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S Corporatopn CPA discusses the 2014 IRS De Minimus Safe Harbor | new 2014 IRS Form 1120S instructions

S Corporation CPA discusses new 1120S instructions for 2014.

New 2014 1120S instructions clarify a universal issue. Need a free consult for your S Corporation? (910) 399-2705.

Before 2014, S Corporation CPAs got little guidance on when business property could be immediately deducted, or conversely, depreciated over time. The IRS Form 1120S instructions were no help.

An example of the expense vs. depreciation rule – old school

Your S Corporation purchases a plastic wastebasket in 2013 for $7.00. Waste baskets last more than one year. So, technically, you had to depreciate the $7.00 expense over seven years (as business equipment) on Form 1120S, U.S. Income Tax Return for an S Corporation. Before 2014, S Corporation CPAs helped the Client pick some reasonable figure, below which business property was immediately deductible, and above which you depreciated it. You could never be sure what the IRS would accept as a reasonable figure if audited – $100? $300? The 1120S instructions were no help on this matter.

Why the big deal over the de minimus safe harbor issue?

  • Depreciating a $7.00 waste basket on Form 1120S is a waste of time.
  • Depreciating a $7.00 waste basket Form 1120S incurs more CPA expense to produce Form 1120S.
  • Depreciating a $7.00 waste basket distorts the balance sheet component of Form 1120S.
  • Generally S Corporations want more expense in the current year.
    • More deductions on Form 1120S reduces the ordinary income reported on the S Corporation’s Schedule K-1, Shareholder’s Share of Income, Deductions, Credits, etc. That means less current tax for the S Corporation shareholders.

Side note on S Corporation cash flow

Please note the above generalization about immediate deduction isn’t absolute. Sometimes it makes sense to delay expenses. Talk to your S Corporation CPA about cash flow issues surrounding accelerated depreciation. Here’s a quick example. Your S Corporations buys a $25,000 piece of equipment on December 31st 2014, which qualifies for a 100% 2014 accelerated depreciation deduction under Section 179. Purchased through 100% financing for purposes of the example. Deducting the entire $25,000 in 2014 on IRS Form 1120S, U.S. Income Tax Return for an S Corporation, is great, saving maybe $5,000 +/-  of taxable income for the share holders on their personal Form 1040(s). Skip to December 31st, 2018 when you scrap the machine. Your S Corporation still makes loan payments of  maybe $350 a month ($4,200 per year) in 2019-2020.  Since most of the loan interest got deducted in 2015 – 2018, your S Corporation gets almost no deduction in 2019. It’s  a common cash flow trap.

The new de minimus safe harbor for the 2014 1120S – smaller S Corporations

  • The new magic number for 1120S is $500.
    • Below the $500 de minimus safe harbor you can immediately deduct it.
    • Over the $500 de minimus safe harbor, you need to depreciate it.
      • Section 179 may factor in here.
  • That’s $500 per item, even on a multiple item invoice.
  • You can’t artificially split costs over multiple invoices to avoid the $500 cap.
  • You can’t split an item into multiple components to avoid the cap.

The S Corporation has to have this $500 accounting policy in place at the beginning of the tax year. I advise S Corporation Clients to keep appropriate minutes on almost every S Corporation policy.

I’m an S Corporation that functions as an S Corporation For a free phone consult, please call (910) 399-2705. Our virtual office distance isn’t an issue.

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