Section 179 Addback Example 1-Sole Proprietor

For his Minnesota return, Mack will have to add back 80% of the difference from the increased federal section 179 expense deduction and the Minnesota limit. He calculates the difference by recomputing Form 4562 for Minnesota purposes (referred to as “Minnesota Form 4562”). Then, he subtracts the Minnesota limit from line 12 of the Minnesota Form 4562 from line 12 of the federal Form 4562 ($80,000 – $25,000 = $55,000).

See the following Form 4562 examples (for federal and Minnesota) and the Worksheet for Line 4 on Minnesota Schedule M1.

Federal Form 4562 — Example 1

Form 4562 MN adjustment - Example 1

Minnesota Schedule M1M, line 4 worksheet — Example 1

Example 1 answer:

• Mack’s Minnesota addback for 2020 is $44,000 (step 4 from the Worksheet for Line 4 above). Also, Mack will be able to subtract 20% of the amount he added back in 2020 — or $8,800 ($44,000 x 20%) — in each of the next five years (tax years 2021 through 2025).
• In the first year, the Minnesota section 179 expense is limited to $36,000 ($25,000 Minnesota maximum plus $11,000, the difference of steps 3 and 4 above [$55,000 - $44,000]).
• He recovers the addback amount of $44,000 over the next five years (2021 through 2025) by subtracting $8,800 each year.
• When the $20,000 (line 13 of federal Form 4562) carryover of section 179 expense is used, he may have a section 179 expensing addback in that year if there are other items expensed and the total exceeds Minnesota’s $25,000 limit.