Drawing from Retained Earnings of an S Corp

Yes, I already pay myself a "reasonalble" salary and yes have had the required annual meetings.  The retained earnings (profits) will be pass through taxable income on my personal taxes for last year and therefore cabable of being distributed out to the shareholders (just me). I could just write myself a check and zero out the RE account, but if I choose to leave it in there.  Profit distributions are untaxed because I already will have paid taxes on it in my 2017 return.

My question is more of a bookkeeping one.   Leave the profits in the company (as retained earnings) and draw it out as needed or distribute profits  (according to bylaws) which in quickbooks I can do by putting it into an owner equity account or writing myself a check.

My accountant is aware I want to take the profit though I may not pull it all out.  

@tj1701

I understand what you are saying.  You can do it either way, but I have a seperate equity account to make it a little more straight foward for my accountant and easy for me to show the owners what they have taken at any point throughout the year.  We are a C Corp and I labled mine S/H Distribution with sub accounts for each owner. (We are a C Corp)

To clairify - I do not move the funds all at once.  When I cut a check to the owners I expense it to the S/H Distribution and then once a quarter I create a JE to capture the funds from the Retained Earnings.

Thank You.

Only one thing I would point out here:  you can't take more distributions from an S-corp than you have available in basis.  Make sure you are tracking your basis.  Ask your CPA if he is tracking basis.  Forgetting this can cause catastrophic problems.

For example, you can't go get a $100k loan for the business, and then take a $100k distribution.    S-corp shareholders do not gain basis through debt, even if the debt is personally guaranteed.  So without basis, that distribution would be reclassified and the rest is a path you want to avoid.

Mark Wagner CPA

Agree you can leave the RE in the company or move to personal bank account once is taxed.  I would decide based on where you are earning the most interest.  Also agree keep in RE account or new one, either way is fine if you want to see it as a separate line on statements.  CPA will track the change in account, I usually do mine like this:

CR 3100 SH Investment - Money I put into company

DR 3200 SH Distribution - Money I took out of company

CR 3300 Retained Earnings -  Money I earned in company

Also agree tax person s/b tracking your Basis, which may differ slightly from above, but DR Debit must not exceed Credit balances.  

So do additional shareholder investments or distributions fall into the label "additional shareholder paid in capital?

Can you invest the RE in stocks or CD's and keep them inside the S corp building up that amount through the years?

You CAN take out more than your basis as a distribution.  It just becomes taxable at that point.  It is not subject to SE taxes though, only income tax.  It’s one of the tax-planning strategies associated with s-corps.  My advice would be to make sure one consults with a tax specialist who knows about s-corps.

I would agree, an S Corp is a pass through entity, thus there are no retained earnings. It is passed to you personally and taxable whether you take the profit out of the business or not. If it was originally a C Corp that elected S treatment I would use the shareholder equity and move retained earnings to your account based off the K1 information to track basis. This would also take into consideration reductions to basis such as 50% meals or fines disallowed. A standard LLC that elects to be taxed as an S Corp would still have partner equity accounts for bookkeeping purposes. Basis would still have to be tracked via the K1’s and moving the R/E to the appropriate members based on percentages. There is no such thing as retained earnings in a sole prop or partnership. Electing S-Corp  treatment doesn’t change that. You only have a retained earnings in a C Corp (or C Corp that elects S-Corp treatment - these retained earnings are taxed as capital gains if not passed to the member.) 

Use your K1 as a guide of your basis each year to make your R/E to equity adjusting entry. Keep in mind retained earnings is an equity account, so you’re not shifting balance, you are just adjusting the equity to the correct account/s based on percentage of ownership You are entitled to take what you have been taxed on :)

@tj1701 

Just saw this and must disagree. No need to distort your Retained Earnings account. I have been an S-Corp single-owner for over a decade. I keep Retained Earnings in that account with a cumulative credit total balance which shows how much money my company has earned since I started biz 12 years ago.

I have a separate Distributions account with a debit balance which show the cumulative balance of total amounts I have distributed to myself in the last 12 years, which I record when I pay myself with cash or

if I pay personal expense with company credit card, which ultimately is DR Distributions and CR Cash.

This allows me to see:

Retained Earnings ($5,000,000)   Taxed as earned each year for last 12 years

SH Distributions          $500,000   Cash Paid to Me (not taxed since already taxed above as earned 

Net Equity               ($4,450,000)   Amount available for me to take anytime since already taxed above

Hi Teri,

Thanks for the detailed response, this looks like my desired set up.

Regarding the retained earnings account, do you pay taxes on the amount the account grows in 1 year, per year? And when you withdraw from this account, does it have the same taxes applied to it as a normal dividend (therefore double taxed?)

Is there a specific report that would show the accounting you present below?

Allow me to provide some information about Retained Earnings and the report that you can run, BeyondTheBox.

The Retained Earnings account shows the total of your company income and expenses from all previous years. Once the new fiscal year starts, QuickBooks Online (QBO) automatically adds the net income from the previous fiscal year to your Balance Sheet. You'll want to view your Retained Earnings in the Balance Sheet:

1. Select Reports.
2. Locate and select the Balance Sheet to open it.
3. In the report, locate the Retained Earnings item to see your company's reported net income.

