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Level 2

Very confused about distributing profits from our S-Corp

I am a managing partner in an LLC which has tax status of S-Corp. I need help in distributing profits (after payroll is paid) to two shareholders of this S-Corp. I have read may posts on this forum about this issue and have filled my head with conflicting information about 'Shareholder Distribution Accounts' in QuickBooks Pro.


So my situation is that we are two shareholders (both contributed $15,000 each as initial capital) in an LLC which is taxed as S-Corp. Both of us draw salary and now LLC has $4000 of profit by the end of year which I need to distribute to shareholders. My question is what type of account is 'Shareholder Distribution Account' ? Because I read on this forum that 'Shareholder Distribution Account' of an S-Corp can not be used the same way as the equity accounts in C-Corp. So it means that 'Shareholder Distribution Account'  cannot be an equity draw account.


Someone suggested to use Shareholder Distribution account as the expense account to distribute the taxable profits of S-Corp to the shareholders. Really is this true that when I receive my profit from my S-Corp, to book it as an expense?


Another person posted that distributions to shareholders are tax-free up to the amount of the shareholder's stock basis. If a distribution of profits exceeds a shareholder's equity contribution, then excess amount over the shareholder's equity is a capital gain. This really confused me. The K-1 issued from my S-Corp is already showing my taxable income/profit from my S-Corp every year. So does it mean, once I receive $15,000 of cumulative profit from my S-Corp ($15,000 is my paid-in capital) I have to pay capital gain tax in addition to regular income tax.

 

Can someone please guide me which is the correct way of accounting the profit distribution in an S-Corp?
Thanks for reading.

3 Comments
Highlighted
Community Champion

Very confused about distributing profits from our S-Corp

WHether an S-corp, an LLC or an LLC masquerading as a S-corp, profits (or loss) are paper reported, passed through to the members, partners, shareholders and this is whether or not any cash actually changes hands. Only in a partnership agreement would there be any requirement that actual cash on hand be distributed.

 

Any cash distribution paid out (after wages) is a tax-free event to the recipient and is not a company expense. You will personally pay tax on your share of profit even if you and your partners leave all retained earnings in the company and take no withdrawals.  

 

https://www.upcounsel.com/s-corp-shareholder-distributions

 

So your company has a $4000 profit that will hit Retained Earnings. And you want to distribute $2000 each.  You can "spend" it directly from Retained Earnings (it is not a company expense) or you can on the books distribute the Retained Earnings to each shareholder equity (stock) account and then distribute by check from there.  Becasue your individual basis increases by your share of retained earnings, prior to any distribution your basis increases to $17000. Where capital gains comes into play would be if you had a ton of cash on hand (maybe form corporate borrowing) and distributed OVER your existing stock basis, say $20,000, then you would have $3000 in capital gains.

 

Some more to chew on. https://www.thebalancesmb.com/should-i-elect-to-have-my-llc-taxed-as-a-corporation-397767#:~:text=LL....

 

 

Highlighted
Level 2

Very confused about distributing profits from our S-Corp

Thanks a lot for answering my question.  Your explanation is very logical.   Would you be so kind to please give an example of a journal entry as of how can I move profits from Retained  Earning account to a share holder's equity account ?

 

 Also it would be also super awesome if he can give an example of a journal entry as how can a share holder 'spend'  money directly from retained hurting a count?

 

Thanks a bunch

Highlighted
Level 1

Very confused about distributing profits from our S-Corp

Thanks for the update and quick reply. I'll be sure to keep an eye on this thread.

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