Discussion:Mechanics of Reporting S-Corp Distribution

Suppose the S-Corp has always been an S Corp, I have 1 shareholder, 100,000 of stock,the company has 20,000 in AAA and this year has a profit of 10,000. The client takes a 5,000 draw/distribution.

I think I report the 5000 distribution on line 7 of the Schedule M2, Distributions other than dividend distributions AND also on line 16d of the K-1.

Is this correct?

Scenario 2 (Loss Scenario): Suppose the S-Corp has always been an S Corp, I have 1 shareholder, 100,000 of stock,the company has -20,000 in AAA and this year has a loss of 10,000. The client takes a distribution/draw of 5,000.

I think I report the 5000 distribution on line 7 of the Schedule M2, Distributions other than dividend distributions BUT I do NOT report the 5000 distribution on line 16d of the K-1.

I am looking at the old tax return- the old accountant decreased line 24 of the Sch L's retained earnings from the 10,000 loss it suffered to 10,000 loss + 5,000 distribution = 15,000 loss for retained earnings. Is that right?

I thought the 5,000 was suppose to decrease the stock. So I was going to enter 100,000 stock- 5,000 distribution = 95,000 capital stock on line 22 of the Sch L.

So, to recap: do I report the distribution on the K-1? and where do I report the distribution on the Sch L, the retained earnings, or the stock?

Scenario 2: distributions always get reported on schedule K and K-1. Distributions that cause AAA to go negative do not get reported on line 7 of M-2. The AAA is an account of the S corporation, not the shareholder. Its sole purpose is to track the amount of taxable income that has been reported by the shareholder and is therefore available to be distributed tax free. If AAA is zero or negative, there is no previously taxed income available for distribution (note: if the S corporation has tax exempt income to distribute, there may be a reportable distribution on line 7 of M-2 even though AAA is negative). As for schedule L presentation, as long as the distribution hits some component of equity (i.e., retained earnings or capital stock) it really doesn't matter (note: an S corporation is a passthrough entity, so shareholder basis equals capital stock account plus retained earnings).

Assume my Retained Earnings on Sch L is (20,000) beginning balance + (10,000) net income for the year + (5,000) draw= (35,000).

However, by not reporting the 5,000 draw on Sch M-2, now my Sch M-2 line 8 (Balance at the end of tax year) is (20,000) Beg balance + (10,000) net income for the year= (30,000).

My line 8 M-2 ending balance does does not equal my Sch L retained earnings line 24.

Is this correct? I've never seen a tax return where these 2 did not balance before.....

Agreed?

2) Just to satisfy my curiosity, , when there is no AAA, no E&P, negative RE, and no capital stock left, where on the Sch L do you record the capital gain? I guess the only thing left is to hit the RE anyway?

If you choose to decrease the capital account, think of it as a return of capital.

Cash (credit)

Capital Stock (debit)

But most owners don't like to mess with the capital stock.

So, to recap: if you decide to not effect the stockholder's equity, you can either post an accounting/bookkeeping entry as loan to shareholder:

the owner takes a draw:

cash (credit)

draw (debit)

close the accounts at the end of the year:

draw (credit)

loan to shareholder (debit)

(remember, you have to also calculate interest)

or simply take a capital gain.

the owner takes a draw:

cash (credit)

draw (debit)

close the accounts at the end of the year:

draw (credit)

RE (debit)

on the tax side (for distribution in excess of AAA) for Lacerte:

simply put the capital gain (the draw that is in excess of AAA) on line 17 of the K-1, other information. Example:Long term capital gain (Cash distribution in excess of AAA) $10,000

Then, on your Sch D of the 1040, you put the same thing: Long term capital gain (Cash distribution in excess of AAA) $10,000

This way, your RE and M-2 account balance out. It isn't a capital gain on line 7 or 8a of the K-1- you didn't sell an asset.

This way, your books are in balance with your tax RE, your sch K is in harmony with your K-1s, and the appropriate gain is recorded on Sch D. Otherwise, you must override, with the result that your books don't tie to your tax, or your Sch K doesn't tie to your K-1s.

Taxability of S-corp distributions are determined at the shareholder level not the corp. Distributions in excess of stock basis are taxable at the shareholder level.

If the AAA is -0- or a debit balance, you don't have anything to distribute.