Discussion Archives:Distributions in excess of Basis for S Corp?

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Discussion Forum Index --> Consumer Questions --> Distributions in excess of Basis for S Corp?


LisaB (talk|edits) said:

16 November 2005
Hi -

Would you consider a distribution in excess of basis for a long time held S Corp a short term capital gain or a long term capital gain?

Thanks.

Jsanchez (talk|edits) said:

17 November 2005
Be sure that your distribution in excess of basis is not considered a dividend. If you distribution is in excess of baisis is the company liq? Need more info sorry.

Sheldon (talk|edits) said:

28 November 2005
Long-term.

Mcewencpa (talk|edits) said:

25 December 2005
I believe it is long term and is determined based on the holding period for the underlying stock. Mcewencpa 20:53, 24 December 2005 (CST)

GaryGauvin (talk|edits) said:

February 20, 2006
If there is a shareholder loan it gets taxed as a gain first. Type depends upon length of the loan.

Next I would treat as gain on stock, as Mcewencpa stated.

Johndimondi@hotmail.com (talk|edits) said:

3 March 2006
if it is a sch d item it is always long term.

but i think the real question relates to non capital items.


the point is being missed i think, where is a cash or draw over basis entered on a k-1? i think its on line 16 code it D. any other input? jdm

Rwood@kcnet.com (talk|edits) said:

13 March 2006
GaryGauvin:Loss in excess of stock basis where there is a stockholder loan large enough to absorbe the excess. Is there still a gain and if so is it a capital gain or a dividend? I know that a shareholder loan can be used to make excess distributions non-taxable, but can the loan be used to make a loss in excess of stock basis a non-income item.

Gmikeg (talk|edits) said:

14 March 2006
OK, Sub-S Distributions:

Assuming NO Retained Earnings from an earlier c-corp:

Basis > $0 - Reduction of basis, Basis <= $0 - Long-Term Distribution of holdings of they are > 1 Yr, Basis < $0 - Regular Income if short term.

Actionbsns (talk|edits) said:

29 January 2007
I'm considering suggesting my S-corp client terminate his corporation. He doesn't understand how it works not matter how often things are explained. He has once again taken distributions in excess of basis as far as I can see at this point. Last year I booked the exess to Loan to shareholder and we've been reducing it through payroll this year and there is $1,000 left on the books. Now it looks as though there will be a loss in the corporation and when I treat distributions in the fourth quarter as payroll, the loss increases, and there is negative basis. If we terminate the corp, what happens to the negative basis? Is it just reported on the 1040 as a gain? He's never going to get that! I think he'll be happier functioning as a sole proprietor again. Do we need to close the corp? Can another option be to move him to sole prop status and leave the corp inactive? It was originally created because he had a very lucrative, long term contract earning a lot of money, the contract is finished and he doesn't earn close to that much anymore.

JR1 (talk|edits) said:

January 29, 2007
Tough call. First, I guess, is the issue of what's the S accomplishing for him? Is the net income high, so he's saving some SE tax? If so, try to make it work. Liquidating it is just going to create tax. Yes, the negative basis, excess distributions, will be taxed, usually as capital gain, fortunately. If his income had dropped and it appears that it will remain that way, maybe you just bite the bullet and save him the annoyance of filing PR taxes, etc.

Actionbsns (talk|edits) said:

30 January 2007
Thanks for the input JR, I have just taken another look and am considering a different tack. He has credit card debt of about $10,000. Without checking (I'm at home right now) I believe none of that is actually in the corporate name, and therefore would actually be a loan from officer. In which case, in a liquidation, wouldn't that be treated similar to APIC? If that were so, can I make a case (for our purposes here and as a reason to carry on as a corp - not in an audit)that with loans from officer of $10,000, current owner equity at about $800 and the current corporate loss of $6,000, there is still a net equity in the corporation? Then still hammer on him to pay closer attention to what he is doing? He's not earning the income he did when he first incorporated and hasn't for about 3 years and won't in the foreseeable future, but he HATES paying taxes and having him on payroll helps keep marital bliss at tax time as well giving me fewer grey hairs. I moved all the distributions to payroll which is giving him the $6,000 loss.

Actionbsns (talk|edits) said:

31 January 2007
Just wanted to bring this forward in hopes of a comment or two.

Thanks

JR1 (talk|edits) said:

January 31, 2007
Yeah, since the debt is his, count it as loan basis, so you're ok. Try to get some quarterly review work on this guy so you can watch it, and explain that when he takes more than he's invested...it's income.

