Discussion:Section 179 and S Corp Shareholder Investor

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Discussion Forum Index --> Advanced Tax Questions --> Section 179 and S Corp Shareholder Investor


Discussion Forum Index --> Tax Questions --> Section 179 and S Corp Shareholder Investor

Taxmommy (talk|edits) said:

15 June 2009
My >2% shareholder in Hotel business is investor only. Using LaCerte, section 179 was always disallowed and CF to next year even on years where there was income. In recent year, most assets were sold and 179CF was allowed in year of the sale. According to section 179 Active Conduct rules..."the purpose of the active conduct requirement is to prevent a passive investor in a trade or business from deducting section 179 expenses against taxable income derived from that trade or business." So far so good. The sale year is under audit and auditor claims passive activity rules supercede section 179 rules and that section 179 would have been allowed in prior years since there was passive income. She wants to disallow the use of the CF in the year of sale. Any insight into this quandary? I had questioned the LaCerte treatment in the early years, but after researching the 179 rules assumed that was the reason and the treatment was correct. Now I am looking for more ammo to defend this position. Thanks.

Kevinh5 (talk|edits) said:

15 June 2009
whipsaw

great search term

Riley2 (talk|edits) said:

15 June 2009
The auditor is completely wrong.

Quoting directly from the 179 regs,

a taxpayer generally is considered to actively conduct a trade or business if the taxpayer meaningfully participates in the management or operations of the trade or business.

Death&Taxes (talk|edits) said:

15 June 2009
"Reverse recoupment?"

You Might look at Reg. 1.179-2 "(5) Ordering rule for certain circular problems—(i) In general. A taxpayer who elects to expense the cost of section 179 property (the deduction of which is subject to the taxable income limitation) also may have to apply another Internal Revenue Code section that has a limitation based on the taxpayer's taxable income. Except as provided in paragraph (c)(1) of this section, this section provides rules for applying the taxable income limitation under section 179 in such a case. First, taxable income is computed for the other section of the Internal Revenue Code. In computing the taxable income of the taxpayer for the other section of the Internal Revenue Code, the taxpayer's section 179 deduction is computed by assuming that the taxpayer's taxable income is determined without regard to the deduction under the other Internal Revenue Code section. Next, after reducing taxable income by the amount of the section 179 deduction so computed, a hypothetical amount of deduction is determined for the other section of the Internal Revenue Code. The taxable income limitation of the taxpayer under section 179(b)(3) and this paragraph (c) then is computed by including that hypothetical amount in determining taxable income."

Riley2 (talk|edits) said:

15 June 2009
The whole issue is whether an owner who is not materially participating can be treated as "actively conducting". I think the answer is obviously yes.

Harry Boscoe (talk|edits) said:

15 June 2009
The use of the word "passive" in this context is ambiguous, incorrect, misleading, and will get you to the wrong answer if you don't get really rigourous with definitions like "passive," "active," "non-passive," and "non-active" and if you don't separate the Section 179 limitations from the Section 469 limitations. Maybe I'm lashing out a little bit here, but right where you say "the auditor claims passive activity rules supercede [sic] section 179 rules" is where you have to jump in, put your foot down and cite the real rules to the IRS know-just-a-little [I try not to use the term "know-nothing" since it gets people's hackles up].

Harry Boscoe (talk|edits) said:

15 June 2009
Put a different way: "Allowance" rules rarely trump "disallowance" rules. Think about it...

When the agent says the allowance under the passive rules trumps the disallowance under the Section 179 rules, she's showing her naivete. Unless of course, the disallowance under the Section 179 rules wasn't really there. Did the investor have other sources of "active trade or business income" under the Section 179 rules?

Riley2 (talk|edits) said:

15 June 2009
Agree with Harry. Quote the following regulation section and the auditor will come to her senses.

Reg § 1.179-2(c)(6)(ii)

Harry Boscoe (talk|edits) said:

15 June 2009
But let's not ask ourselves yet how the S corporation was passing through Section 179 deductions in years that it had taxable business losses... [This is a tangential issue and shouldn't be considered until after we've won the audit.]

Taxmommy (talk|edits) said:

16 June 2009
Investor only has retirement and portfolio income and there were no losses on the K-1 until the year after most of the assets were sold. I appreciate those of you who really read my question and understood the dilemna. This audit is an NRP case so every line is under review. I have found in most cases LaCerte is right so I believe our position is correct even though the auditor is at odds with us.

Thanks for all of the input.

Taxmommy (talk|edits) said:

16 June 2009
Investor only has retirement and portfolio income and there were no losses on the K-1 until the year after most of the assets were sold. I appreciate those of you who really read my question and understood the dilemna. This audit is an NRP case so every line is under review. I have found in most cases LaCerte is right so I believe our position is correct even though the auditor is at odds with us.

Thanks for all of the input.

Riley2 (talk|edits) said:

16 June 2009
Lacerte assumes that a taxpayer, who does not materially participate, does not make meaningful management decisions. This is not necessarily true; although, it may be true in your case.

Taxmommy (talk|edits) said:

16 June 2009
Great news from the auditor. Since section 469 is more liberal than 179 when it comes to passive income, she has decided to accept our 179CF position. Yahoo!

Thanks again for your supportive replies.

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