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krcroteau1
Level 1

Shareholder Distributions & Retained Earnings Journal Entries

I have two questions regarding Shareholder Distributions for my S-Corp where I am both the owner and employee.

 

1. My S-Corp pays my ACA Healthcare premiums each month.  At the end of the year I am supposed to close out the Health Insurance account with a Credit to Health Insurance and a Debit to Shareholder Distributions.  Is this correct?

 

2.  I'm also taking a $2500 distribution.  I have Capital Stock of $3000 and I am the 100% shareholder.  What are the journal entries for this transaction?  

What entries should I be making to Retained Earnings at the end of the year?  

 

I appreciate any help.  My income is very low.  Thank you.

7 Comments
Rustler
Level 15

Shareholder Distributions & Retained Earnings Journal Entries

1. I do not know, but you need to get with a tax accountant on this one.

If you do what you propose, debiting distributions, that will lower overall shareholder capital and you say yours is 3K

 

2. If you take, as you propose, a distribution of 2.5K after your health care adjustment, shareholder capital will/may go negative.

Negative shareholder capital is taxed as normal income in most cases

SEE a tax accountant.

Malcolm Ziman
Level 10

Shareholder Distributions & Retained Earnings Journal Entries

 

Assuming that a) you paid yourself a reasonable salary and b) there is sufficient "basis" (basically Retained Earnings but check with a tax expert) you can pay yourself a distribution. The allocation of the cash payment is a debit to equity.  It's not a journal entry; it's a Check/Expense transaction.  I would set up an equity type account called Shareholder Distributions, to keep it separate.

The payment must come from Retained Earnings, not from Capital Stock, as you seem to suggest

 

Here is an interesting discussion

https://quickbooks.intuit.com/community/Reports-and-accounting/Drawing-from-Retained-Earnings-of-an-...

qbteachmt
Level 15

Shareholder Distributions & Retained Earnings Journal Entries

1. No, this is Wrong. You have not been allowed to post that expense as Distribution for at least a decade, now. You have to run these through payroll and they are Taxable to you, the beneficiary. Whoever gave you that guidance either is too "old school" for new rules, or you need a new CPA if that is the person insisting you do it like that.

 

Example text: "Therefore, the additional compensation is included in the shareholder-employee’s Box 1 (Wages) of Form W-2, Wage and Tax Statement, but is not included in Boxes 3 and 5 of Form W-2."

 

From this topic: https://www.irs.gov/businesses/small-businesses-self-employed/s-corporation-compensation-and-medical...

 

This is especially applicable to you, because you stated this is not a Company Group Plan and because you are a more than 2% Shareholder.

 

2. You are Never removing the value of the Stock; that is the Par Value that reflects the Corporate Stock that was issued to form this corporation as a corporation. Don't confuse this type of equity with other equity, such as Retained Earnings, Capital Contribution balance, and Distributions.

 

There is no Journal Entry for taking a distribution. That is already what you would enter on the Check or Banking Transaction that pays you the amount.

 

After year end entries from tax preparation are done, the Retained Earnings has the final amount. You don't need to do anything with it., because you are the only shareholder. There is no reason to split and allocate it. For the First Date of the new fiscal year, you might want to zero out Distributions to Retained Earnings, so that it starts at $0 for the new year.

 

And you cannot afford to Avoid seeking the help of a CPA or tax preparer.

Teri
Level 9

Shareholder Distributions & Retained Earnings Journal Entries

@krcroteau1 
@krcroteau1 wrote:

I have two questions regarding Shareholder Distributions for my S-Corp where I am both the owner and employee.

 

Just happened to see this question while looking for something else and know it is confusing for many here.

 

1. My S-Corp pays my ACA Healthcare premiums each month.  At the end of the year I am supposed to close out the Health Insurance account with a Credit to Health Insurance and a Debit

to Shareholder Distributions.  Is this correct?

