This article focuses solely on the entry of the Deduction items which are found on Boxes 11 and 12 of the Schedule K-1 (Form 1120-S) Shareholder’s Share of Income, Deductions, Credits, etc. For additional information regarding the requirements for Schedule K-1 (Form 1120-S), see: Shareholder’s Instructions for Schedule K-1 (Form 1120-S).
To enter the Deduction items from a Schedule K-1 (Form 1120-S) in Keystone Tax Solutions Pro from the Main Menu of the Tax Return (Form 1040) select:
Income Menu
Rents, Royalties, Entities (Sch E, K-1, 4835, 8582)
K-1 Input – Select ‘New’ and double-click on Form 1120S K-1 (S Corporation) which will take you to the K-1 Heading Information Entry Menu. All information in this menu must be entered to continue. If this step has been previously completed, double-click on the corporation entry, or select the entry from the list and select the Edit button.
After entering all required information on the K-1 Heading Information screen, select ‘OK’. The K-1 Edit Screen has two distinct sections entitled ‘Heading Information’ and ‘Income, Deductions, Credits, and Other Items.’
The K-1 1120-S Edit Screen has a line for each box on found on the Schedule K-1 (Form 1120-S) that the taxpayer received. A description of the items contained in boxes 11 and 12, including each of the Codes for Other Deductions that can be entered in Box 12 can be found below. The amounts shown in boxes 11 and 12 reflect the taxpayer’s share of deductions from the corporation. These amounts do not take into consideration the following limitations: the adjusted basis of the interest in the corporation; the amount for which the taxpayer is at risk; or the passive activity limitations. See: Publication 925 – Passive Activity and At-Risk Rules. Accordingly, the taxpayer may be limited in the amount of the deduction that is available.
DEDUCTIONS
Line 11 – Section 179 Deduction – Section 179 Limitations are not calculated by the System, enter ONLYSection 179 Expenses within the Limitations. To determine the amount to be entered in this field, Form 4562 must be completed. Specifically, the amounts reported in Box 11 are used, along with the total cost of section 179 property placed in service during the year from other sources, to complete Part I of Form 4562. See: Shareholder’s Instructions for Schedule K-1 (Form 1120S). Form 4562 can be accessed from the Income Menu of Keystone Tax Solutions Pro by selecting Rents, Royalties, Entities (Sch E, K-1, 4835, 8582) and selecting Form 4562. See: Instructions for Form 4562.
Once the correct amount has been calculated on Form 4562, enter the amount on Line 11 of the K-1 Edit Screen. If the amount calculated on Form 4562 is entered as a Non-Passive Section 179 Deduction it will automatically carry to the Schedule E (Form 1040), Line 28 column (i). If the amount is entered as Passive Section 179 Deduction, it will automatically carry to Worksheet 3 of Form 8582 – Passive Activity Loss Limitations where any deduction may be limited.
The Section 179 Deduction that is allowed can affect the Qualified Business Income (Section 199A income) and the amount reported by the corporation as Qualified Business Income (Loss) on Box 17, Code V may need to be adjusted to reflect any allowed Section 179 Deduction.
Charitable Contributions – Any contributions reported in Box 12, Codes A through G may affect the Qualified Business Income (Loss) coming from the partnership. If the taxpayer has Itemized Deductions on Schedule A, the entire amount of the Charitable Gifts claimed on the Schedule A that were from the corporation, will reduce the QBI coming from that corporation. The charitable contributions entered in the tax program on the following Line 12, Codes A through G. that are allowed contribution on Schedule A – Itemized Deductions will automatically reduce the Qualified Business Income from that corporation.
Line 12A – Cash Contributions 60% – Amounts reported in Box 12 Code A represent a taxpayer’s share of cash contributions made by the corporation on behalf of the taxpayer. This amount will automatically pull to line 11 of Schedule A (Form 1040), subject to the 60% AGI limitation on such contributions (prior to the Tax Cuts and Jobs Act and the 2018 redesign of Schedule A (Form 1040), this amount flowed to Line 18 of Schedule A and was subject to a 50% AGI limitation).
