S-corp equity accounts, retained earnings, and net loss

longhornk · ‎February 15, 2021

Single owner LLC taxed as s-corp since 2016; Never had a loss in the past and am struggling to figure out how everything will affect taxes/balance sheet. Background/Questions:

A shareholder distribution was issued prior to April 1st, no other distributions afterwards. Covid hit and got PPP loan/EIDL grant May 1, income was greatly decreased. Also got EIDL Loan June 1st which is recorded on the books. At end of year s-corp had a net loss of approx. $10000.

1. When figuring everything at end of year: Forgiven PPP increased shareholder basis. The shareholder distribution (done prior to Covid/PPP grant) reduced retained earnings to zero then reduced OAA (non-taxable income recorded in books d/t forgiven PPP) to zero. There was still $87 in distributions to account for, but shareholder has basis still of $2100 from common stock and additional paid in capital. These accounts both show an amount and wasn't sure if I should be doing something different with these two accounts at year end/beginning of year (didn't matter in the past as basis was more than the amount in these accounts and never had a loss). So my question is what adjustments need to be made to the different accounts? I usually debit RE and credit shareholder distributions for the beginning of a new year, however, since I have distributions coming from OAA and other equity accounts, I wasn't sure what procedure to follow.

2. After distributions are accounted for, there is a $2013 basis, but there is also a $10,000 net loss. Assuming the $2013 loss can be claimed on the 1040 (maybe not as I'm not sure it meets at risk rules due to PPP forgiveness), how is that accounted for in the s-corp books that the shareholder now has zero basis, and does this affect the retained earnings? Retained earnings were basically -$10,000 at year end. Does this same amount carry over to 2021, and if s-corp is profitable again in 2021, does this affect shareholder claiming loss from 2020. I'm having difficulty understanding how it ties together. I realize the shareholder and s-corp are separate entities, but I am having trouble wrapping my head around it and thought maybe someone could explain it.

john-pero · ‎February 18, 2021

1. For a sole proprietor or LLC PPP forgiveness is , after year end changes to program, booked as non taxable income. For an S -corp it is only treated, as far as I can tell, as an increase to shareholder basis. There would only be the basis upside and no non taxable income component. So your distributions reduce the adjusted basis and nothing else.

You still only reduce basis to no less than zero after which any excess distributions become long term capital gains to shareholder.

2. If subject to at risk rules only loss equal to basis of both stock AND debt company owes shareholder can be used and the balance carried forward on company books.

Question arises, how much W2 wages as a reasonable wage have you paid yourself BEFORE the distributions? You would owe more in your own taxes but what about reclassified the 10000 as additional net W2 (bonus?) You could pay yourself 100% W2vand 0 distribution. Company loss would increase by over $10k additional but no effect of distributions on basis, only basis going to zero and loss either usable or more importantly NOT counting as capital gains. It all depends on which personal tax rate is higher

Run it past your tax CPA, no S-corp should be without one. Free advice on the web is always worth what you paid for it

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S-corp equity accounts, retained earnings, and net loss

S-corp equity accounts, retained earnings, and net loss

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