Q: Why is Section 179 Deduction sometimes reported on Schedule K-1? Is it a non-cash item? When does it flow through, if at all, to the personal 1040 tax return? Should you ever include the Section 179 Deduction when calculating global cash flow?
A: The Section 179 Deduction does not appear as an expense on business income tax returns for a Subchapter S Corporation, a Partnership, or an LLC. It is included as a depreciation expense on the business income tax returns for a Subchapter C Corporation. and Sole Proprietorship. It never appears as an expense on an accrual income statement regardless of the type of business organization.
For owners of pass-through entities, the Section 179 Deduction is reported on Schedule K-1 and carried to Part II on Schedule E where it is used to reduce an owner's or partner's share of ordinary business income. The sole role of the Section 179 Deduction is to reduce taxable income.
Q: On the Form 1120S business income tax return, why don't the distributions on Schedule M-2 match the distributions on Schedule K and Schedule K-1?
A: The distributions reported on Schedule M-2 reflect the amount of distributions applied to adjust undistributed taxable income for the year. That amount of taxable income – $37,796 – was eliminated by application of distributions in that amount. Total distributions for the year – $709,446 – are reported on Schedule K at Line 16d. Of that amount, $37,796 was applied to offset, or eliminate in this instance, the undistributed taxable income for the year.
Course overview: Understanding Schedules K-1