The Farm CPA
Paul is now part of the fourth generation in America that is involved in farming and hopes the next generation will be involved also. Through his blog he provides analysis and insight to farmer tax questions.
Section 179 Can Create A Farm Loss (In Certain Situations)
Jan 10, 2013
We got the following question from one of our readers:
"Is it true you can only deduct Section 179 in the amount of your farm income remaining after other deductions? In other words you can not have a loss because of 179 depreciation? If the Section 179 deduction is more can you carry it over to next year?"
For Section 179, there is an overall taxable income limitation for deducting the 179 expense. For an individual, this limit is based upon your overall global business income including the following:
- Wages and salaries for the taxpayer and/or spouse,
- Ordinary proprietorship (schedule C or F), partnership, or S corporation net income (or loss),
- Section 1231 gains (or losses) from a trade or business (selling farm machinery for more than cost),
- Depreciation recapture from the sale of farm or other business equipment.
All of these items are added together and this "taxable income" limitation will determine your maximum Section 179 deduction.
For example, assume a farmer has schedule F net farm income before Section 179 of $200,000. He has $100,000 of wages earned from outside the farm. He purchased $500,000 of equipment during the year. He is allowed to deduct up to $300,000 of equipment under Section 179 on his schedule F resulting in a farm loss of $100,000 which is offset by his wages of $100,000. In most cases, he would not want to take that much, but he is allowed to deduct that amount.
Without the wages, he would have been limited to a $200,000 deduction amount.
If the amount of Section 179 elected exceeds this taxable income limitation, then the excess can be carried forward and used in the next year (subject to these limitations, etc.). As discussed in previous posts, if you carry too much forward, you may permanently lose the deduction. You do not want that to happen.
As usual, you should discuss this with your tax advisor. We have seen many returns with the wrong amount of Section 179. Make sure yours is correct.