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Old 07-15-2011, 04:26 PM
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How to record Sec 179 on 1120S and K-1

I have an S-Corp where I'm electing Section 179 for about $4,000 in equipment. I listed that amount on line 14 of my 1120S for Depreciation not claimed on Schedule A or elsewhere, that in turn added to my total Deductions on line 20.

What do I put on the K-1 for me and the other shareholder? I'm a little confused by what I'm reading, which sounds as if the Sec 179 deduction goes on the shareholders' personal returns, but why wouldn't it be a part of the business's deductions - it all flows through anyway. Or am I just overcomplicating this (and perhaps not understanding the K1 correctly)?

thx!



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Old 07-16-2011, 07:25 AM
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“I have an S-Corp where I'm electing Section 179 for about $4,000 in equipment. I listed that amount on line 14 of my 1120S for Depreciation not claimed on Schedule A or elsewhere, that in turn added to my total Deductions on line 20.”-->You do not report any section 179 expense deduction on 1120s line 14. The amount is NOT deducted by the S corp. Instead, it is passed through to the shareholders in box 11 of Schedule K-1.For reference, for passthrough entities,like your S corp, recapture of the Sec. 179 expense deduction information is required when the entity disposes of an asset for which the entity passed through Sec. 179 expense to its owners on a Schedule K-1 of 1120S. Recapture of Sec. 179 expense deduction information is also required when there is a decline in business use that triggers recapture ;if the equipment for which a Sec. 179 expense deduction was claimed ceases to be used more than 50% in business at any time before the end of the property's recovery period, partial recapture of the deduction is required.
What do I put on the K-1 for me and the other shareholder? I'm a little confused by what I'm reading, which sounds as if the Sec 179 deduction goes on the shareholders' personal returns, but why wouldn't it be a part of the business's deductions - it all flows through anyway. Or am I just overcomplicating this (and perhaps not understanding the K1 correctly)?”-->As said above, Section 179 deductions, as separately stated items, must be reported on Schedule K-1 Box 11. Sec 179 expense is depreciation. S-Corp can use a Section 179 depreciation as an expense, But on the tax return, the entity must have taxable income before the 179 expense in order for the entity to pass the 179 through to the s/h's. If not, the 179 is treated as an M-1 adjustment, to be utilized in a later year. On Sch K line 11, as a summary schedule of all shareholders' deductions, sec 179 expenses is reported. The S corporation can't claimor maybe that's can't pass through Section 179 greater than the corporation's net active business income (which allows - I think - an addback of the owner's compensation deduction. And the shareholder can't claim more Section 179 than his net active business income (which includes active business income other than from the S corporation).Also, section 179 deduction are NOT AMT add backs. I other words,Section 179 deductions are fully deductible for AMT purposes.


Last edited by Wnhough : 07-16-2011 at 04:12 PM.


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Old 03-13-2014, 01:11 PM
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Section 179 1120s/k-1 question

I have been searching and finally found the below quote that addresses my confusion. Seems clear that the 179 "expense" is NOT to be included on line 14 of 1120S and IS to be included on line 11 of Schedule K-1.

1. Is this correct?

If so, I'm still unclear on a few things:

2. What does this part of the below quote mean - "S-Corp can use a Section 179 depreciation as an expense, But on the tax return, the entity must have taxable income before the 179 expense in order for the entity to pass the 179 through to the s/h's."? Is the "expense" included on line 19 of 1120S in addition to line 11 of Sched. K-1 (assuming the entity has taxable income)? That would seem like double dipping?

2. If my initial statement is true (that the 179 "expense" goes on Sched. K-1 and nowhere on 1120S), then how do I account for that in Quickbooks? Would I leave it as normal asset/AD asset accounts with a messed up balance sheet and m1 adjustments every year from now on?? Seems wrong, especially since I'm not even required to complete m1 (though I do anyway).


