Discussion:Distributions in Excess of Basis - S Corp
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Discussion Forum Index --> Tax Questions --> Distributions in Excess of Basis - S Corp
11 October 2006 | |
| How do I account for distributions in excess of basis for an S Corp in Proseries? The S Corp side only allows me to take down to zero. Where on the 1040 would I account for the excess? Or any other suggestions? | |
| 12 October 2006 | |
| How much were the excess over basis? Are you considering setting up a Shareholder's Loan? | |
| 12 October 2006 | |
| About $40K....I have considered a Shareholder loan. Now what? | |
| 12 October 2006 | |
| If you don't do a shareholder loan, you recognize the excess as capital gain on the sch D. | |
Death&Taxes (talk|edits) said: | 12 October 2006 |
| And if you do a shareholder loan, make it right with paper, interest payments etc. Last corporate audit I had went back and forth on shareholder loan issue. | |
| 12 October 2006 | |
| If the amount exceeds the basis ( like in your case) the excess is treated as payment in exchange for the stock, i.e. as capital gain see SEC.1368(B)(2). | |
Bottom Line (talk|edits) said: | 12 October 2006 |
| I'd do it as a shareholder loan. This means that the owner has borrowed money from the company and will/should pay it back. This type of thing should not be an ongoing event. It would only show on the 1120S balance sheet since loans payable don't appear anywhere on a 1040. This would not be a taxable event. | |
| 12 October 2006 | |
| If you treat the excess distribution as shareholder loan receivable you should consider calculating interest on the total amount of the loan and issue a 1099-int to the sharehodler whether you pay the interest or you accrual the interest.
Use the APPLICABLE FEDERAL RATES(AFR) REV.RUL.2005-77 TABLE 1 SHORT TERM AFR | |
| 12 October 2006 | |
| Thanks to you all !! I always appreciate the input so much!!! | |
| 12 October 2006 | |
| I'm with Mauro on this, offsetting entry is Treasury Stock. | |
| 12 October 2006 | |
| I assume the Treaury Stock would stay on the books until the Corporation decided to issue more shares to others, is that correct? If the client goes with biting the bullet in 2005 and paying the taxes on the excess distributions, what description do you use on the Schedule D to reflect the excess? | |
| October 12, 2006 | |
| Ok, I've got a philosophical problem with this, paying tax on the excess distribution. If you do, you're out the cash. Now, a year or two later, when you have excess earnings, effectively repaying that old distribution, you cannot now get any kind of credit back. The money's still gone, and will remain gone indefinitely unless you begin to sustain losses and get the extra basis, or sell out. I find that short-sighted. I'd much prefer to create the note properly and hope and pray that within a year or two it can be repaid...If we can show some payments against it, issue the 1099INT, etc. so that it's legit, what's the problem? Save the client the cash, now and forever... | |
| 12 October 2006 | |
| Thanks, JR1 -- love to get your point of view. This will be my recommendation. | |
| 12 October 2006 | |
| All depends on the amount involved. Tax bite generally compares favorably with and annual cost of tracking the loan, computing the interest accrual...etc. The type of client that gets into this situation is the type who takes what's there. Loan tracking could go on for years. Typical example caused by Section 179 in excess of down payment and principal paid. This will even out on a cash flow basis over the life of the equipment loan. Compare say five years of shareholder loan tracking cost to the tax bite on recognizing gain. | |
| 12 October 2006 | |
| Dennis - are you sure you don't know my client? Yes, they take everything out --- in fact in the form of distributions --- I plan to have a sit down with them to discuss many various aspects of their way of doing business -- they've had a bookkeeper for years that does not ask questions nor advise them on much -- so this is only one of the issues that came up on this return. I'm going to calculate their tax liability and give the client the 2 choices and let them make their decision - ultimately it's up to them bu JR1 has a great point and why pay taxes now when it's not necessary? Seems like once the loan is set up, interest accruals calculated, then the client should be good to go. | |
Death&Taxes (talk|edits) said: | 12 October 2006 |
| Client once asked, 'what do we do with these loans on the books?' Both he and wife each had C corporations with loans in the 100,000-200,000 range. Loans had been there since their old accountant told them the words all want to hear, 'Just take what you want, I'll figure out payroll at the end of the year." I told them that whatever they did, they had to die with their businesses still active. "Funny," he said, "that's what the other guy said too." Wife's was audited; she had notes, interest was accrued every year, and had made some repayment. IRS tried to claim loans had been effectively forgiven; I asked what year, why should it be the year of audit, why not five years before or five years later? They did back off. The couple, or their estates, had the last laugh five years later when they both died within a year of each other with both businesses winding down, but still active. | |
| 14 October 2006 | |
| This would be ST gain cap gain if only in business one year, right? | |
15 October 2010 | |
| S-Corp w/3 s/h (50%, 40%, 10%). All three are active s/h emp receiving salary. In past years each s/h has cut checks of various amounts over the course of the year as needed. Then at year end reviewing for a pro-rata distribution matching ownership. Going forward, we are working to have everyone on the same schedule so as to avoid this issue.
The question: What other options are there (beside s/h loan) for recording remaining amounts paid to s/h after calculating the pro-rata split at EOY? Example: And Distribution for $100k of A:50k, B:40K, C:10K | |
| 17 October 2010 | |
| Wages should be commensurate with the value of the services provided to the corporation by each of the stockholders, not necessarily proportional to stock ownership. The 10% stockholder may be working more hours/providing more valuable services than either of the others.
Withdrawals of cash or property in excess of reasonable salaries are one of two things: distributions of profit, or loans to the stockholders. A distribution in excess of available profits (AAA in the case of an S that was formerly a C) that is not a loan is a return of capital to the extent of the stockholder's basis in the stock and loans to the corporation; any amount in excess of basis in stock and loans is capital gain. Distributions that are neither loans nor salaries must be proportional to stock ownership. A's and B's withdrawals in excess of their proportionate shares can be treated as salaries or loans. Or, if there is enough profit or AAA to cover it, you could distribute an additional $10K to B and an additional 5K to C, bringing the total distribution up to $150K and making the distributions proportional. As long as the disproportionate distributions or the difference in their timing was not in accordance with a binding agreement, that shouldn't create a problem. Also, if you do as Captcook suggests and treat the excess distributions to A and B as salary, even if those salaries are excessive in relation to the services they perform, as long as that difference is not per a binding agreement it will probably be OK. You might want to look at the examples under Reg. 1.1361-1(l)(2). | |
| 19 October 2010 | |
| Thank you Capt & Katie. Just one more question for clarity: How would crossing the yearly time line with the remaining amounts still open effect the options available?
Company was always a S-Corp, no binding agreements for this. Would crossing the time line force the monies to be treated as a s/h loan? | |
| 9 December 2010 | |
| Can anyone tell me where I might find the tax authority to treat the distributions in excess of basis as capital gain, or a discussion of the tax treatment? Also, may I assume the capital gain holding period is based on the date the original funds were transferred to the S Corporation in exchange for stock? | |
| 10 December 2010 | |
| Jana, start by reading Subchapter S of the Internal Revenue Code, with particular attention to Sec. 1368. And please complete your profile, as you were asked to do when you registered with TaxAlmanac. If you are a tax practitioner, you have no business dealing with S corporations if you haven't even read the Code. And if you are the taxpayer, an S corporation is not a do-it-yourself proposition; you need professional help. | |
