1120-US: Section 179 expense not allocated to a shareholder who is an estate or trust (FAQ)

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Question

Why is the Section 179 expense not allocated to a shareholder who is an estate or trust?

Answer

Each individual shareholder's pro rata share of Section 179 expense is reported on Schedule K-1, Box 11. However, per Form 1120S instructions for Box 11: "Do not complete Box 11 of Schedule K-1 for any shareholder that is an estate or trust." The Section 179 expense for the remaining shareholders is not adjusted for the amount that would have been allocated to the estate or trust.

Per IRC Regulation 1.179-1(f)(3), the S Corporation's basis in Section 179 property shall not be reduced to reflect any portion of the Section 179 expense that is allocable to the trust or estate. The S Corporation can claim a depreciation deduction for the amount of Section 179 that would have been allocated to the trust or estate shareholder.

Related topic: 1120-US: Form 1120S - common FAQs

Internal notes


There is not a setting in UT that automatically separates the portion of Section 179 the S Corporation is allowed to take as normal depreciation. 

Workaround: Add an asset in the Asset tab for the amount of Section 179 that would have been claimed by the estate or trust shareholder(s) making sure to not claim bonus or Section 179 depreciation).  The depreciation on that asset will be included in the business income of the S Corporation and divided among all the shareholders. 

The IRS is not clear on the amount of Section 179 that should be shown on Form 4562 or Schedule K (the total or the adjusted amount) if one or more of the shareholders is an estate or trust.  UT leaves the full amount of Section 179 on Form 4562 and Schedule K, if the user disagrees it is up to them to adjust the amount accordingly. 

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