Limited partner taking Section 179

Did a search and found a topic that comes close, but not quite. A limited partner owns a minority interest in an active business. Limited in liability (limited to capital account balance) and does not make management decisions. All management decisions are approved by managing partner who is also general partner. K-1 for limited partner shows ordinary income in box 1 and section 179 expense in box 12 and NO SE earnings in Box 14 as limited partner earnings are not subject to SE tax on limited partner earnings.

Limited partner works for general partner in another business (construction) and gets a substantial W-2. The businesses are similar in nature (construction and land development) and often construction is hired to develop all land for the partnership. Limited partner actively participates in the partnership and meets the material participation rules (participates 500 hours per year in partnership).

Limited partner's CPA is disallowing the section 179 expense based on the K-1 marked as limited partner and no SE earnings and is taking the position it is a passive activity and therefore no section 179.

My position is that since limited partner participates in the operations of the business, he is treated as active and section 179 is allowed. He also meets the 500 hour threshold for material participation (item #1 in the 7 rules of material participation). His w-2 from the construction business, (not the partnership) is also more than enough to absorb the section 179. My reading is w-2 earnings from a separate entity are allowed to be used to deduct section 179 from a limited partnership.

Limited partner. If you owned an activity as a limited partner, you generally are not treated as materially participating in the activity. However, you are treated as materially participating in the activity if you met test (1), (5), or (6) under the seven material participation tests discussed above.


Is my understanding correct here in that he has 2 ways to take section 179 in that he does materially participate and he has w-2 earnings to offset even if he is considered passive?

Anyone??

Reg 1.179-2(c)(2)(v)(6)(ii)
In the context of section 179, the purpose of the active conduct requirement is to prevent a passive investor in a trade or business from deducting section 179 expenses against taxable income derived from that trade or business.

750 hours or 500 hours - to qualify as "materially participation"?
Unless a Real Estate Professional.
Tax Advisor has many articles on this topic.

Most tax cases the TP loses - court rules against sufficient hours or type participation. Recent case the TP won - whoopie -
a rare win for the taxpayer - look for the Physician in St Louis who owned night clubs and restaurants.

I agree with you and not the other accountant.

Here’s my take on 1.179-2: The “meaningful participation” test (i.e., the “active conduct” test) is applied to ALL trades or businesses owned by the taxpayer. And W2 wages count as active income.

Thus:

Activity #1 – Assume no meaningful participation. Assume $10k ordinary income and $1k Sec 179 deduction.
Activity #2 – Assumes yes to meaningful participation. Assume $9k ordinary income and $0k Sec 179 deduction.

In this case, we’d have $9k of “qualifying income” and, therefore, we’d be entitled to the $1k Section 179 deduction. It does not matter that the 179 deduction stemmed from Activity #1.

Thank you Jeff. I was reading this thread and couldn't figure out why the original accountant was doing that, and my tired brain started wondering whether I had missed a Limited Partner = No 179 deduction all these years.

So an update. The other CPA forwarded my write up to their tax department and the tax manager there agreed with my assessment, which I was hoping he would as I don't have time or energy right now to argue with them.

In summary, limited partner defaults to passive income unless material participation applies, then it is considered "active" income.

ALL active income (w-2s and other trade or business income) adds to get total active income and then sec 179 is applied against total active income to determine the deduction.

There is probably more but I am tired.

I have been coming here and Tax Almanac for years and always enjoy the topics. When I am bored I read this forum for educational purposes and truly appreciate the expertise here. I serve as the tax guy in my firm but have to keep up with payroll, retirement, AUDIT, etc as the managing partner to settle disagreements with treatment and this resource is invaluable. Thank you all.