1120-S depreciation accounting

[appelman]

This question may just reflect my ignorance of corporate accounting practice. An S-Corp charges off capital expenditures on its books in the year they were paid for. But the 1120-S depreciates them by MACRS. This leads to a depreciation adjustment on Schedule M-1. But what else? Shouldn't this go on the K-1 as an item affecting shareholder basis? But, if so, in what category? Distribution? Non-deductible expense? And what about subsequent years, when the adjustment will go in the other direction?

Can anyone help clarify this? Many thanks.

[BOB W]

The books should be treated with either S/L or just use MACRS. I always use tax for the books. Too many years of adjustments for just the year of purchase plus new and old years. Statements do not reflect proper P/L. Statements are nothing more than a cash flow statement.

[Maribeth]

This question may just reflect my ignorance of corporate accounting practice. An S-Corp charges off capital expenditures on its books in the year they were paid for. But the 1120-S depreciates them by MACRS. This leads to a depreciation adjustment on Schedule M-1. But what else? Shouldn't this go on the K-1 as an item affecting shareholder basis? But, if so, in what category? Distribution? Non-deductible expense? And what about subsequent years, when the adjustment will go in the other direction?

Can anyone help clarify this? Many thanks.

The depreciation adjustment is already on the K-1. Example: Corp writes off $500 for book purposes; tax depreciation is $100. Net income for tax purposes is $400 more than for book purposes. The K-1 reflects this increased amount on line 1.

Following year, with no other adjustments except for tax depreciation of $100, the book income will be $100 more than the tax income. The lower income will be reflected on the K-1.

Maribeth

[Nashville]

No Basis Adjustment

...unless of course one of the shareholders FURNISHED the depreciable item to begin with. If this is the case, a whole new can of worms is opened.

Bob W is 100% correct, but didn't answer your question. The question is not whether it is proper to expense capital equipment, but given the fact that the company does this, how should this be reflected on the K-1 and related basis. Maribeth is correct.

[appelman]

Thanks!

Thanks,all.

...unless of course one of the shareholders FURNISHED the depreciable item to begin with. If this is the case, a whole new can of worms is opened.

Bob W is 100% correct, but didn't answer your question. The question is not whether it is proper to expense capital equipment, but given the fact that the company does this, how should this be reflected on the K-1 and related basis. Maribeth is correct.

[Maribeth]

...unless of course one of the shareholders FURNISHED the depreciable item to begin with. If this is the case, a whole new can of worms is opened.

Bob W is 100% correct, but didn't answer your question. The question is not whether it is proper to expense capital equipment, but given the fact that the company does this, how should this be reflected on the K-1 and related basis. Maribeth is correct.

I can understand if this were a partnership and a partner contributed the depreciable item. But what would be different as an S corporation. There is no specific allocation of depreciation in an S corp, is there??

Maribeth

[buzzardbreath]

Maribeth

Don't really know - you could very well be correct. After your question I read the TTB chapter on S Corps, and there was absolutely no mention of special allocations for irregular contributions such as can happen in a partnership.

"Absolutely no mention" doesn't necessarily rule it out. Sometimes TTB wants to present information without cluttering up their examples with information that is not essential. I believe their purpose is to focus on the topics at hand without introducing stuff that doesn't contribute to the topic at hand.

Whether contribution of equipment or other non-cash items is different for an S corp than a partnership, I don't know.

[BHoffman]

This question may just reflect my ignorance of corporate accounting practice. An S-Corp charges off capital expenditures on its books in the year they were paid for. But the 1120-S depreciates them by MACRS. This leads to a depreciation adjustment on Schedule M-1. But what else? Shouldn't this go on the K-1 as an item affecting shareholder basis? But, if so, in what category? Distribution? Non-deductible expense? And what about subsequent years, when the adjustment will go in the other direction?

Can anyone help clarify this? Many thanks.

Hi appleman - I'm sure you already caught this, but it sounds like the client is expensing asset purchases and you are correctly capitalizing them. If the expense account is not corrected in your making book-to-tax adjustments, this will result in a double deduction - once for the car that the client recorded under "automobile expense" and again through depreciation.

We all probably see this. I think the easiest way to deal with it is to correct the client's books FIRST and THEN run the financial statements you'll use to prepare the tax return. That way, you don't have to make a lot of adjustments

[appelman]

It seems the IRS has thought of this.

Schedule M-1 has two line items for depreciation method differences between book income and tax return income. As some other posters have noted, if you follow through rigorously, everything comes out fine. In this case, taxable income ends up higher than book income by the undepreciated amount. In future years, if there are no other purchases capitalized, taxable income will be lower than book income.

Hi appleman - I'm sure you already caught this, but it sounds like the client is expensing asset purchases and you are correctly capitalizing them. If the expense account is not corrected in your making book-to-tax adjustments, this will result in a double deduction - once for the car that the client recorded under "automobile expense" and again through depreciation.

We all probably see this. I think the easiest way to deal with it is to correct the client's books FIRST and THEN run the financial statements you'll use to prepare the tax return. That way, you don't have to make a lot of adjustments