SeattleJR (talk|edits) said:

6 February 2007
I'm running into the same issue. I am struggling with where to report exactly so everything still balances. When I enter as a distribution, it reduces retained earnings, give me some error messages (in Lacerte) and throws the balance off. Help is appreciated. (PS: I'm new to the site, and am thrilled to find the resource!!)

JR1 (talk|edits) said:

February 6, 2007
You can only distribute the amount of profit showing on line 1 of your M1 area under the Balance Sheet. And you may not want to distribute all that if you've got a negative starting AAA...see if that helps. Then, whatever is left will be the upside down NP S/H...which you need to document with an actual note, etc. and hope gets repaid one way or 'nuther.

Susan77 (talk|edits) said:

12 February 2007
I'm having the same Lacerte trouble as SeattleJR. My S Corp shareholder has a negative taxable income on his 1040 after deductions, so for 2006 I want to move some of that NP S/H to show as capital gain (distribution in excess of basis); but I can't figure out how to record that on Lacerte. Retained earnings is not balancing. Keep getting error messages from Lacerte.

Kevinh5 (talk|edits) said:

12 February 2007
You don't do it like that. The note still has the amount due (face amount or paid down balance). You track basis on the shareholder level, not the 1120S level. Most people use a worksheet to track basis. When basis increases, it applies to shareholder loans up to the face amount or balance due first, then to stock basis.

JR1 (talk|edits) said:

February 12, 2007
There should be a place to track that within the software. LaCerte folks will have to tell you where.


Gee241 (talk|edits) said:

24 February 2007
not a reply but a question. We have maintain a ga s-corp name for many years. My husband changed it when he bought a farm. Because we use personal money to finance this venture we can not operate like an s-corp. I would like to get out of it. We have cattle and land. Can this be sold to my husband or something like that to get back to including business on a F schedule on our personal income tax form. Please tell me the easies way to end this s-corp

Kevinh5 (talk|edits) said:

24 February 2007
does the corp own the real estate?

Tacomatax (talk|edits) said:

26 March 2009
I believe that you have debt relief income but it is not taxable under the insolvency of the entity. Debt relief in an insolvency is similar to when one files bankruptcy and they aren't taxed on the debts that are forgiven. That rule applies to both bankruptcy and instances of insolvency which is more debts than assets. Again that is looked at the entity level and the stockholders don't need to be insolvent. While it isn't taxable I believe that it does diminish tax attributes to the shareholder, there was a situation that it increased the shareholder basis because it was a pass thru income (though not taxable) and allowed for losses that were suspended due to basis. I was looking at the internet to find more about the change of rule that I think was added to not allow this. It was a loop hole that I am just looking to resolve on my own situation.

It is somewhat complex so I don't know if the prior posts are really hitting on point. I just didn't want you to be going in the wrong direction.

the preceding Q/responses are from a different discussion; combined as Q below is a duplicate, and to remove the non-pro Qs from a tax forum discussion.

Gee241 (talk|edits) said:

26 February 2007
My husband and I have gotten into a mess with s-corp. I want to know how to get out with out liquidating. The land is in our name the loan is in our name. But we included it on our s-corp tax return. I constantly have to pay bills out of our personal account.

We have had a big lose for last year and this year. What I want to do is put it on our personal income tax form as a farm on schedule F. Is this possible? We have reg cows and they are in corp, but could transfer them to our name ease. Please give me some suggestions. We have a small amount of equipment most it bought with personal money. ty

JR1 (talk|edits) said:

February 26, 2007
Whatever the corp owns has to stay there or be sold at fair value in order to get it out. Now, as to the real estate, was it in fact transferred to the corp? Was the deed changed? If not, that could be undone and gotten back out if it legally never was put in correctly.

Will (talk|edits) said:

26 February 2007
Get a professional in your area to look at your paperwork and situation Gee241. It will be worth the modest cost to have your documents reviewed by a pro.

Smokeytax (talk|edits) said:

26 February 2007
Are you sure the shareholder has a negative basis in the S corporation?

I'm thinking if the negative basis was created by distributions in excess of prior basis, the shareholder would have had income and an increase in basis.

If the negative basis was created by an s corporation loss, then the loss in excess of basis would not have been deducted.

JR1 (talk|edits) said:

February 26, 2007
And putting the farm in there, unless you've refied with heavy debt...you've got plenty of basis, but a future tax problem with the real estate in the corp, maybe. See a pro.

