S-Corp loss - basis limitations

[Unregistered]

TP basis in S-Corp is $100. S-Corp shows loss of $25 ($105 sec 179 not allowed).

Question: does the $105 sec 179 wipe out TP's basis, so that the $25 is not deductible?

[jimmcg]

Believe the deduction has to be taken and the loss utilized before basis is reduced.

[Bees Knees]

You didn't say why the Section 179 deduction was not allowed.

TTB, page 9-16, "A Section 179 deduction claimed by a partnership or an S corporation flows through to a partner or shareholder as a separately stated item on Schedule K-1. The investment limit and business income limit apply first at the partnership level, then at the individual level. Caution: If a Section 179 deduction from a pass-through entity is limited because of the deduction limit or the investment limit on the individual's return, the limited amount is not deductible and is lost forever. In this case the basis is reduced for the total amount of Section 179 expense passing through even though the taxpayer is not allowed to claim the deduction."

[OldJack]

Question: does the $105 sec 179 wipe out TP's basis, so that the $25 is not deductible?

It would appear that in your case the §179 deduction is limited by the S-corp loss of $25. Therefore, the $105 sec 179 deduction is carried forward for the S-corp to deduct in future years. (Quickfinder Depreciation Handbook, page 5-3.) The shareholders basis is reduced, however, but any §179 carryover remaining when the S-corp is disposed of increases the owners basis in the entity and, thus, reduce the gain or increase the loss realized upon the disposition. (QF depreciation Handbook, page 5-4.) Thus, it doesn't sound to me like in your case it is completely lost forever.

Easy solution... don't take §179 and instead take regular depreciation. I am not sure but I believe that your $25 loss reduces basis before the $105, therefore, you may still have a loss deduction.

[Unregistered]

Right

The 179 deduction was not allowed due the the loss situation.

It does seem that switching to regular depreciation would be more beneficial. Probably would increase the allowable loss by another $20, which still does not exceed basis.

Thanks for your help

[OldJack]

Well... I have not researched this but the more I think about it the more I think the disallowed §179 deduction at the s-corp level does not decrease the shareholder's basis for purposes of loss limitation as this §179 deduction is not at the shareholder level. A suspended deduction is just that a suspended deduction.

[JG EA]

To review-

How could a 179 not be allowed at the partnership level and be on the K-1? The net income/loss does not include the 179. That passes directly through to the partners. In your eg the deduction on Form 4562 is zero because it is carried forward.
.
Form 1065 Line 12. Section 179 Deduction:

"A partnership can elect to expense part of the cost of certain property the partnership purchased this year for use in its trade or business or certain rental activities...
Complete Part I of Form 4562 to figure the partnership's section 179 expense deduction... Attach Form 4562 to Form 1065 and show the total section 179 expense deduction on Schedule K, line 12...

Schedule K-1.

Report each partner's distributive share of the section 179 expense deduction in box 12 of Schedule K-1."

If there would have been a 179 deduction then it would decrease basis.

Pub 541 says:

"The partner's basis is decreased (but never below zero) by the following items...
The partner's distributive share of nondeductible partnership expenses that are not capital expenditures. This includes the partner's share of any section 179 expenses, even if the partner cannot deduct the entire amount on his or her individual income tax return."

So the answer to Question: does the $105 sec 179 wipe out TP's basis, so that the $25 is not deductible? Yes, if there was a deduction on the K1. No, if it was carried forward on the 4562.

[OldJack]

So the answer to Question: does the $105 sec 179 wipe out TP's basis, so that the $25 is not deductible? Yes, if there was a deduction on the K1. No, if it was carried forward on the 4562.

I agree the §179 carryforward does not reduce shareholder basis at the shareholder level but it does reduce basis of the asset from which it came so that the amount of the asset for depreciation is lower regardless of what year, if ever, the suspended 179 is taken.

Therefore, I agree that the $105 does not reduce shareholder basis for loss purposes and the $25 operating loss should be fully deductible. However, if the full §179 ($105) had not been limited at the S-corp level but passed on the k-1 to the shareholder, we would have a different story. The §179 amount at the shareholder level would be suspended again but would decrease the shareholder basis as that is the only basis it can reduce.

[Bees Knees]

I agree with JG EA on this one. If the Section 179 deduction is not allowed at the S Corp level, it would not even show up on the K-1. The limitation is done on the 4562, not the K-1.

Point being, the shareholder would not even know there is a suspended Section 179 deduction.

Therefore, I think the very fact the tax preparer and client even know there is a $105 Section 179 deduction that is not allowed indicates to me it is a deduction on the K-1 that the shareholder cannot use.

Unless the tax preparer knows this because he or she also prepared the 1120S return.