Depreciation Expense and S-corp basis issues

[GTS1101]

We have a client who purchased five trucks and 90% of the cost were financed by the s-corp. They were all purchased by the s-corp and titled to the s-corp. All these trucks are over 6,000 pounds so there are no depreciation limitations.

If we deduct 100% bonus depreciation on the vehicles they won't have basis to distribute all the retained earnings in 2020. The depreciation is a phantom expense because they didn't really spend that in 2020 but they get to take the expense all at once.

Can the loans on the trucks increase loan/debt basis so they are able to distribute the retained earning? If not what do we do in this situation?

Do we suggest to the client that if they want to distribute more of the retained earnings than they need to decrease their depreciation deduction? Or they take distributions in excess of basis and have to pay tax?

Thank you for any suggestions and guidance!

[BOB W]

Probably best to use sect 179 and find your sweet spot. Are profits so high that bonus depreciation is needed?

[TaxGuyBill]

Can the loans on the trucks increase loan/debt basis so they are able to distribute the retained earning?

No, the shareholder does not get Basis if the corporation has a loan from a third party.

There is no need for the corporation to distribute everything in their bank account. But if distributions are taken in excess of Basis, that excess amount will be taxable.

[GTS1101]

Thank you!

Section 179 will not work because basis is still reduced by non-deductible expenses and separately stated items.

And yes there is no need for the corp to distribute but the shareholders need the money. So we will let them know the excess amount will be taxable.