Q:

Subject: Section 179 expense

I don’t know if you can help me or not but I am trying to analyze tax returns for a borrower who has an S Corp and on his Sch E there is income loss under the Section 179 heading is this income that I should be able to use when qualifying my borrower or is this truly a deduction like when Sch C people write off expenses?  I would appreciate any assistance you could give me.  Thank you.

A:

As pass-through entities, S corps are taxed very similarly to sole proprietor Schedule C, as part of the owners’ 1040.  Section 179 expense for new business equipment purchases is required to be shown on a separate line from the other net income or loss from the S corp because it has its own limitation on the 1040 based on the Section 179 deductions from other K-1s, as well as directly from Schedules C, E and F on the 1040.

I know that different lenders have different policies in regard to using a borrower’s  AGI for loan qualification purposes.  Some lenders use the reported AGI with no adjustments of any kind allowed.  Others do allow an add-back for some kinds of quasi-personal expenses that were run through the business schedule for tax purposes. 

Normally, the Section 179 deduction wouldn’t (and definitely shouldn’t) be one of those adjustments.  There may be other quasi-personal expenses buried in the S corp’s net bottom line.  You should ask your borrower and his/her tax preparer for details on those kinds of things if you are so inclined to make that kind of adjustment. 

Just adding back the Section 179 would not be appropriate unless your borrower confesses to running personal use assets through his/her business.  In that case, you may also want to factor in possible future IRS tax or fraud charges, since they are currently putting S corps under their microscope as I explained in a recent blog posting.

I hope this helps.

Kerry Kerstetter

 Follow-up:

Thank you very much and this helps greatly.