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Section 179 Business Income Limitation

Software reference · Written guide Content date 2 min read

The Section 179 deduction is limited to the taxpayer’s taxable income from the active conduct of trades or businesses. On Form 4562, line 11, the business income limitation is the smaller of the dollar limitation on line 5 or the taxpayer’s business income, but not less than zero. 

For the purposes of section 179 in the individual income tax return, business income is all wage income earned as an employee (Form 1040 line 1) plus the taxable income from the active conduct of all trades or businesses during the year without regard to the section 179 deduction itself, the deduction for one-half of self-employment taxes, any NOL carryback or carryforward, and any unreimbursed employee business expense.

How Is the Section 179 Business Income Limitation Calculated?

The business income calculation assumes the taxpayer materially participates in all the business activities included in the calculation, or for rental activities has active participation or is a real estate professional.

Activities where the taxpayer does not materially participate are excluded from the calculation, as well as any activity reported from a publicly traded partnership.

The business income limitation on Form 4562 is calculated as follows:

 Wages, salaries, tips, etc. (Form 1040 line 1)
+Interest from working capital of the trade or business. (Schedule B)
+/-Business income (loss) reported on Schedule C without regard to any section 179 deduction.
+/-Rental real estate income (loss) (a) for a real estate professional or (b) with active partcipation, reported on Schedule E without regard to any section 179 deduction.
+/-Pass-through entity nonpassive income (loss) reported on Schedule E lines 28(i) and 28(k), not including unreimbursed partner expenses.
+/-Pass-through entity net rental real estate income (loss) reported on Schedule K-1 (Form 1065) Box 2 and Schedule K-1 (Form 1120-S) Box 2 with either active or material participation.
+/-Pass-through entity other rental income (loss) reported on Schedule K-1 (Form 1065) Box 3 and Schedule K-1 (Form 1120-S) Box 3 with either active or material participation.
+/-Pass-through entity section 179 recapture reported on Schedule K-1 (Form 1065) Box 20 code L and Schedule K-1 (Form 1120-S) Box 17 code K.
+/-Income (loss) reported on Form 4835 with active participation and without regard to any section 179 deduction.
+/-Farm income (loss) reported on Schedule F without regard to any section 179 deduction.
+/-Ordinary gain (loss) on sale of business property reported on Form 4797 with active participation.

Tax Processors Plus strives to make the information on this page timely and accurate but makes no promise or guarantee about the timeliness, accuracy, or completeness of the contents of this page. This is general information and is not intended to be tax advice. You are encouraged to also review the underlying federal resources and publications.