Reduce self-employment earnings by 179 expense?

[MR]

when determining the earned income for a self-employed dude, we have always taken the net earnings from self employment number and subtracted the 179 expense. in reading the sal tripodi definition of earned income, he seems to imply that you do not subtract it. what's right?

mr

[mbozek]

I have never head of a reduction for 179 expenses which are a reduction from taxable income. There is a reduction of net earnings from SE for 1/2 of the SECA tax. The 179 deduction is limited to taxable income derived from from the trade or business of a taxpayer. See IRC 179(B)(3). Bu that is not the same as reducing the NESE.

[GBurns]

Lets think about this.

What line on the 1040 provides the amount of SE Income?

Is this before or after the 179 deduction?

If SE income is determined before then you could not deduct the 179 expense for this purpose.

If it is after then you have a reduced SE income.

[Mary Kay Foss]

I've always calculated SE tax after the Section 179 deduction, most computer tax return services do the same. Schedule C income is always after the Sec 179 deduction and Sec 179 deductions from partnerships reported on Schedule E are always deducted in calculating both income tax and SE tax.

With the original formula described, I assumed that the starting point was income after the Sec 179 deduction.

[jane123]

What is partnership income for purposes of determining compensation for making an employer SIMPLE IRA contribution? Is if the amount reported on the k-1 or must the k-1 amount be reduced by expenses deducted on the partner’s tax return in order to determine compensation. Also posting on SIMPLE board

[Guest Robert Garrels]

Great question! The answer is that line 15(a) on the partner?s K-1 is only the starting point for determining self-employment income. There are three adjustments applied at the partner?s Form 1040 level: (1) Section 179 expense, (2) Depletion from oil and gas properties and (3) Unreimbursed partnership expense. Items 1 and 2 may not agree with the amount reported out separately on the partner?s K-1 because of limitations applied at the Form 1040 level. Item 3 is unknown by the partnership so you have to get it (and items 1 and 2) from the Form 1040 for each partner ? specifically Part II, Schedule E, Form 1040. (Incidentally, these adjustments also affect the calculation of self-employment taxes used in arriving at earned income.)

I remember attending an ASPA lecture where partnership compensation was described as one of the most understood items affecting practitioners, I don?t think that was meant to condone ignoring the adjustments, but like on tax returns, anything is deductible unless you are audited.

To get the software that prompts you to include these adjustments affecting income from partnerships, check out my Website at www.aqsoftware.com or contact Gary Lesser for his version.

Bob Garrels

[jane123]

Thanks Bob