Is an S Corporation Required to File Depreciation?

An S corporation records depreciation on eligible fixed assets -- similar to other businesses, including C corporations, partnerships and limited liability companies. The business files deprecation expense in regulatory returns, although it does not pay taxes on its operating income. It passes it on to its stockholders, who must settle fiscal debts when filing personal returns.

Depreciation

Regulatory guidelines and accounting standards require that an S corporation depreciate an eligible resource over a period that is proportionate to the asset's operating life. Depreciating an asset means allocating its cost over several years, a time frame accountants call "useful life." Depreciation is a noncash item -- meaning, a company does not pay for it, unlike other expenses like office supplies, rent and insurance.

Fixed Assets

An S corporation can only depreciate tangible resources, also known as capital or long-term assets. Examples run the gamut from equipment and commercial establishments to production machinery. Eligible resources also include residential dwellings, building improvements with a long-term useful life and factory mechanisms. S corporations don't depreciate some long-term assets, such as held-to-maturity securities and intangible resources.

Non-Cash Expenses

Besides depreciation, an S corporation records and reports other noncash charges in its financial data summaries. An example of a noncharge cost is amortization, which primarily pertains to intangible assets. These include patents, copyrights and customer goodwill, all of which embody a company's intellectual capital and innovative prowess. The record-keeping procedures for amortization are similar to those that bookkeepers follow to post depreciation expense.

Financial Accounting and Reporting

To record depreciation expense, an S corporation's bookkeeper debits the depreciation expense account and credits the accumulated depreciation account. Depreciation expense is an operating cost that accountants report in the statement of profit and loss. Accumulated depreciation, a balance sheet item, is a contra-account that reduces the value of the corresponding tangible asset. To record amortization expense, the bookkeeper debits the amortization expense account and credits the respective intangible asset account. Besides a balance sheet and a statement of profit and loss, depreciation entries affect a statement of cash flows and a statement of retained earnings.

Strategic Importance

The leadership of an S corporation often uses depreciation procedures to ensure that personnel effectively track fixed assets and to shake up ingrained perceptions about long-term resources and their importance in operating activities. The idea is to have employees think of long-term assets as strategically relevant to the company's future and make sure they deploy all available tools to maintain the assets in good condition. Given that most long-term assets fetch high prices, reducing their obsolescence -- or wear-and-tear -- rate is a money saver. Obsolescence rate is the pace at which an asset wears down.

References

• Internal Revenue Service; Form 1120S: U.S. Income Tax Return for an S Corporation; 2010
• UNC Charlotte Berk College of Business: Choice of Business Entity -- Operations and Distributions
• University of Central Florida: Chapter 12 -- S Corporations (2011 Edition)
• Cornell University Law School; United States Code: Section 1361 -- S Corporation Defined
• American Institute of Professional Bookkeepers: Depreciation Under GAAP (PDF)
• Internal Revenue Service: Overview of Depreciation