Section 179

Today TaxMama hears from IRA in California, who tells us . “This year I will have over $80,000 in Section 179 deductions for my sole proprietorship. Is this deduction a preference item for AMT purposes?”

Dear Ira,

You can only use the deduction if you have sufficient income, preferably in your business. Though, it will offset wages, too. http://www.irs.gov/publications/p946/ch02.html#d0e2599

If the $80,000 is substantially more than your business income, think very, very carefully before using it to offset other income on your tax return. You are apt to attract a hobby loss audit. So be prepared with a business plan showing when and how your business is going to turn a profit.

Now, to your actual question – is this a preference item for AMT (alternative minimum taxes), take a peek at Form 6251. http://www.irs.gov/pub/irs-pdf/f6251.pdf

See if you can find the line that says Section 179 depreciation on it. You can’t find it? Because it’s not there.

Two things are: Line 10 – Net operating loss deduction from Form 1040, line 21. Enter as a positive amount

If your Sec. 179 depreciation results in a net operating loss, that will affect AMT next year.

Line 17 – Depreciation on assets placed in service after 1986 (difference between regular tax and AMT)

But, that’s not AMT. It’s the difference between straight-line depreciation and MACRS depreciation – or any other accelerated depreciation.

Incidentally, did you know that California didn’t recognize the old Sec 179 limits. So, this new, higher limit is certainly not included in California’s Franchise Tax Code. For California, your limit is $25,000. http://www.ftb.ca.gov/forms/07_forms/07_540dins.pdf
You will have to use regular depreciation on the rest of the cost. So you will have a large difference between IRS and California depreciation for many years to come.

Definitely more than you ever wanted to know!

And remember, you can find answers to all kinds of questions about depreciation and other tax issues, free. Where? Where else? At TaxMama.com

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