Line 12B – Cash Contributions 30% – Amounts reported in Box 12, Code B represent a taxpayer’s share of cash contributions made by the corporation on behalf of the taxpayer. This amount will automatically pull to line 11 of Schedule A (Form 1040), subject to the 30% AGI limitation on such contributions (prior to the Tax Cuts and Jobs Act and the 2018 redesign of Schedule A (Form 1040), this amount flowed to Line 18 of Schedule A).
Line 12C – Non-Cash Contributions 50% – Amounts reported in Box 12, Code C represent a taxpayer’s share of contributions of property other than cash that was made by the corporation. This amount will NOT pull to Schedule A (Form 1040). Instead, a manual entry must be made on the Schedule A Gifts to Charity Menu, subject to the 50% AGI limitation on such contributions. If an entry is made in this field, a warning is provided upon exiting the K-1 Edit Screen Entry Menu that non-cash contributions have to be entered on Schedule A and will not automatically carry from this menu.
Line 12D – Non-Cash Contributions 30% – Amounts reported in Box 12, Code D represent a taxpayer’s share of contributions of property other than cash that was made by the corporation. This amount will not pull to Schedule A (Form 1040). Instead, a manual entry must be made on the Schedule A Gifts to Charity Menu, subject to the 30% AGI limitation on such contributions. If an entry is made in this field, a warning is provided upon exiting the K-1 Edit Screen Entry Menu that non-cash contributions have to be entered on Schedule A and will not automatically carry from this menu.
Line 12E – Capital Gain Property to a 50% Organization (30%) – Amounts reported in Box 12, Code E represent a taxpayer’s share of contributions of appreciated property that was made by the corporation on behalf of the taxpayer. This amount will not pull to Schedule A (Form 1040). Instead, a manual entry must be made on the Schedule A Gifts to Charity Menu, subject to the 30% AGI limitation on such contributions. If an entry is made in this field, a warning is provided upon exiting the K-1 Edit Screen Entry Menu that Capital Gain Property has been contributed and it has to be entered on Schedule A and will not automatically carry from this menu.
Line 12F – Capital Gain Property (20%) – Amounts reported in Box 12, Code F represent a taxpayer’s share of contributions of property other than cash that was made by the corporation on behalf of the taxpayer. This amount will not pull to Schedule A (Form 1040). Instead, a manual entry must be made on the Schedule A Gifts to Charity Menu. The amount subject to the 20% AGI limitation on such contributions. If an entry is made in this field, a warning is provided upon exiting the K-1 Edit Screen Entry Menu that Capital Gain Property has to be entered on Schedule A and will not automatically carry from this menu.
Line 12G – Contributions 100% – Amounts reported in Box 12, Code G represent a taxpayer’s share of qualified conservation contributions of property used in agriculture or livestock production. This contribution isn’t included in the amount reported in Box 12, Code C. If the taxpayer is a farmer or rancher, they qualify for a 100% AGI limitation for this contribution. Otherwise, the deduction for this contribution is subject to a 50% AGI limitation. This amount will not automatically pull to Schedule A (Form 1040) or Form 8283. Instead, a manual entry must be made subject to the appropriate AGI limitation on such contributions. If an entry is made in this field, a warning is provided upon exiting the K-1 Edit Screen Entry Menu that Property has to be entered on Schedule A, Contributions if $500 or less or on Form 8283 if greater than $500.
Line 12H – Investment Interest Expense – Amounts reported in Box 12, Code H represent a taxpayer’s share of investment interest expense incurred by the corporation. This amount will automatically flow to Form 4952 (Form 1040), line 1; however, in order to access Form 4952 in the tax program, the taxpayer has to meet certain conditions. See: Instructions For Form 4952 – Investment Interest Expense Deduction. If the corporation has investment income or other investment expense, it will report the Taxpayer’s share of these items in Box 20, Codes A and B of the Schedule K-1 (Form 1120-S) Shareholder’s Share of Income, Deductions, Credits, etc.
Line 12I – Deductions – Royalty Income – Amounts reported in Box 12, Code I represent a taxpayer’s share of deductions allocable to royalties. This amount will automatically pull to Schedule E (Form 1040), line 19.
