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PDtax, Certified Public Accountant (CPA)
Category: Tax
Satisfied Customers: 4022
Experience:  35 years tax experience, including four years at a Big 4 firm.
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I am filling a form 1120, i receive a partnership K-1 on

Customer Question

hi i am filling a form 1120, i receive a partnership K-1 on Line 13 which says "Other deductions included in item L - Current increase/decrease Section 754 Dep (Line 13W)", what should I do?
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Submitted: 3 months ago.
Category: Tax
Expert:  PDtax replied 3 months ago.

Hi from just Answer. I'mCustomer I can assist.

Customer: replied 3 months ago.
any ideas?
Expert:  PDtax replied 3 months ago.

The 1120 is reporting its ownership in the partnership. Correct?

Customer: replied 3 months ago.
Expert:  PDtax replied 3 months ago.

Section 754 is used when a partnership interest is acquired by a new partner. The election allows the new partner to depreciate assets acquired by allocating their purchase price to the assets acquired. The K-1 you received is showing the additional depreciation your corporate partner is allowed.

Report the additional expense as other expenses, 1120 line 26. Call it "additional expenses, XY partnership, per K-1" or similar language (if there are no limitations on deducting any losses).

I hope that covers it for you. Thanks for using Just Answer. Please rate my service using the star rating scale when i have answered your question. Positive feedback is appreciated. I'mCustomer

Customer: replied 3 months ago.
I share your same thought initially, simply put on Line 26, but based on the description on K-1 "Current increase/decrease Section 754 Dep", it seems unclear that this is an extra dep expense given an increase in the tax basis. Based on the wordings it seems not so sure it is really an expense right? Let say if this line item actually means a Section 754 adj..but not Section 754 dep.. what i shld do should be adjusted my tax basis , which then no need to be shown on form 1120, instead of claiming this line 26 expense right?
Expert:  PDtax replied 3 months ago.

The tax basis ytour corporation has in the investment is your burden to maintain, not the partnership's. Once they are notified of your allocation of the 754 purchase price adjustment, they report them as you see on your K-1. They do NOT typically maintain your tax basis information, although some do.

It is an expense, and one you should claim that way.

The corporate investment in the partnership interest, let's say for $10,000, is reported as an asset, likely under investments, for $10,000. Income you report adds to basis, losses and 754 expenses would decrease basis. Payments from the partnership reduce basis, additional investments needed in the partnership would increase basis.

Let's say this is the first year, you paid $10,000, and reported income of $1,100 and a 754 expense of $80. Your basis at year-end would be $10.920. If you never received any cash, and sold the interest january 1, 2016, your basis for gain or loss would be $10,920.

You report both the $1,000 income and $80 expense on 1120. The basis question is addressed most often upon sale.

Customer: replied 3 months ago.
But sometimes when I saw items in K-1, this does not mean I necessary need to report on my line 1120, right? Going back to your example, Let's say this is the first year, you paid $10,000, and reported income of $1,100 and a 754 expense of $80. I fully agree that the tax basis shall be $10.920. However, if from that K-1 it also shows a line 18c non-ded exp item let say 500. This time the tax basis shall be 10,420, right? And the 500 needs not report on my form 1120. (as this belongs to Section 705a2B item, expenditure of the partnership not deductible in computing its taxable income and not properly chargeable to capital account.I just wonder if the same situation would apply to this case. If I receive a Line item which Section 743 exp, of course I can have full confidence to present this on my form 1120. But wt if this is actually arise some other situation. Let say this partnership i only own 50%, Alan, my frd owns the other 50%. And he sold the parternship and so there is a Section 743 adj in my capital account.Just as you said, the partnership won't keep track of my tax basis, so do you think this line item might actually only means i only need adjust my tax basis for my own record, instead of an expense in nature, esp it says vaguely "current increase/decrease"
Expert:  PDtax replied 3 months ago.

I get the question. But the partnership reported this as included in item L, which means that the deduction is against portfolio income. Report this item on 1120, and use it for basis.

The other nondeductible items are reported as such and are adjustments to basis only.

Note the code, which will dictate the tax treatment. L is portfolio income.