Q: The excess (a carryover of the Section 179 Deduction) just compounds the following years loss correct?
A: Section 179 Deductions can only be used to offset ordinary business taxable income. If there were a carryover or “excess” Section 179 Deduction, that carryover would be used to reduce ordinary business taxable income in the following years if there is ordinary business taxable income to offset. If there were a loss in a subsequent year, no carryover Section 179 Deduction would apply, as there would be no taxable income to offset. Thus it will never compound a loss.
Accrual income or accrual loss on the income statement prepared in accordance with generally accepted accounting principles (GAAP) would not be impacted by a Section 179 Deduction nor by any “excess” or carryovers. The Section 179 Deduction only impacts taxable income. Carryover Section 179 Deductions can be used to reduce that taxable income in subsequent years, emphasizing why it is important to use the GAAP financial statement income and expenses to evaluate the profitability of a business and not rely solely on reported ordinary business taxable income and expenses that reflect IRS regulations and guidelines rather than GAAP.
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