 

No, definitely not. This would be shorting yourself on what is an allowable company-paid benefit. Health insurance expense paid should stay on your books as a tax-deductible business expense, BUT you must add that exact same amount to your W-2 as imputed income, since you must pay  taxes on that amount as if it was paid TO you since it was paid by the company FOR you to utilize. (Any year that you may have paid that from personal funds, you would reimburse yourself for that).  Either way, your payroll service provider should show an option to record on payroll so that it will show up in the proper boxes on your W-2. Yes, you can make corrections for prior years if needed. In all cases, exact same amount shows on your business and personal tax returns (1120S & 1040). This is applicable to all S Corp owners/shareholders who own 2% or more of that S Corporation. You can confirm this on the IRS website. I am not a tax accountant but am an MBA accountant for over 30 years and have been an S Corp owner (100% shareholder) for 12 years so I'm sure on this.

 

2.  I'm also taking a $2500 distribution.  I have Capital Stock of $3000 and I am the 100% shareholder.  What are the journal entries for this transaction?  

What entries should I be making to Retained Earnings at the end of the year?  

 

Retained Earnings on your Balance Sheet are the accumulation of your annual profits or losses from Income Statement. Entries to this account are made automatically by QB from your IS to BS for you. As noted below, in order to pay out Distributions (of profits) to shareholders, you/they must first be paid a reasonable salary for each year (to pay payroll taxes) on that salary total. Then, as also noted, you must have "basis" to be able to pay out Distributions, meaning, there must be a profit (retained earnings) available to be paid to you as Distributions (no negative equity). So your accounting entry for Distributions is a debit to account called Distributions and credit cash. Income taxes are paid in the year income is earned and 'distributed' to shareholders, which may just be on paper if you like. 

 

Meaning as a single shareholder, you can leave that money in your business bank account and take it out later, whenever you want and not pay taxes on it then, since you already paid taxes as earned, so it is your money to take out anytime.  Just as an example, I rarely pay out my Distributions since that would just be moving money from my business to personal bank account, so no matter to me. So then, a few years ago when my Mom was widowed, I wanted to buy a new house for her and the one directly across the street from my sister's house went up for sale and was perfect (3BR/2BA etc) and they were getting many offers, I was able to just take the money out of my biz bank account to pay the $300k in cash since I wanted to grab that house before bidding competition raised price. 

   

I appreciate any help.  My income is very low.  Thank you. 

 

Not sure what you mean by "income being very low," whether you mean company revenue earned or the salary amount you chose to pay yourself.  You should only pay out salary and distributions of amounts you can afford (as earned), so then the key for IRS is to make sure the proper percentage of the total paid to you/shareholders is first paid as payroll with payroll taxes deducted from salary. I do not know what that proper percentage is for your company or others so ask your tax person.


soodm
Level 1

Shareholder Distributions & Retained Earnings Journal Entries

Hi Teri,

 

In your following reply, what type of account should Distributions be? Should it be an Expense account?

 

"Retained Earnings on your Balance Sheet are the accumulation of your annual profits or losses from Income Statement. Entries to this account are made automatically by QB from your IS to BS for you. As noted below, in order to pay out Distributions (of profits) to shareholders, you/they must first be paid a reasonable salary for each year (to pay payroll taxes) on that salary total. Then, as also noted, you must have "basis" to be able to pay out Distributions, meaning, there must be a profit (retained earnings) available to be paid to you as Distributions (no negative equity). So your accounting entry for Distributions is a debit to account called Distributions and credit cash. Income taxes are paid in the year income is earned and 'distributed' to shareholders, which may just be on paper if you like."

BeyondTheBox
Level 3

Shareholder Distributions & Retained Earnings Journal Entries

Retained earnings has a value in year 2 of the business which reflects profit / losses from the first year and does not account for distributions, correct?

 

I think your mention of this is confusing "profit (retained earnings)". Profit is the requirement and it needs to be inclusive of distributions. 

 

I make the clarification because I like many are not accountants, and the Retained Earnings account use has been a difficult concept to reconcile.

awhite_216
Level 1

Shareholder Distributions & Retained Earnings Journal Entries

Distributions are generally considered equity accounts, as it reduces basis not expenses.

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