How to handle distributions in excess of retained earning in quickbooks

sharley0716 · ‎January 14, 2018

I own an scorp and the two owners took out more in distributions than there was in retained earnings. I recognize there will be tax issues with the distributions, but I now want to zero out the distributions to start the new year. How would I do this?

mcwagner · ‎March 17, 2018

You should never take distributions in excess of basis. And you (or your CPA) should be tracking basis carefully.

Generally if a shareholder takes dist in excess, I will reclassify the excess distribution as a loan to shareholder. Then the following year instruct the client to take no distributions until income is sufficent to cover that (so that it goes away on the following tax return). Note that this technique would probably be overturned if IRS audits you, but I've only had one case where that ever happened - and it was egregious and happened multiple years in a row, which alerted them. You have to decide if you accept that risk.

Also, distributions NEVER "zero out." Basis and distributions are a cumulative ever-to-date amount.

If you are looking to track just your current year, you can set up a "prior distributions" account, and every Jan 1 transfer your prior dist over there.

Mark Wagner CPA

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Rustler · ‎January 15, 2018

You need a tax accountant.

S-corps do not have owners in the traditional sense, they are shareholders and must be on payroll if they work in the company.

That said, shareholders do not take out funds, the company is required to have a shareholder meeting and document the approval for dividends and distributions. Non-dividend distributions reduce shareholder value, if you issue a distribution is excess of the shareholder value, that excess is subject to capital gains tax personally. So the shareholder value does not decease below zero.

All that said, I am not a tax accountant, and the above is my understanding of how it works.

Your s-corp needs, needs to work with a tax accountant

mcwagner · ‎March 17, 2018

You should never take distributions in excess of basis. And you (or your CPA) should be tracking basis carefully.

Generally if a shareholder takes dist in excess, I will reclassify the excess distribution as a loan to shareholder. Then the following year instruct the client to take no distributions until income is sufficent to cover that (so that it goes away on the following tax return). Note that this technique would probably be overturned if IRS audits you, but I've only had one case where that ever happened - and it was egregious and happened multiple years in a row, which alerted them. You have to decide if you accept that risk.

Also, distributions NEVER "zero out." Basis and distributions are a cumulative ever-to-date amount.

If you are looking to track just your current year, you can set up a "prior distributions" account, and every Jan 1 transfer your prior dist over there.

Mark Wagner CPA

stenizet · ‎March 01, 2019

He said distributions in excess of retained earnings NOT in excess of basis though. Distributions in excess of RE are just a return of capital (as long as there is enough basis). They do not trigger a tax event on the personal return.

Teri · ‎July 18, 2020

Hi @sharley0716 -

I agree with @mcwagner is good answer and @stenizet is good further clarification.

S Corp Shareholder Equity might include:

- SH Investments (Credit balance) Incoming $

- SH Distributions (Debit balance) Outgoing $

- Retained Earnings (accumulated profit/loss from Income statement every year, so CR or DR)

Distributions paid out should not be more than the Net credit balance of Equity (all 3 accounts).

Further, since each shareholder may have invested a different amount or already taken some Distributions during the year, each SH has their own "basis" for how much they can take out in Distributions each year.

Each SH can only take out their net credit balance.

- SH Investments (Credit balance) Incoming $

- SH Distributions (Debit balance) Outgoing $

- Retained Earnings (Their share after split up)

Minus any Distributions they may have taken earlier in the year.

The attached might help make this more clear and helps to setup proper accounts to keep separated.

Also agree better to do a loan than submit tax return with negative equity.

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How to handle distributions in excess of retained earning in quickbooks