I am using Quickbooks Online:
I am a bit confused about my S-Corp Retained Earnings account. Does the balance of that account just continuously grow (or shrink if the business makes a loss) regardless of me taking distributions? I started my business in July 2020. I had $70,000 in sales. I paid myself W-2 wages of $12,500 ($25,000 annualized). My net income was $39,000. My contributions were $20,000. My distributions were $40,000. My total equity at year end 2020 was $20,000.
Now in 2021, my revenue was $65,000. I paid myself $25,000 W-2 wages. My net income was $20,000. I made no contributions. My distributions were about $23,000. My total equity at year end 2021 is $17,000. This all makes sense to me. Now, my net income gets booked to retained earnings, so my retained earnings now show at $59,000 as of Jan 1, 2022.
I guess I'm confused because I have taken most of the money out of the business through distributions or paying for business expenses. The cash balance in checking is only $6,000. Is there no relationship between making distributions from my s-corp and the balance in my retained earnings account? I always thought the retained earnings account was supposed to represent funds available to invest in the business or pay out as dividends, but it seems to me the only thing that will reduce the balance in that account is business losses. I read somewhere that the IRS doesn't like to see a big retained earnings balance in an S-corp or they might revoke its status. Please help to clear up my thinking. Does it really not matter what the retained earnings account balance grows to? Is it more important to look at the net of retained earnings (large positive balance) and Owner Investment (large negative balance)? Thanks!!