Does passive income qualify for the business income limitation when determining Section 179 deduction eligibility?
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No, passive income does not qualify for the business income limitation when determining Section 179 deduction eligibility.
1. Legal Framework
Section 179 Business Income Limitation:The Section 179 deduction is limited to the taxpayer’s aggregate taxable income derived from the active conduct of any trade or business during the taxable year. This limitation is designed to prevent the Section 179 deduction from creating or increasing a net operating loss. The relevant statutory language is:
“The amount allowed as a deduction under subsection (a) for any taxable year (determined after the application of paragraphs (1) and (2)) shall not exceed the aggregate amount of taxable income of the taxpayer for such taxable year which is derived from the active conduct by the taxpayer of any trade or business during such taxable year.”
— Subsection 179(b)(3)(A)
Treasury Regulations:The regulations clarify that 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. Importantly, the regulations specify that:
- Taxable income derived from the active conduct of a trade or business does not include income from property held merely for the production of income or from activities not engaged in for profit (as described in section 183).
- Passive income, such as rental income or investment gains, is not considered income from the active conduct of a trade or business for Section 179 purposes.
IRS Guidance and Publications:IRS Publication 946 and the Instructions for Form 4562 both reinforce that only income from the active conduct of a trade or business is counted toward the Section 179 business income limitation. Passive income, such as investment income, rental income (unless the taxpayer is a real estate professional and materially participates), and portfolio income, is excluded.
Practical Example:If a sole proprietor earns $50,000 in net business income and $20,000 in capital gains from stock investments, only the $50,000 of active business income counts toward the Section 179 limit. The $20,000 of passive investment income does not increase the Section 179 deduction limit.
2. Summary Table
3. Conclusion
Passive income does not qualify for the business income limitation when determining Section 179 deduction eligibility. Only taxable income from the active conduct of a trade or business is considered. Passive income, such as rental income (unless the taxpayer is a real estate professional and materially participates), investment income, and portfolio income, is excluded from the calculation.
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