Discussion:S Corporation Distribution in Excess of AAA
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Discussion Forum Index --> Tax Questions --> S Corporation Distribution in Excess of AAA
| 15 May 2007 | |
| I have a tax return with total distributions in excess of AAA account by $2,663. I am getting a ciritical diagnostic in Lacerte. The AAA account is reduced to zero but not below and I know that is the rule. There is an override that allows the return to show a AAA balance that is negative. This does not seem to be correct. Do I adjust the distribution to a loan account to make it work? Any suggestions? | |
| 15 May 2007 | |
| Couple of choices. Set up a note from the S/H to the corp to repay the excess distribution with interest and reclassify the excess as a s/h receivable, or stick the debit onto Sch L, Line 25 with an explanation. If it is not reclassified as s/h loan, it will result in cap gain recognition at the individual level as well. | |
| 15 May 2007 | |
| [Distributions from AAA]
The AAA balance cannot be reduced below zero by distributions to shareholders. (Reg. 1.1368-2(a)(4)(iii)). TexCPA 12:22, 15 May 2007 (CDT) | |
| 16 May 2007 | |
| It would not be proper to set up a shareholder loan unless the shareholder has some intention of repaying the excess distribution. Although it is not proper to use distributions to create or increase a negative balance in AAA, this same rule does not apply to retained earnings (which can go negative). The real question is whether the shareholder has taken a distribution in excess his stock basis. If the answer is yes, then there is a capital gain to report on Sch D of the 1040. | |
| 16 May 2007 | |
| And if the distribution is more than the AAA, but the stockholder has basis remaining after the AAA is cleaned out, the distribution reduces basis to zero before it becomes capital gain. | |
LAddington (talk|edits) said: | 16 May 2007 |
| I've just inherited an S-Corp client of which the ending AAA account on last year's return was negative. I've run into the same situation as above (current year distributions exceed the current year income, plus beginning AAA). Do I override Lacerte and continue to show a negative AAA balance, or do I have Lacerte adjust it only to $0 and keep the critical diagnostic. There is no E&P to worry about, but I understand that it's still important to track the AAA account. I also understand the capital gain ramifications at the individual level. Should I just reduce AAA to zero and then have the OAA account go negative? | |
| 16 May 2007 | |
| The taxability of S-corp distributions are determined at the shareholder level. Distributions in excess of the shareholders stock basis are taxed as capital gains short or long term depending on the holding period of the stock. AAA realy comes into play if an S-corp by accident or design converts to a C-corp. The C-corporation has a certain amount of time to distribute S-corp earnings without having them be taxable as dividends to the shareholders. One year I think but I would have to look it up. Distributions cannot take AAA into the negative and distribtions should not effect the OAA. AAA doesn't have to equal R/E. This is why it is important to track the individual shareholders stock basis. | |
| 16 May 2007 | |
| Correction distributions can effect OAA once AAA is zero but can't take it negative. | |
| 12 August 2007 | |
| OK. I'm confused. Taxpayer has distributions that reduced basis before the nondeductibles, etc. Still has remaining basis. But its the first year of the S Corp and there were losses, i.e. negative AAA. Distributions cannot reduce AAA below $0. Is this capital gain (ignoring the fact that a loan could be set up)? I think so because, even though there is stock basis, there is no previously taxed income from which to draw the distributions. Agree? | |
| 13 August 2007 | |
| No, it's a return of capital and repayment of loans until the stock and loan basis get to zero. THEN you have capital gain. But where did the money come from? Third party financing? | |
| 13 August 2007 | |
| The distributions to the S/Hs were in the form of payments made by the S Corporation on behalf of the SHs to pay for a personal debt of the SHs. Since the debt was not S Corp debt, I reclassified them as distributions because the SHs are not going to pay this $$ back to the S Corporation. | |
| 13 August 2007 | |
| I am matching a 2005 1120S before doing the 2006 return and have a similar problem. The 2005 return has a distribution that was used to increase a negative AAA account. The S Corp was dissolved as of March 31, 2007. I was planning just to carry forward the incorrect AAA account to 2006, but will that cause problems with the final return?
Also, this should perhaps be a different thread, but in this return and in another 2005 1120S I was matching before doing 2006, there was a non-deductible expense that is a federal tax penalty that showed up in the M-1 and the AAA, but did not carry over to line 16 C of the K-1. I couldn't figure out how to get the software to do that and called ProSeries. They say that the tax penalty should be carried over with the other non-deductible expenses to the K-1. That seems to be the correct result according to Sec. 1367, but why would 2 different preparers not have it in the K-1 unless there's some missing information? | |
| 13 August 2007 | |
| Chase, it's still return of capital or repayment of loans up to the amount of the remaining stock basis or loan balance. After that it's capital gain. But the question still remains: if there is no remaining stock or loan basis, and the first year's operations resulted in a loss, where did the money come from to pay the stockholder's personal debt? | |
| 13 August 2007 | |
| There is remaining basis even after the distributions (or shall I say, loan payment on behalf of the SH that I counted as a distribution) are taken into account. They have a regular tax loss due to depreciation, etc. Stock has basis because of the initial capital contribution. If the loans are not going to be re-paid to the Corporation, and the Corporation paid for this personal debt, I just wonder how else to reclassify the debt payments other than as a distribution. | |
| 13 August 2007 | |
| JD - So then the amount you show as a debit on Sch L, line 25 will carry forward forever? It may increase if there are any more excess distributions, but will never decrease. Is this correct? | |
| 13 August 2007 | |
| I just woke up -- I have made the adjustment to Sch L, Line 25.....it will carryover forever. Sometimes I wonder about myself .....no cap gain --thank you for your help KatieJ | |
| 13 August 2007 | |
| Was the original investment recorded as a sh loan acct? If so then the excess distrib can be a return of cap.
If it's add'l pd in cap, that acct can't be reduced. Did the sh take p/r? If not, the irs can reclassify the distrib as p/r and say that you are evading p/r tax. | |
| 13 August 2007 | |
| Chase - If there is no capital gain, then there is no entry to Sch L, Line 25. | |
| 13 August 2007 | |
| The loan payments on bahalf of the shareholder are distributions - that's clear. They had enough basis so no problem - no cap gain. To make the Balance Sheet balance, Sch L, I used Line 25. It has to go somewhere on the balance sheet and it is not going to be treated as a loan. Any problems? | |
TAXi driver (talk|edits) said: | 21 November 2007 |
| Anyone guide me on this? I'm not sure if Lacerte is handling this correctly. Total distribution was 2450. Lacerte took the rest to sch L line 25.
AAA BB 1233 OI 9429 Other Adj 355 Loss Other red. (9801) Combine lines 1216 Distributions 1233 EB (17) Is this correct, or should another 17 of that distribution go to L25? | |
Mmartinuzzi (talk|edits) said: | 23 July 2008 |
| What if AAA is negative at the beginning of the year, but there is current year income, but not enough to bring AAA to positive. Can you take distrubutions from current income even though AAA will still have a negative balane, albeit smaller, at the end of the year? The tax software is not letting me, and I doubt it, but I need some consensus. The partner is arguing with me here, he wants to be able to do this. All discussion in the Regs are very simplistic in this area, they just say no. | |
| 23 July 2008 | |
| Don't confuse AAA with basis. A distribution in excess of basis will generate a capital gain. In contrast, AAA is meaningful only in cases where the S corporation has C corporation earnings and profits. | |
| July 23, 2008 | |
| You may end up with a shareholder loan, that must be repaid, in order to get what you're after. | |
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