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Section 179 Addback Example 1-Sole Proprietor
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Mack is the sole proprietor of a trucking company who purchased a new dump truck he placed in service in 2019 and used for his business. On his federal return, Mack elects to expense $100,000, which is the entire cost of the new truck. He has business income of $80,000. His federal section 179 expense deduction is limited based on the cost of the asset in comparison to his business income. Since he is limited to expensing $80,000 (his business income), Mack will have a carryover of $20,000 ($100,000 – $80,000 = $20,000) on his federal return.
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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 these 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 2019 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 2019 — or $8,800 ($44,000 x 20%) — in each of the next five years (tax years 2020 through 2024).
- In the first year, the Minnesota section 179 expense is limited to $36,000 – that is, $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 (2020 through 2024) 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.