Line 12J – Section 59(e)(2) Expenditures – Amounts reported in Box 12, Code J represent a taxpayer’s share of qualified expenditures that the taxpayer may make a section 59(e) election for. The corporation should provide the taxpayer with a statement that identifies the property (or properties) for which the expenditures were incurred or paid. However, no amount entered in this field will automatically flow to the tax return. Instead, the taxpayer can elect to either amortize these expenditures on Form 4562 and deduct the expenditures over a number of years or choose to deduct these expenditures in full in the current year and have the entire deduction treated as an adjustment or tax preference item for purposes of the alternative minimum tax. Based on the election that the taxpayer makes, to have the correct amount flow to Schedule E (Form 1040), line 28 or to Form 8582, a separate entry should be made on this K-1 1120-S Edit Screen identifying the item as a Section 59(e) expenditure. Based on the election made by the taxpayer either the amortized amount calculated on Form 4562 or the entire amount will be entered as a deduction (loss) on Line 1 of the separate K-1 entry. See: Shareholder’s Instructions for Schedule K-1 (Form 1120-S). Form 4562 can be accessed from the Income Menu of Keystone Tax Solutions Pro by selecting Rents, Royalties, Entities (Sch E, K-1, 4835, 8582) and then the Form 4562 menu. See: Instructions for Form 4562. Form 6251 – Alternative Minimum Tax – Individuals can be accessed from the Other Taxes Menu of Keystone Tax Solutions Pro by selecting Alternative Minimum Tax. See: Instructions for Form 6251.
Line 12K – Section 965(c) deduction – Amounts reported in Box 12, Code K represent a taxpayer’s share of section 965(a) deductions. Any amount reported as a deduction would reduce any 965 (a) inclusion amount reported in Box 10, Code F.
Prior to 2018, Line 12K was used for “Deductions – Portfolio (2% Floor)” – which represented a taxpayer’s share of portfolio deductions that are subject to the 2% income limitation as a Miscellaneous Deduction on Schedule A (Form 1040). These Miscellaneous Deductions subject to the 2% income limitation were eliminated by the Tax Cuts and Jobs Act.
Line 12L – Deductions – Portfolio (Other) – Amounts reported in Box 12, Code L represent a taxpayer’s share of portfolio deductions that are not subject to the 2% income limitation as a Miscellaneous Deduction on Schedule A (Form 1040). This amount will automatically carry to Schedule A (Form 1040), line 16 with a description that it came from this entity.
Line 12M – Preproductive period expenses – Amounts reported in Box 12, Code M represent the amounts of costs and expenses incurred before the entity commenced production. The taxpayer may be able to deduct these expenses currently or they may need to capitalize them under section 263A. See Pub. 225, Farmer’s Tax Guide, and Regulations section 1.263A-4 for details. No amounts entered in this field will carry to the Form 1040.
Line 12N – Commercial revitalization deduction from Rental Real Estate Activities – Amounts reported in Box 12, Code N represent the amounts paid by the corporation that would qualify for a special revitalization deduction. Commercial revitalization is for the rehabilitation of certain buildings in distressed communities that were placed in service before January 1, 2010. Follow the Instructions for Form 8582 to figure how much of the deduction can be reported on Schedule E (Form 1040), line 28, column (f). Any amount in Box 12, Code N that is determined to be deductible should be reported on a separate entry made on this K-1 1120-S Edit Screen. Enter the deductible amount on Line 1 as a passive loss. Identifies the item as a commercial revitalization deduction. By making a separate entry on Line 1 of the K-1 1120-S Edit Screen, it will allow the item to carry to Worksheet 3 of Form 8582 and if the deduction is allowed under the passive loss requirements, it will be reported as a separate line item on Schedule E (Form 1040), line 28, column (f).