Inthepocket (talk|edits) said:

2 March 2007
I have a negative basis AAA and was wondering the best way to handle it.

The Shareholder has a negative basis of about $3,000. He zereod out the corp with his ditributions, but the AAA went negative because he made $3,000 in charges on a credit card in December and it was paid in Jan 07, so evn though he is cash basis, he can write-off these amounts.

I have heard that some people take the negative basis and reclass it to a loan stockholder and some treat it as a capital gain on the 1040. I don't believe I can classify the credit card as stockholder debt, so the basis is increased by this amount, but maybe that's an option?

Any thoughts?

JR1 (talk|edits) said:

March 2, 2007
That's what I'd do, exactly. It's dumb that credit cards or accrued taxes or accrued retirement can create this situation, but definitely book to a note s/h, and when it's paid in Jan...it's over. Just opens the return up for scrutiny. My own corp looks like this because of year end bonus accrual for the taxes, which are then paid from an equity line on Jan. 15...

Inthepocket (talk|edits) said:

2 March 2007
So rather than set up an account "Credit Card Payable", you just put the offset of the credit card expenses to Loan Payable Stockholder and be done with it?

JR1 (talk|edits) said:

March 2, 2007
No, I'd keep the CC Payable...but assuming that that kicks up an excess distribution, I'd book that difference, then, to the NP S/H.

Inthepocket (talk|edits) said:

2 March 2007
Great, thanks JR!

Inthepocket (talk|edits) said:

5 March 2007
JR-

When you mentioned book the negative AAA basis to the NP S/H account, I'm assuming you mean debit Note Receivable - Stkholder and credit R/E, right?

JR1 (talk|edits) said:

March 5, 2007
Yep.

Whitelightningjnc (talk|edits) said:

March 22, 2007
Just want to confirm proper placement of draws and contributions in Lacerte for S Corp. I have been putting them on the M-2 under AAA as "other reductions" and "other additions" and carrying them to the Schedule L. Is this appropriate? I guess I just expect something as common as this to be labeled "Draws" and "Contributions" and not "other whatevers." In the case there are distributions in excess of basis, will this properly carry over to the K-1 and 1040 or are additional entries needed elsewhere? Thanks.

Dyeomans (talk|edits) said:

22 March 2008
What to do with $15,000.00. A schedule c taxpayer had a debit balance in Equity at the end of 2005.
 Balance Sheet is pulled into S Corp.  At the end of 2006 the $15,000.00 was carried on the 1120S a Due from SHolder.  Is this actually negative equity in the Share holder AAA or what.  Should it be considered a distribution in access of basis?  I got it to work in Lacerte (balances in Diagnostic)  show up as long term cap gain on K-1. and distribution.  The move form Schedule C to LLC - S Corp, well he is getting a W-2. Looking back - easier as C.  Plumber or that type of TP.  Would appreciated your thoughts on treating the $15000.00  numbers and career type changed to protect privacy.

DY--NICE GUY 13:13, 22 March 2008 (CDT)

JR1 (talk|edits) said:

March 22, 2008
You don't want to know. When you inc'd with the 15k of negative equity, you have income recognition on the 1040 for debt relief of the 15k. Which only then, makes it zero onto the new BS. You do not incorporate with a NP -SH. And it never ever has anything to do with AAA, which are earnings, not inc'ing equity or lack thereof. So your final solution of taking LT cap gain might just be accomplishing what you need it to, accidentally.

Dyeomans (talk|edits) said:

22 March 2008
Thanks.

Djs53 (talk|edits) said:

24 June 2011
It has been my understanding that C corporations in most states cannot pay dividends if they have a deficit in retained earnings. Does this apply to S corporations? If that is correct, how do you show distributions in excess of retained earnings on the balance sheet equity section? Do you lower paid in capital and/or common stock to -0-?

JR1 (talk|edits) said:

June 24, 2011
I book them to the NP-Shareholder so that it's not taxable, but that presumes it will be repaid from future undistributed profits which will cover it. You cannot cause AAA/Retained Earnings to go negative via distributions. So yes, if you want to create tax for the client, you'd have to book it against the equity somehow.

Kevinh5 (talk|edits) said:

24 June 2011
I'd probably do the opposite, JR1, and book it as a Note Receivable - From Shareholder. A negative note payable just woudn't make sense.
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