income is required.
6. Summary Table
7. Key Takeaways
- An LLC in a loss position cannot currently deduct Section 179 expense; the deduction is limited to taxable income from active trades or businesses.
- The unused deduction is carried forward indefinitely until it can be used.
- For LLCs taxed as partnerships, the deduction is allocated to members, who then apply their own income limitation.
- Recapture rules apply if the property is disposed of or business use drops below 50% before the end of the recovery period.
If you need further details on how the limitation is calculated or how the carryforward is tracked, please specify.
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