1st year S Corp Sect 179

[dsocpa]

First year S corp.  Franchise operation with equipment purchases, franchise fees etc.  Taxpayer has a rather large operating loss.  Based on my reading it's likely more advantageous Sect 179 depreciation rather than bonus.  The problem is I enter the 179  on the asset entry screen.  the amount of 179 shows up on the asset list.  However the 179 doesn't show up on the K-1, M-1 screens.  It's like there is no Sect 179 yet the asset basis is reduced.  What am I missing?

[rbynaker]

Section 179 income limitation at the entity level?

Rick

[abctax55]

Rick be right, I bet.

Lacerte provides 'general info' that shows the carry-over & I think it is also shown on the f 4562 (top section).

So you're likely better off with bonus, assuming the shareholder can use the loss on the F 1040 (assuming basis limitations aren't a problem..)

AND, Lacerte makes it hard to keep the balance sheet balanced - I have to override in M-1  IF you have suspended § 179.  (P I T A)

[dsocpa]

Definitely a basis limitation.  The bonus would create an NOL that can be carried forward and used @80%.  The 179 can be carried forward and used to offset income (subj to basis limitation of course) 100% indefinitely.

[abctax55]

And this kind of scenario/thinking is why we get the 'big bucks'... 

[dsocpa]

Agree!  But I don't think ProSeries is showing the Section 179 correctly.  It's only showing up on the Asset entry sheet and the Depreciation list.  Not flowing to the K-1 or showing on the summary.

[rbynaker]

[My response is] unresearched.  On 4/15 all you get is what's behind the cobwebs in my aging brain. 🙂

The first limitation you run into with S179 is the business income limitation at the entity level.  If it's limited by business income at the entity level, it doesn't make it out to the K-1 (it's carried forward until no longer limited by business income, then it passes out where the owner mixes and mingles it with other (potential) activities with S179 and applies the limits again at the owner level.)

In many ways this is an art form.  I've never been a huge fan of S179 carryover, and certainly not in an S Corp.  It's much more useful with a Sch C (where S179 offsets SE tax vs. Bonus depreciation fueled NOL which does not).  With PTEs you have to look at the big picture.  Is it beneficial to the owner to have a big loss in the first year (maybe they have other income they can offset)?  In many cases the answer is no.  With up-front write offs you're potentially "wasting" the lower tax brackets.  Saving 10-12% now is probably not worth paying 22% on that income next year (adjust brackets as needed, save 22% now, pay 37% later, etc.)  Fortunately we have LOTS of options in the tax code when it comes to fixed asset cost recovery.  What do the 3-5 year tax projections look like with Bonus vs. S179 vs. regular MACRS?  This is where 95% of the taxpayers are short-sighted and choose to save $1 now so they can pay $2 later.

The IRC also gives us the flexibility of filing an extension.  Why not wait until Aug/Sept and see how 2024 income is shaping up before deciding what is the "best" choice for 2023 depreciation elections?  That's what I would recommend to my client (doesn't mean that's what they'll agree to.)

Rick

(Edited to clarify)

[dsocpa]

As I explained in my post there is a loss this year, taking Sect. 179 will result in a carryover - no expectation it would be used for 2023.  Same with Bonus.  The difference is bonus is at the entity level (included as part of the NOL) whereas 179 is not.  The point is the Sect. 179 will, eventually, be used and will not be subject to the 80% limitation on NOL, which is what I prefer the client avoid.  In addition, the taxpayer can amend for change to 179 with bonus he/she cannot.  I've thought about MACRS but considering Sect. 179 carries indefinitely and without the NOL 80% limitation I'm inclined to use the 179.  I believe this is a win win for the client, but not immediate.

After the S Corp deadline the client told me he bought this franchise in 2023 and formed the S Corp.  I am trying to limit his penalties.  As I stated with 179 I can amend later if circumstances warrant.  In the meantime I need to get this return filed.

ProSeries should be showing the carryover on the 4562 but it is not.