Quote:
Originally Posted by Wnhough View Post
“I have an S-Corp where I'm electing Section 179 for about $4,000 in equipment. I listed that amount on line 14 of my 1120S for Depreciation not claimed on Schedule A or elsewhere, that in turn added to my total Deductions on line 20.”-->You do not report any section 179 expense deduction on 1120s line 14. The amount is NOT deducted by the S corp. Instead, it is passed through to the shareholders in box 11 of Schedule K-1.For reference, for passthrough entities,like your S corp, recapture of the Sec. 179 expense deduction information is required when the entity disposes of an asset for which the entity passed through Sec. 179 expense to its owners on a Schedule K-1 of 1120S. Recapture of Sec. 179 expense deduction information is also required when there is a decline in business use that triggers recapture ;if the equipment for which a Sec. 179 expense deduction was claimed ceases to be used more than 50% in business at any time before the end of the property's recovery period, partial recapture of the deduction is required.
What do I put on the K-1 for me and the other shareholder? I'm a little confused by what I'm reading, which sounds as if the Sec 179 deduction goes on the shareholders' personal returns, but why wouldn't it be a part of the business's deductions - it all flows through anyway. Or am I just overcomplicating this (and perhaps not understanding the K1 correctly)?”-->As said above, Section 179 deductions, as separately stated items, must be reported on Schedule K-1 Box 11. Sec 179 expense is depreciation. S-Corp can use a Section 179 depreciation as an expense, But on the tax return, the entity must have taxable income before the 179 expense in order for the entity to pass the 179 through to the s/h's. If not, the 179 is treated as an M-1 adjustment, to be utilized in a later year. On Sch K line 11, as a summary schedule of all shareholders' deductions, sec 179 expenses is reported. The S corporation can't claimor maybe that's can't pass through Section 179 greater than the corporation's net active business income (which allows - I think - an addback of the owner's compensation deduction. And the shareholder can't claim more Section 179 than his net active business income (which includes active business income other than from the S corporation).Also, section 179 deduction are NOT AMT add backs. I other words,Section 179 deductions are fully deductible for AMT purposes.



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Old 03-13-2014, 08:40 PM
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Quote:
Originally Posted by dhowardpeters View Post
#1;I have been searching and finally found the below quote that addresses my confusion. Seems clear that the 179 "expense" is NOT to be included on line 14 of 1120S and IS to be included on line 11 of Schedule K-1.

1. Is this correct?

If so, I'm still unclear on a few things:

#2. What does this part of the below quote mean - "S-Corp can use a Section 179 depreciation as an expense, But on the tax return, the entity must have taxable income before the 179 expense in order for the entity to pass the 179 through to the s/h's."? Is the "expense" included on line 19 of 1120S in addition to line 11 of Sched. K-1 (assuming the entity has taxable income)? That would seem like double dipping?

#3. If my initial statement is true (that the 179 "expense" goes on Sched. K-1 and nowhere on 1120S), then how do I account for that in Quickbooks? Would I leave it as normal asset/AD asset accounts with a messed up balance sheet and m1 adjustments every year from now on?? Seems wrong, especially since I'm not even required to complete m1 (though I do anyway).
#1;correct;as said, You do not report any section 179 expense deduction on 1120s line 14. The amount is NOT deducted by the S corp. Instead, it is passed through to the shareholders in box 11 of Sch K-1 ;unless you take losses, you need to recapture it as ord income; you will report the sale of the assets on Form 4797. If you sold individual assets, you will report each sale and gain to the extent of Sec 179 expense and/or depreciation taken will be Sec 1245 gain and subject to tax as ordinary income taxed at your marginal tax rate.

If so, I'm still unclear on a few things:

#2;sory for the confusion; S-Corp can use a Section 179 Depre. as an expense;what I(this means) meant was that it is depreciation exp for the S corp. But on the tax return, the entity must have taxable income before the 179 expense in order for the entity to pass the 179 through to the s/h's. If not, the 179 is treated as an M-1 adjustment, to be utilized in a later year.So in other words aslongas the S corp has taxable income before the 179 expense in order for the entity to pass the 179 through to you, owner/EE or etc, then no M1 adjustment is needed. There is one area of Sec. 179, however, that can be tricky and is not well understood: how to report the recapture of sec 179.exp. for passthrough entities at both the entity and owner levels. One more,Sec 179 deductions, as separately stated items, must be reported on Sch K-1 Box 11. Sec 179 expense is depreciation. S-Corp can use a Section 179 depreciation as an expense, But on the tax return, thecorp must have taxable income before the 179 expense in order for the entity to pass the 179 through to the owner/sh. If not, the 179 is treated as an M-1 adjustment, to be utilized in a later year. On Sch K line 11, as a summary schedule of all shareholders' deductions, sec 179 expenses is reported. The S corporation can't claim or maybe that's it can't pass through Section 179 greater than the corporation's net active business income which allows - I think - an add back of the owner's compensation deduction. And the shareholder can't claim more Section 179 than his net active business income (which includes active business income other than from the S corp).

