What types of business income are excluded from the Section 179 business income limitation calculation?
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The Section 179 business income limitation restricts the amount of Section 179 deduction a taxpayer can claim in a tax year to the aggregate amount of taxable income derived from the active conduct of any trade or business during that year. However, not all types of income are included in this calculation. The following types of business income are specifically excluded from the Section 179 business income limitation calculation:
- Investment Income: Income from property held merely for the production of income (such as interest, dividends, or rents from investment property) is not included. Only income from the active conduct of a trade or business is counted. For example, rental income from property not actively managed as a trade or business, or portfolio income, is excluded.
- Income from Activities Not Engaged in for Profit: Income from activities that are not engaged in for profit (as described in IRC §183) is excluded. This means that hobby income or income from activities that do not rise to the level of a trade or business under IRC §162 is not included in the calculation.
- Tax-Exempt Income: Any tax-exempt income is not included in the calculation of taxable income for the Section 179 limitation.
- Certain Partnership and S Corporation Items: For partnerships and S corporations, the calculation of taxable income for the Section 179 limitation excludes credits, tax-exempt income, and, for S corporations, deductions for compensation paid to shareholder-employees.
- Deductions Suspended Under Any Section of the Code: Deductions that are suspended and not currently deductible under other provisions of the Internal Revenue Code are not included in the calculation.
- Net Operating Loss Carrybacks or Carryforwards: The calculation of taxable income for the Section 179 limitation is made without regard to any net operating loss carryback or carryforward.
- Section 164(f) Deduction (One-half of Self-Employment Tax): The calculation is also made without regard to the deduction for one-half of self-employment tax under IRC §164(f).
Summary Table of Excluded Income:- Investment income (e.g., interest, dividends, passive rents)- Income from activities not engaged in for profit (hobbies)- Tax-exempt income- Credits, tax-exempt income, and certain S corporation compensation deductions- Deductions suspended under any section of the Code- Net operating loss carrybacks or carryforwards- Section 164(f) deduction (one-half of self-employment tax)
Key Principle: Only income from the active conduct of a trade or business (as defined under IRC §162) is included in the Section 179 business income limitation calculation. Passive, investment, or non-trade/business income is excluded.
For further details, see Treas. Reg. §1.179-2(c)(1), (c)(6), and related examples.
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