Business Income Limit

The total cost you can deduct each year after you apply the dollar limit is limited to the taxable income from the active conduct of any trade or business during the year. Generally, you are considered to actively conduct a trade or business if you meaningfully participate in the management or operations of the trade or business.

Any cost not deductible in 1 year under section 179 because of this limit can be carried to the next year. Special rules apply to a deduction of qualified section 179 real property that is placed in service by you in tax years beginning before 2016 and disallowed because of the business income limit. See Special rules for qualified section 179 real property under Carryover of disallowed deduc- tion , later.

Taxable income. In general, figure taxable income for this purpose by totaling the net income and losses from all trades and businesses you actively conducted during the year. Net income or loss from a trade or business includes the following items.

• Section 1231 gains (or losses).

• Interest from working capital of your trade or business.

• Wages, salaries, tips, or other pay earned as an employee.

For information about section 1231 gains and losses, see chapter 3 of Pub. 544.

In addition, figure taxable income without regard to any of the following.

• The section 179 deduction.

• The self-employment tax deduction.

• Any net operating loss carryback or carryforward.

• Any unreimbursed employee business expenses.

Two different taxable income limits. In addition to the business income limit for your section 179 deduction, you

may have a taxable income limit for some other deduction. You may have to figure the limit for this other deduction taking into account the section 179 deduction. If so, complete the following steps.

Step Action

1 Figure taxable income without the section 179 deduction or the other deduction.

2 Figure a hypothetical section 179 deduction using the taxable income figured in Step 1.

3 Subtract the hypothetical section 179 deduction figured in Step 2 from the taxable income figured in Step 1.

4 Figure a hypothetical amount for the other deduction using the amount figured in Step 3 as taxable income.

5 Subtract the hypothetical other deduction figured in Step 4 from the taxable income figured in Step 1.

6 Figure your actual section 179 deduction using the taxable income figured in Step 5.

7 Subtract your actual section 179 deduction figured in Step 6 from the taxable income figured in Step 1.

8 Figure your actual other deduction using the taxable income figured in Step 7.

Example. On February 1, 2025, the XYZ Corporation purchased and placed in service qualifying section 179 property that cost $2,500,000. It elects to expense the entire $2,500,000 cost under section 179. In June, the corporation gave a charitable contribution of $10,000. A corporation’s limit on charitable contributions is figured after subtracting any section 179 deduction. The business income limit for the section 179 deduction is figured after subtracting any allowable charitable contributions. XYZ’s taxable income figured without the section 179 deduction or the deduction for charitable contributions is $2,520,000. XYZ figures its section 179 deduction and its deduction for charitable contributions as follows.

Step 1— Taxable income figured without either deduction is $2,500,000. Step 2— Using $2,520,000 as taxable income, XYZ’s hypothetical section 179 deduction is $2,500,000. Step 3— $20,000 ($2,520,000 − $2,500,000). Step 4— Using $20,000 (from Step 3) as taxable income, XYZ’s hypothetical charitable contribution (limited to 10% of taxable income) is $2,000. Step 5— $2,518,000 ($2,520,000 − $2,000). Step 6— Using $2,518,000 (from Step 5) as taxable income, XYZ figures the actual section 179 deduction. Because the taxable income is at least $2,500,000, XYZ can take a $2,500,000 section 179 deduction. Step 7— $20,000 ($2,520,000 − $2,500,000).

Publication 946 (2025) Chapter 2 Electing the Section 179 Deduction 19

Step 8— Using $20,000 (from Step 7) as taxable income, XYZ’s actual charitable contribution (limited to 10% of taxable income) is $2,000.

Carryover of disallowed deduction. You can carry over for an unlimited number of years the cost of any qualified section 179 real property that you placed in service in tax years beginning after 2015, and that you elected to expense, but were unable to deduct because of the business income limitation. This disallowed deduction amount is shown on line 13 of Form 4562. You use the amount you carry over to determine your section 179 deduction in the next year. Enter that amount on line 10 of your Form 4562 for the next year.

If you place more than one property in service in a year, you can select the properties for which all or a part of the costs will be carried forward. Your selections must be shown in your books and records. For this purpose, treat section 179 costs allocated from a partnership or an S corporation as one item of section 179 property. If you do not make a selection, the total carryover will be allocated equally among the properties you elected to expense for the year.

If costs from more than 1 year are carried forward to a subsequent year in which only part of the total carryover can be deducted, you must deduct the costs being carried forward from the earliest year first.

Special rules for qualified section 179 real prop- erty. You can carry over to 2026 a 2025 deduction attributable to qualified section 179 real property that you placed in service during the tax year and that you elected to expense but were unable to take because of the business income limitation. See Carryover of disallowed de- duction , earlier. Thus, the amount of any 2025 disallowed section 179 expense deduction attributable to qualified section 179 real property will be reported on line 13 of Form 4562.

Tip: If there is a sale or other disposition of your property (including a transfer at death) before you can use the full amount of any outstanding carryover of your disallowed section 179 deduction, neither you nor the new owner can deduct any of the unused amount. Instead, you must add it back to the property’s basis.