#3;as mentioned above; because the s corp must maintain fixed asset depreciation schedules for tax purposes, which includes the Sec. 179 expense deduction, it has the information needed to prepare the supporting schedule necessary for codes K and L items. The instructions to the Schedules K-1 for 1120S state that for codes K and L the passthrough entity should provide the owner the information: For passthrough entities, recapture of the Sec. 179 expense deduction information is required when the entity disposes of an asset for which the entity passed through Sec. 179 expense to its owners on a Sch K-1. Recapture of Sec. 179 expense deduction information is also required when there is a decline in business use that triggers recapture. If property for which a Sec. 179 expense deduction was claimed ceases to be used more than 50% in business at any time before the end of the property's recovery period, partial recapture of the deduction is required .



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Old 03-14-2014, 11:23 AM
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Thanks and more questions

Getting clearer but I'm not there yet. Instead of addressing your excellent comments directly, how about I lay out my specifics and you tell me if I should change anything?

Background: Small landscaping S-Corp since 1998, single shareholder, separate regular full-time job

Details: Our professional mower was stolen in March 2103. It was functional, but it was old - purchase in 2000 - and fully depreciated long ago. in fact, we have had only fully depreciated assets on our books for over ten years. We bought a new mower for $7695.19 in March 2013 using our personal credit card.

Actions thus far:

Created new asset accounts and Journal Entries -
1. Scag STC mower fixed asset account: Journal entry dated 3/18/13 - debit Scag STC fixed asset account $7695.19 and credit Owner Draw account $7695.19.

2. A/D Scag STC mower fixed asset account: Journal entry dated 12/31/13 - debit Depreciation Expense account $3500 and credit A/D Scag STC account $3500

3. Completed Form 4562 Part 1: Line 6 b and c - 7695; Line 8 - 7695; Line 9 - 7695; Line 11 - 4712 (business income); Line 12 - 3500 (179 expense decuction - I chose this number); Line 13 - 4195 (carryover of deduction to 2014).

4. Schedule K, Form 1120S: Line 1 - 5531; Line 11 - 3500; Line 16c - 819; Line 16d - 1663; Line 18 - 2031

5. Schedule K-1: Line 1 - 5531; Line 11 - 3500

6. ISSUE: Right now 1120S, Line 14 has 3500 entered and Schedule L, M-1 and M-2 balance out. I will remove the 3500 from Line 14, but am unsure after that:
6a. Do I add 3500 depreciation expense to Line 19 (and my overflow statement)?
-OR-
6b. Do I leave it out, thereby increasing the corp. ordinary business income (Line 21 of 1120S and Line 1 of Scheds. K and K-1) and add 3500 to M-1 Line 3? Or what?

7. I believe I have the s/h basis to absorb this reduction but find that area confusing as well. For example - Should the initial Capital Stock ($6177), which is part of my basis, be included every year somewhere on Sched. K and/or K-1, or is it just part of my outside basis?



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Old 03-14-2014, 12:32 PM
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1. Scag STC mower fixed asset account: Journal entry dated 3/18/13 - debit Scag STC fixed asset account $7695.19 and credit Owner Draw account $7695.19.===========>>>>>>>>>>I guess corp owner/ee’s draws are routine occurrences in small businesses. They don't qualify as biz expenses, however. Rather, they are distributions of company profits ,much like the dividends that a corp would pay. In general, only the owners of sole proprietorships /mmllc, I mean partnerships ,can draw cash straight from the business for personal use. By contrast, in businesses organized as corps , even if the corp has only one owner , owners can't take draws. They need to either be on the payroll as employees or receive distributions of profits as dividends. As an owner's drawing is not a business expense, so it doesn't appear on the company's income statement, and thus it doesn't affect the company's net income.

2. A/D Scag STC mower fixed asset account: Journal entry dated 12/31/13 - debit Depreciation Expense account $3500 and credit A/D Scag STC account $3500=============>>>>>>>>>>>perhaps.

