URGENT ANSWER - RETAINED EARNINGS PLS

[WITAXLADY]

hello - so on sch L - pg 4 of the S corp 1120S - when the depreciation is put in as total and then the written off and the rest is there as left to write off -

If sec 179 is included - under liabilities and retained Earnings - it really lowers the owners RE...

If I do not put sec 179 in the deprec written off - the RE are very nice!!

Sec 179 is just a manufactured number...

help please

[rfassett]

Not sure I am following your dilemma.  Section 179 is simply accelerated depreciation which is an expense on the schedule k of the s corp return as a pass through.  The offset goes to accumulated depreciation account.  Because it is an expense, it DOES affect retained earnings.  Section 179 has nothing to do with liabilities. 

[WITAXLADY]

um - not answer I wanted...:(

so business makes lots of money buys lots of equipment and we sec 179 of $61,000 so don't have to pay tons of tax - leaving $90,000 as every year write off total deprec $500,000 accum $410,000 

have $200,000 in cash at year end

and re of $220,000 after a/p. a/rec, etc

 

income of $$100,000 - isn't that good enough for a building loan purchase with the bldg. as collateral?

[rfassett]

There will be a lot more than this that goes into the evaluation of a commercial building loan purchase and financing.  I would suggest they talk to the banker.  And you should give some serious thought to counseling your client to NOT put the building in the corporation.  It may look appealing now, but if the S-Corp rules go south and you end up busting the S-Election for some reason, you have a very bad situation with the real estate setting in the C Corp.  There was just a question recently, here or on another listserv I subscribe to, wherein the primary shareholder had passed on, I believe, leaving the beneficiaries owning the stock of a C-corp that primarily held highly inflated real estate.  Some of the benes wanted to cash out which meant selling the real estate and paying a ridiculous amount of tax,  Be careful here.

[Lee B]

Even if the corporation keeps it's S status, somewhere down the road it may become desirable to distribute the property to the shareholder(s) which in an S Corp means that it will probably come out at FMV with unintended tax consequences.

Sometimes reducing taxes as much as possible is not a good strategy, especially if obtaining a loan can be foreseen. Really it's a balancing act between tax reduction and credit-worthiness.

[BHoffman]

Lenders usually add back depreciation when they use tax returns instead of financial statements, so I'm a little confused.  Your client might be best served to have at least a compilation prepared and signed by a CPA on the (GAAP) accrual basis if he's shopping for a loan and willing to use his company assets as collateral.

What happens to the SCorp assets if the owner defaults on the building loan?

Agree that the building should not be in the SCorp. 

[WITAXLADY]

yes - I would never put a building into an corporation - always separate -

Sometimes I inherit them that way...

They need the S Corp books for the loan tho...

but it is irritating that the President of the Credit Union wants a CPA to do the taxes - as he does not like the way the Sch L looks...

Hey I just put it on there the way I received it from their accountant - after she has balanced it and tied it all out

says the Retained Earnings are too low for the profit they made - but their a/r are high and they bought capital items plus loans! over the year prior - shucks makes sense to me their RE would be low...