 Most of this information comes from publication 946 how to depreciate property tax year 2022 you can find on the IRS website irs.gov irs.gov looking at the income tax formula we're focused online one income remember the first half of the income tax formula is in essence an income statement although just an outline of scaffolding other forms and schedules flowing into these line items one of those the schedule see having business income minus business income minus business expenses gets us to the net business income that rolls into line one income of our income tax formula first page of the form 1040 remember in the schedule see rolls into the schedule one which rolls into page one of form 1040 line number eight we're looking at the schedule see profit or loss from business noting the income statement format with the income and expense categories we're focused now on the expense categories more specifically the depreciation more specifically it's still the 179 type of deduction so quick recap remember that when you have property then you might have to put it on the books deviating from a cashed based system to an accrual based system in essence as an asset allocating the cost over the useful life a common accrual type of concept and in general what we would like to do as taxpayers is get the deductions as soon as possible although there could be exceptions to that rule for the tax code and depreciation they might have a accelerated depreciation method instead of straight line which is usually getting us a deduction sooner which is usually good and then if we can get a 179 deduction in essence deducting as much as we can in the first year that's usually a benefit as well we might have a special deduction as well special depreciation we'll talk about in future presentations all right that said we're focusing in once again on the 179 deduction just as a recap electing the 179 deduction introduction you can elect to recover all or part of the cost of certain qualifying property up to a limit by deducting it in the year you place the property in service this is a section 179 deduction you can elect the 179 deduction instead of recovering the cost by taking depreciation deduction which would be a benefit if we can get the benefit in the current year we're continuing on now this is the third part of our 179 deduction discussion we're now taking a look at the limitations on the amount that you might be able to deduct for the 179 deduction we looked at dollar limitations in prior presentations now we're looking at the business income limit the total cost you can deduct each year after you apply the dollar limit is limited to the taxable income from the active conduct of any trade or business during the year generally you are considered to actively conduct a trade or business if you meaningfully participate in the management or operations of the trade or business so the prime example of that would be reporting say on a schedule c generally remember when we're thinking about different kinds of incomes it's kind of a good idea to have a general categorization of different kinds of income the most common often being say what i would call w2 income that you are receiving as an employee from an employer one of the distinguishing factors that might help you to kind of categorize the different types of income in your mind is to think about how the fika taxes are being paid as the social security and medicare for example as an employee they're going to be the payroll taxes so they're going to be withholdings in that type of situation as an employee you typically don't have as many of the business expenses that you're able to be taking because the employer then is the one that is going to be responsible for most of those types of expenses although as an employee you are of course doing active work in that situation the situation and then you have a schedule a schedule c situation where you're actively participating in say your own type of business and in that situation the social security and medicare is being paid in the form of self-employment tax which would be an indication oftentimes that it's a a business kind of activity and then you have activities that might be more passive in nature such as investing in stocks and bonds where you might have interest in dividends and those are not subject to any form of social security fika taxes not in terms of withholdings usually and not in terms of self-employment taxes and then the other kind of passive-ish kind of situation is where you have real estate property on the schedule e and there's a question there whether or not some some of those businesses are active or not or passive in nature so those are the general categories okay and then that could lend to some of these limitations as well so any cost not deductible in one year under section 179 because of this limit can be carried to the next year so clearly if you're if you're limited to the 179 deduction then you would expect possibly that in the following years you might be able to take the normal depreciation so you don't like lose the capacity for the deduction you were just limited due to the income limitation and now it wouldn't really be called a carry forward but you but you do have kind of a carry forward situation with the basis that still has the capacity for deduction that you would deduct under normal rules such as for example makers deduction in the future so special rules apply to the deduction of qualified section 179 real property that is placed in service by you in tax years beginning before 2016 and disallowed because of the business income limit see special rules for qualified section 179 real property under carryover of disallowed deduction later all right taxable income what is it in general figure taxable income for this purpose by totaling the net income and losses from all trades and businesses you actively conducted during the year net income or loss from a trade or business includes the following you got section 1231 gains or losses interest from working capital or or your trade or business and wages salaries tips or other pay earned as an employee now remember just as a general rule the the IRS is of course skeptical on losses the IRS wants to be your silent partner they want to have the benefit of taking a piece of the income that but they don't want to have to take on the risk of the losses right so losses are going to be could be a benefit with regards to two taxes so just as a general rule you would think that you want to always be thinking well there might be limitations if this you know cuts into a loss situation for many areas in the tax code so in addition figuring taxable income without regard to any of the following so the section 179 deduction my tax deductions are crying so the self-employment tax deduction any net operating loss carry bought back or carry over any unreimbursed employee business expenses two different taxable income limits in addition to the business income limit for section 179 deduction you may have a taxable income limit for some other deduction you may have to figure the limit for this other deduction taking into account the section 179 deduction if so complete the following steps so in other words now you've got this income limitation with regards to this one deduction they apply the same principle sometimes to other deductions which also might be subject to an income limitation so now the question is well how are you going to figure out which deduction is going to be limited in which order with that these two deductions or multiple deductions that have these income limitations okay so one figure taxable income without the section 179 deduction or the other deduction two figure a hypothetical section 179 deduction using the taxable income figure in step one three subtract the hypothetical section 179 deduction figured in step two from the taxable income figured in step one four figure a hypothetical amount for the other deduction using the amount figured in step three as taxable income notice that this is a complex series of steps here you can see conceptually why this problem happens but running through these calculations can be quite tedious software hopefully can help us run through those calculations and then we might be able to unpack or deconstruct using the software and applying these concepts five