How to record & correct owner draw that was not taken.

@LogineticsLLC 

As long as you have adequate stock basis, you can take that money out via a distribution anytime and it's not taxed because you already paid income tax when it was reported to you on your K-1.  Taking a distribution from an S-Corp is taxed as capital gain only if it exceeds your stock basis.  Your 2023 year-end basis is listed on your 2023 Form 1120-S, Schedule M-2, line 8.  Any contributions you've made or income the business has generated in 2024 increases that amount.  Any distributions, losses or other reductions in 2024 reduce your basis.

There is no stock basis.  When we created the LLC, we simply put $1000 in the bank to open the account.  So our equity in the company is $500 each.  

But the way profit is calculated and taxed is based on the difference between the beginning bank balance and the ending bank balance.  Let's say I neared the end of 2023 with $10K in the bank.  If I had done this correctly, I'd have drawn out that money before 12/31, categorized it as an owner-draw, and paid taxes on it, and ended with 0. But I did not.  So now that money flows through as $5K each to me and my wife as profit.  We paid that tax out of personal income on our joint 1040 as the $10K was never touched.

@LogineticsLLC 

"When we created the LLC, we simply put $1000 in the bank to open the account. So our equity in the company is $500 each."

You file as an S-Corp so the term "stock basis" is what tax accountants understand to be reported on Schedule M-2.  If you had $10K in undistributed income taxed in 2023, then your equity should have increased by that much.  Therefore, you should have $10K showing as Retained Earnings (RE) in the equity section of your balance sheet as well as on line 8 of Schedule M-2 of your 2023 return.  Do you see that?  Your question is from a tax perspective and the only way to know if you can distribute the $10K and not pay cap gains on that is to make sure you have adequate basis to cover the distribution.  I have personally been bit a couple of times by taking distributions from our S-corps in excess of basis and paid significant costs for doing so.   

"If I had done this correctly, I'd have drawn out that money before 12/31, categorized it as an owner-draw, and paid taxes on it, and ended with 0. But I did not. So now that money flows through as $5K each to me and my wife as profit. We paid that tax out of personal income on our joint 1040 as the $10K was never touched."

If it's as simple as that, then you can distribute the $10K anytime tax-free.  If it were me, I would confirm that I have adequate basis based on 2023 Schedule M-2, line 8, increased by any income not yet distributed in 2024 and reduced by any distributions taken in 2024.     

Yes, looking at my 1120S, that extra cash is on schedule M-2, Line 2 Ordinary Income and is reflected in line 8, EOY balance.  It shows up accordingly in my Balance Sheet under Current Assets Total, i.e. my checking account balance. It is not on the Balance Sheet categorized as Retained Earnings.

Simplified, my question is: In Quicken Desktop, when I take this money out of my checking account, to what COA category do I assign the transaction?  It's clearly not an expense.  And since the taxes have already been paid, it shouldn't belong to an income category.  If this cash is "Journaled" over to RE or Equity, then I think I can debit it and everything will balance.  But I'm not sure of the proper way to do it.

@Rainflurry See below.

@LogineticsLLC 

"Simplified, my question is: In Quicken Desktop, when I take this money out of my checking account, to what COA category do I assign the transaction?"

Assign it to the appropriate equity account.  Stick with me for one more second - you're an LLC taxed as an S-Corp so, IMO, the equity section of your balance sheet should look like an S-Corp.  Therefore, the proper equity account to assign it to is Shareholder Distributions. 

Of course, you and your wife are not shareholders, you're members of the LLC.  So, if the equity section of your balance sheet looks like an LLC, then assign the payment to Member's/Owner's Draw.

Then how do I differentiate between the draw taken for this year versus last year?

@LogineticsLLC 

Name the equity account "2024 - Distributions/Draws".  Or, if you have taken distributions in the past, use that same account and run a Balance Sheet Comparison Report at year-end and you will see the $10K change in the account balance from 12-31-23 to 12-31-24.

@Rainflurry 

There must be something fundamental I am not understanding.  I have an owner-draw COA that I use.  And if I understand correctly, for any draw that I take in 2024, it will end up in the correct reporting for taxes for 2024.  If I take this $10K from this example in 2024 with no modification, it will be taxed again.  I already paid the taxes when the $10K showed up on my K1 for 2023.  Shouldn't I be recording this differently?  

@LogineticsLLC 

"And if I understand correctly, for any draw that I take in 2024, it will end up in the correct reporting for taxes for 2024.  If I take this $10K from this example in 2024 with no modification, it will be taxed again."

S-Corp income is NEVER taxed twice so I'm not sure where you're getting that from.  If your draws have been taxed twice, because you're preparing your own taxes, then you need a CPA or tax accountant - stat. 

Income from an S-Corp passes through to you and your wife (via your K-1s) every year as ordinary income and you pay tax on that income on your personal return regardless of whether you take the money out via a draw or leave it in the business.  Any previously taxed income that is left in the business can be taken via a draw anytime with no tax ramifications since it was already taxed. 

When you take a draw out of the business that is above and beyond your previously taxed income (your basis, as previously discussed) left in the business, you pay capital gains on the amount.  But, to be clear, that money was never previously taxed.  Again, there's never double taxation in an S-Corp.  

The transaction should be recorded to your Owner's Draw/Shareholder Distribution equity account.  That's the proper recording of it and you should owe no tax on it unless it is above and beyond your basis.  If that amount ends up as a taxable amount because of how you have your chart of accounts mapped to your tax return, you need the help of a CPA/tax accountant.