3. Completed Form 4562 Part 1: Line 6 b and c - 7695; Line 8 - 7695; Line 9 - 7695; Line 11 - 4712 (business income); Line 12 - 3500 (179 expense decuction - I chose this number); Line 13 - 4195 (carryover of deduction to 2014).4. Schedule K, Form 1120S: Line 1 - 5531; Line 11 - 3500; Line 16c - 819; Line 16d - 1663; Line 18 – 2031;5. Schedule K-1: Line 1 - 5531; Line 11 – 3500;6. ISSUE: Right now 1120S, Line 14 has 3500 entered and Schedule L, M-1 and M-2 balance out. I will remove the 3500 from Line 14, but am unsure after that:
6a. Do I add 3500 depreciation expense to Line 19 (and my overflow statement)?
-OR-
6b. Do I leave it out, thereby increasing the corp. ordinary business income (Line 21 of 1120S and Line 1 of Scheds. K and K-1) and add 3500 to M-1 Line 3? Or what?=================>>>>>>>>>I guess you need to contact a cpa/ an ea in your local area to go thru line by line on/in the forms/sch for more accurate solution.

7. I believe I have the s/h basis to absorb this reduction but find that area confusing as well. For example - Should the initial Capital Stock ($6177), which is part of my basis, be included every year somewhere on Sched. K and/or K-1, or is it just part of my outside basis?========================>>>>>>>>>>initial cap stock is included on stock basis, on sch k1 of 1120s,aspart of inside basis . Because the corp does not die, there is no change in the corporation's basis in its assets. Hence, there is a potentially substantial difference between the corporation's basis ,the "inside" basis, in its assets and the shareholder's stock basis ,the "outside" basis.for example, assume that A owns all of the stock of A, Inc., an S corp created to develop an invention to sniff out illegal drugs at airports.A contributes $25k in capital and thus has a $25k basis in his S stock, I mean inside basis. After A inc. becomes very successful, A dies unexpectedly in Dec 2013,. At the time of his death, the basis in his S stock increased to its FMV as of Dec 2013, which is $1M.A’s heirs are approached and offered $1M for the corporation's assets. At the time, the corporation's basis in its assets - the "inside" basis is $25K.




179 can only carry forward, not back, and is subject to limitation first at the S-Corp level where you are, and then at the individual owner level. Because of the limitations, 179 is a separately stated item on the K-1 and will appear to not decrease the income to the owner(s).Your deduction is limited to your aggregate taxable income from the active conduct of any trade or business. Basically, this means that unless you have other sources of business income, your Section 179 deduction can't create a taxable loss for your business. For example, you are someone else's employee for most of the year. Your wages exceed the Section 179 deduction. You start your own business at the end of the year and purchase equipment . Even if your new business doesn't generate gross income that year, you can still take the Section 179 deduction on the new equipment as your wages exceed the Section 179 deduction. Any amounts disallowed by the trade or business taxable income limit are carried over to the next year and added to the cost of any eligible property placed in service in that year. The same rules for maximum deduction, maximum annual investment and taxable income apply to the next tax year as well. .The tax tip explains the process for using Section 179 to fully expense certain business expenses immediately instead of depreciating them across a period of several years.
•Lowers adjusted gross income, which could help you qualify for various deductions which are limited by AGI.
•Lowers earned income, which can increase your earned income credit.
•Is allowed in full even if the eligible property is placed in service on the last day of the year.Fortunately, Section 179 deduction are not amt add backs. said another way, Sec 179 deductions are fully deductible for AMT purposes.
--------------------------------------------------------------------------------



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Old 03-14-2014, 02:15 PM
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I think I got it - quick questions

1. "1. Scag STC mower fixed asset account: Journal entry dated 3/18/13 - debit Scag STC fixed asset account $7695.19 and credit Owner Draw account $7695.19.===========>>>>>>>>>>I guess corp owner/ee’s draws are routine occurrences in small businesses. They don't qualify as biz expenses, however. Rather, they are distributions of company profits ,much like the dividends that a corp would pay. In general, only the owners of sole proprietorships /mmllc, I mean partnerships ,can draw cash straight from the business for personal use. By contrast, in businesses organized as corps , even if the corp has only one owner , owners can't take draws. They need to either be on the payroll as employees or receive distributions of profits as dividends. As an owner's drawing is not a business expense, so it doesn't appear on the company's income statement, and thus it doesn't affect the company's net income." ========>>>> I should have said credit "Shareholder Capital Account" (not draw account). It is an equity account. I purchased the mower with personal funds and handled it this way instead of setting up a loan to shareholder. Problem?

To clarify -

2. I CANNOT include section 179 depreciation expense in Line 19 of 1120S (for which I create an overflow statement each year with the expense details), right?

3. I CAN repeat this process next year to expense the rest of the section 179 I elected this year as long as all the basis and profit criteria are met, right?

Thank you so much for all you do!!!



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