In addition, you can distribute the amounts in the Retained Earnings account at the end of your fiscal year using a journal entry. The Debit column will decrease while the Credit will increase your Retained Earnings account. Remember that you must offset every debit with equal credit.

However, if you want to see what makes up Retained Earnings, you can run the Profit and Loss report to view details for the Net Income (Loss) amount. 

You can also browse some helpful articles for your reference. This will simply guide you in anything that you want to know about QuickBooks. 

Feel free to leave a comment below if you need anything else about retained earnings. As always, I'll be here to further assist you. 

Thanks for the information but it's not what I was after. There was a very specific example in a previous post that accounted for distributions and their affect in retained earnings:

Retained Earnings ($5,000,000)   Taxed as earned each year for last 12 years

SH Distributions          $500,000   Cash Paid to Me (not taxed since already taxed above as earned 

Net Equity               ($4,450,000)   

I asked if there was a report that reflected this information in this way, as the Net Equity is what is actually important.

Thanks for posting here again, @BeyondTheBox,

At the moment, the report you're looking for is currently unavailable. You can temporarily use the Balance Sheet report to see the Retained Earnings information.

To access Retained Earnings report, follow the steps below:

1. Tap the Accounting menu from the left navigation panel.
2. Choose the Chart of Accounts tab.
3. Find the Retained Earnings account.
4. Click on the drop-down arrow beside Run Report found in the Action column.
   
5. From there, you can edit the account name and description.

I'll be sharing some related links about Retained Earnings account and how it works in QBO. See them here:

• How to view your Retained Earnings account
• How to view Retained Earnings account details

Kindly add some updates or additional questions below. I'll be right here to help you. Have a good one!

Thank you for the information. You explanation begs the question I am chasing. Do we really need to be adding journal entries to make the Retained Earning account reflect actual monies retained by the company. Retained earnings does not reflect distributions making the term "Retained Earning" confusing since it does not necessarily reflect monies actually retained.

Its seems to be more of a profit/loss indicator over the years, which to me is the reason it does not care about distributions. Thoughts?

Thank you but all of these things are know to me and others, I am trying to determine if I need to be adding journal entries to make the account actually reflect "Retained" earnings which in reality it often does not. I am sure this is just an unfortunate title but it is the source of MANY questions. 

@BeyondTheBox 

No one should ever need to make any journal entries into the Retained Earnings account in QB. System automatically makes the annual entry for you on the first day of the new year by zeroing out Income Stmt moving that profit or loss to Retained Earnings on the Balance Sheet. RE account has credit balance if you have a cumulative profit (revenue minus expense = profit or loss).

Distributions are when Retained Earnings are paid to S-Corp Shareholders, usually at year end close. Entry to pay is a debit to Distributions account and credit to cash account so DOES NOT CHANGE Retained Earnings. RE account continues to show cumulative profit or loss for life of the business.

Retained Earnings is Credit balance (ideally) and Distributions are a Debit (if done correctly).

The net of that debit and credit = net equity.

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@BeyondTheBox wrote:

Thank you but all of these things are know to me and others, I am trying to determine if I need to be adding journal entries to make the account actually reflect "Retained" earnings which in reality it often does not. I am sure this is just an unfortunate title but it is the source of MANY questions. 

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Thank you for the clarifications. Really appreciate it.

In my mind then the label "Retained Earnings" is a misnomer it that it does not actually reflect "Retained" anything. Its just a running total of profits or losses.

Also, for the less Accounting inclined, my distributions are sent from the Business Checking account to the Shareholder. I dont think of that as a cash account. QB Online has a "Cash on Hand" and but think that might refer to petty cash, and not money in the bank.

But, adjusting Retained Earnings, was the main concern.

You said, "Retained Earnings is Credit balance (ideally) and Distributions are a Debit (if done correctly)."

and I agree. I would like QB to do the math for me showing me how much of the retained earnings are actually still in the company coffers vs. me having to figure that out. Seems like something that should be there but perhaps Accounting is not like Quicken in that Accounting is all about running totals vs point in time.

Thanks again.

The problem here, in my experience, is that the Retained Earnings in QB that is used in the Profit/Loss report is not the same as "ordinary business income (loss)" + "rental income (loss) or other net rental income (loss)" as reported on an 1120S, which ultimately reflects in the Accumulated Adjustments Account (AAA).  This can be due to deductions allowed on the 1120S that are not "accounted" for in QB.  The primary one for me is the mileage deduction, which is not an expense in the QB world.  QB provides a nice way to track it, but it is not incorporated in its reports as near as I can tell.  The Tax function in my QB online only contains 1099 and Sales Tax functions.  There may be other similar tax deductions/expenses not considered by QB as well.

For this reason, the RE in QB would not be an accurate accounting of AAA, which ultimately is what is reported, on a shareholder ownership percentage, in Schedule K-1.  It is this amount a shareholder must use to keep track of Stock Basis for the purposes of determining tax liability.  I am thinking that setting up bank or equity account mirroring the AAA is the better way of tracking this.  One would expense/check distributions against this account to account for all those items that reduce or add to the AAA.  The only caveat here is that one cannot reduce the AAA below zero with a distribution so there would be a problem there if one wanted or needed to do this.  That is a tax specific issue so there is no rule against it in accounting to my knowledge, but I am in no way a CPA.