Section 179 on commercial rental property

[jessicaphillipsc]

How do I elect Sec 179 for carpet installed in 2018 on a commercial rental property. It is my understanding that this is allowed for 2018.

[TaxGuyBill]

Is this 5 year property or 39 year property?

[jessicaphillipsc]

It would be 39 year property because its carpet. I tried using rental improvements but that does not allow sec 179.

[TaxGuyBill · Accepted solution]

Okay, I figured out the problem.

Section 179 is for purchases that are used for the "active conduct of the taxpayer's trade or business", and is limited by the total "Trade or Business" income.  However, rentals are not always a "Trade or Business".

*IF* you determine the rental does qualify as a Section 162 "Trade or Business", you need to manually add the rental income to Line 11 of Form 4562 (Line 3b of the Depreciation Options worksheet will avoid an override).  The program does not automatically do this because the program does not know if it qualifies as a "Trade or Business" (although the QBI section should let it know if it qualifies as a Trade or Business).

*IF* the rental does not qualify as a "Trade or Business", Section 179 is not allowed.

Regulation §1.179-2(c)(6):

(6)Active conduct by the taxpayer of a trade or business -

(i)Trade or business. For purposes of this section and § 1.179-4(a), the term trade or business has the same meaning as in section 162 and the regulations thereunder. Thus, property held merely for the production of income or used in an activity not engaged in for profit (as described in section 183) does not qualify as section 179 property and taxable income derived from property held for the production of income or from an activity not engaged in for profit is not taken into account in determining the taxable income limitation.

(ii)Active conduct. For purposes of this section, the determination of whether a trade or business is actively conducted by the taxpayer is to be made from all the facts and circumstances and is to be applied in light of the purpose of the active conduct requirement of section 179(b)(3)(A). In the context of section 179, 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. Consistent with this purpose, 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. Generally, a partner is considered to actively conduct a trade or business of the partnership if the partner meaningfully participates in the management or operations of the trade or business. A mere passive investor in a trade or business does not actively conduct the trade or business.

 https://www.law.cornell.edu/cfr/text/26/1.179-2#c

[jessicaphillipsc]

I would consider this active trade or business as it is the taxpayers only source of income.  The only way I can get it to work is to add it to line 3b on the Depreciation Options tab. I would have assumed I could have checked a box somewhere on the Schedule E worksheet. I am curious if this would cause an audit issue. I have never manually entered anything here and if I override 3a, I receive an error disallowing efile.

[TaxGuyBill]

If it is a Trade or Business, you can go ahead and enter the income on Line 3b of that worksheet.  The program is just not set up for the ability for determining if a rental is a "Trade or Business" or not.

As a side note, in MOST cases you can e-file with an override if you disable error-checking when you e-file (you need to file from Homebase to have that option; it does not give you that option if you e-file from the 'tab' within the client file).  But entering it on Line 3b of that worksheet should do it without any overrides.

[TaxGuyBill]

Glued-down carpet (typical of commercial properties) is usually 39 years, but tacked-down carpet (typical of residential properties) is usually 5 years.

Anyways, "Qualified Improvement Property" (Code "J5") should allow Section 179.  Does that work for you (it works for me)?

[jessicaphillipsc]

No it doesn't work for me.

[TaxGuyBill]

Have you updated the software?  Maybe try deleting the asset and re-enter it?

[jessicaphillipsc]

I have tried both. I must be missing something. It is a Schedule E, I have it set up as commercial and the asset as J5. When I enter the 179 election manually, I don't receive an error, but it does not calculate it with depreciation.

[TaxGuyBill]

Yes, you need to manually enter the Section 179 on that line on the Worksheet, just like any other kind of asset you claim Section 179.  It can't be an automatic thing because it is an election.  When you enter the Section 179, the depreciation calculated will be $0 because it has all been used via Section 179.

So if I am interpreting your last comment correctly, it working just fine.

[jessicaphillipsc]

I entered the 179 manually just like I would on any asset under the business usage %. The income does not change if I enter the 179 amount. This appears to be a system problem to me. I have updated my software.