Section 179 Addback Example 1-Sole Proprietor

For his Minnesota return, Mack will have to add back 80 percent of the difference from the increased federal section 179 expense deduction and the Minnesota limit. The difference is calculated by re-computing Form 4562 for Minnesota purposes and subtracting 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 Minnesota Schedule M1M worksheet.

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 2018 is $44,000 (step 4 from above worksheet for line 4). Also, Mack will be able to subtract 20 percent of the amount he added back in 2018 — or $8,800 ($44,000 x 20%) — in each of the next five years (tax years 2019 through 2023).
• In the first year, the Minnesota section 179 expense is limited to $36,000 ($25,000 Minnesota maximum plus $11,000, the difference of step 3 & step 4 above [55,000 - 44,000]).
• He recovers the addback amount of $44,000 over the next five years (2019 until 2023) 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 that are expensed and the total exceeds the Minnesota$25,000 limit.