Software Follows Strict Standards when Recapturing Section 179 Expense Deductions

Intuit's popular TurboTax tax preparation program ably fits the needs of most taxpayers. For those with more demanding long form needs, specifically, partnerships and S corporation shareholders, TurboTax's refusal to allow the use of negative numbers in the recapture of Section 179 expense deductions makes the process even longer -- but only if filing electronically. When preparing the printed forms, TurboTax does not object to "negative deductions." Handling of deductions and expenses is critical for business owners. According to the IRS (Section 179 expense deductions), a corporation may elect to expense part of the cost of tangible property that the corporation purchased. But what if you dispose of property you have already depreciated, or no longer use that property for business purposes? As the IRS

has long recognized, deductions and expenses can be entered as negative as well as positive numbers. This may sound like a double negative, and it is: it comes out positive for the federal government. For example, let's say that in 1999 you took a one-time Section 179 expense deduction (Schedule K of 1140S, line 8). But in 2000 that same equipment was returned to the vendor for a refund. To "recapture" the deduction, you simply enter the negative amount. In essence, you are giving back to the IRS in the form of declared income the amount of the previously claimed deduction you no longer qualify for. When an Error is not an Error Intuit's TurboTax program handles "negative deductions" well enough when dealing with normal Schedule A itemized deductions and other credits and expenses (such as Forms 8863 and 2441). However, when applying expense deductions to partnerships (Form 1065) and S-corporations (Form 1120S), the TurboTax K-1 worksheet does not allow recapture of a previously claimed deduction to be stated as a negative on line 8 --that is, if you intend to file electronically. Nevertheless, TurboTax does tabulate the entry correctly. Your only recourse at this point, then, short of filling in Form 4979 (with supporting details), is to print out the return, apply the postage, and snail mail the wad of paper off to the IRS. When an Error is an Error There are firm grounds, however, to Intuit's contention that they are following standard IRS practices and procedures. According to the "Instructions for Form 4797" and "Instructions for Form 1120S," when recapturing deductions under Sections 179 and 280F(b)(2), taxpayers should use Form 4797 (which TurboTax supports), and then report the Section 179 recapture on Line 23 in the Schedule K-1 worksheet (which TurboTax supports). The question for the tax accountants and the IRS is whether skipping Form 4797 and directly entering a negative amount on line 8 constitutes "standard practices and procedures"; the question for Intuit is why a negative entry is flagged in this one area, and why it correctly calculates such an entry in a printout, but then does not accept it for electronic filing.