Line 12O – Reforestation Expense Deduction – Amounts reported in Box 12, Code O represent the amounts paid by the corporation for reforestation expenses on qualified timber property. This expense deduction is limited to $10,000 ($5,000 if married filing separately) for each qualified timber property. The amount entered on Line 12O will not automatically carry to Form 1040. If the taxpayer materially participated in the reforestation activity, the deduction should be reported as a nonpassive loss by making a separate K-1 entry from the K-1 1120-S Edit Screen. Enter the amount on Line 1 of the separate K-1 as a nonpassive loss. Identify the item as Reforestation Expense.
If the taxpayer did not materially participate in the reforestation activity the expense deduction should be reported as a passive loss by making a separate K-1 entry from the K-1 1120-S Edit Screen. Enter the amount on Line 1 of the separate K-1 as a passive loss. Identify the item as Reforestation Expense. The amount entered will flow to Form 8582, Worksheet 3 where, based on other passive items affecting the taxpayer, it will determine if any amount will be allowed on Schedule E (Form 1040), line 28, column (f). Any remaining deductions above the $10,000 ($5,000 if married filing separately) for each qualified timber property can be amortized. See: Shareholder’s Instructions for Schedule K-1 (Form 1120-S).
Line 12P – Domestic Production Activities Information – The amount reported in Box 12, Code P represents information on the corporation’s domestic production activities. The corporation will provide the taxpayer with a statement that contains the information that is used to figure the domestic production activities deduction on Form 8903. Many times there is no actual amount reported in Box 12, Code P, but instead the K-1 will have a reference to an attached statement. The information contained on this statement should be entered directly on Form 8903. An Amount entered on Line 12P will not automatically carry to Form 8903. Form 8903 can be accessed from the Main Menu of Keystone Tax Solutions Pro by selecting Adjustments, then Domestic Production Activities (8903). See: Instructions for Form 8903 – Domestic Production Activities Deduction. Effective for all tax years starting after December 31, 2017, the Tax Cuts and Jobs Act eliminated the Domestic Production Activities Credit and this item will no longer be reported on the Schedule K-1 (Form 1120S) starting in 2018.
Line 12Q – Qualified Production Activities Income– The amount reported in Box 12, Code Q represent information on the corporation’s qualified production income. The information contained in this section is used to calculate any potential Domestic Production Activities Deduction. The amounts in Box 12, Code Q will automatically carry to Line 7 of Form 8903. Form 8903 can be accessed from the Main Menu of Keystone Tax Solutions Pro by selecting Adjustments, then Domestic Production Activities (8903). See: Instructions for Form 8903 – Domestic Production Activities Deduction. Effective for all tax years starting after December 31, 2017, the Tax Cuts and Jobs Act eliminated the Domestic Production Activities Credit and this item will no longer be reported on the Schedule K-1 (Form 1120S) starting in 2018.
Line 12R – Employer W-2 Wages – Amounts reported in Box 12, Code R represent the amount of Form W-2 wages reported to the taxpayer by the corporation and is used to calculate any Domestic Production Activities Deduction. The amount entered in this field will automatically flow to line 17 of Form 8903. See: Instructions for Form 8903 – Domestic Production Activities Deduction. Effective for all tax years starting after December 31, 2017, the Tax Cuts and Jobs Act eliminated the Domestic Production Activities Credit and this item will no longer be reported on the Schedule K-1 (Form 1120S) starting in 2018.
Line 12S – Other Deductions – Amounts reported in Box 12, Code S are deductions that the corporation can pass through to the shareholder (taxpayer) but do not fit any of the categories above. An amount entered on Line 12S will not automatically flow to Form 1040. See the shareholder’s instructions provided by the corporation for further information on the treatment that these items will receive.
NOTE: This is a guide on entering the Deduction items from Schedule K-1 (Form 1120S) in the Keystone Tax Solutions Program. This is not intended as tax advice.
Additional Resources:
Shareholder’s Instructions for Schedule K-1 (Form 1120S)
Schedule K-1 (Form 1120S) – Heading Information
Schedule K-1 (Form 1120S) – Income (Loss) Items
Schedule K-1 (Form 1120S) – Credits & Foreign Transactions
Schedule K-1 (Form 1120S) – Alternative Minimum Tax (AMT) Items
Schedule K-1 (Form 1120S) – Items Affecting Shareholders Basis