I have a S Corporation whose taxable income is rather nominal, however, my corporation has purchased substantial capital assets for business.

The question I have is whether or not I claim section 179 deduction on these new asset acquistions? I have other taxable income from passive activities so losses here would be useful in reducing my personal taxable income.

To answer your question, "the IRS has imposed some limitation on the amount of Section 179 expense deduction a taxpayer can claim". This is called taxable income limitation rule.

In other words, the maximum section 179 depreciation deduction a taxpayer can claim in 2007 is $108,000. However, there is further limitation in that the taxpayer must have taxable income from the active conduct of any trade or business during the tax year, including wages and salaries that must equal the amount of section 179 deduction (maximum allowed is $108,000) that is being claimed.

For example, in your situation let us assume that your S corporation has purchased $1080,000 of qualified depreciable assets in 2007. However, the S Corporations taxable income is $0 for 2007. Then you must have other active income such as wages and salaries of up to $108,000 in order to take advantage of section 179 deduction of $108,000.

The maximum deduction in your case, would be to the extent of your other active income limited to the maximum allowable $108,000 in 2007.

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