Excess Taxable Distributions


T

techiegirl

Business went from Sch C to S-Corp. Carried forward assets.
Two of the assets still had liab. The liab. is over the adj
basis of assets.

Because of this the shareholders distributions are over
their basis by $1700. Officer that does perform serices, did
not take payroll, only distributions. Which I am concerned
about. Net income $27000, distributions $28700.

How do I show the excess taxable distributions of $1700? I
know they (shareholders) pay capital gains but I do not know
where to list this on the S-Corp return for it to
carryforward to the shareholder. Does it go on the K-1? or
Page 3? Does a 1099-DIV need to be made (I'm thinking no on
this).

Any help would be appreciated since this is the first time I
have encountered this.

Side note: I'm wondering if some of the distributions need
to be reclassifed as payroll... do a corrected 941 return.
 
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P

Phoebe Roberts, EA

techiegirl said:
Business went from Sch C to S-Corp. Carried forward assets.
Two of the assets still had liab. The liab. is over the adj
basis of assets.
Are you sure that the liabilities were retitled into the
corporate name, as opposed to being liabilities of the
shareholder still? Or is the issue that the corporation
paid off the shareholder's liabilities, creating the
distribution in excess of basis?
How do I show the excess taxable distributions of $1700?
That calculation is made at the individual level, and
doesn't appear on the 1120S or the K-1. My 1120S software
produces a basis schedule to go with the K-1 each year, and
the distribution in excess of basis would appear as a note
at the bottom of the schedule.
Side note: I'm wondering if some of the distributions need
to be reclassifed as payroll... do a corrected 941 return.
That's the client's call, not yours. IMHO.

Phoebe :)
 
G

Gene E. Utterback, EA

techiegirl said:
Business went from Sch C to S-Corp. Carried forward assets.
Two of the assets still had liab. The liab. is over the adj
basis of assets.

Because of this the shareholders distributions are over
their basis by $1700. Officer that does perform serices, did
not take payroll, only distributions. Which I am concerned
about. Net income $27000, distributions $28700.

How do I show the excess taxable distributions of $1700? I
know they (shareholders) pay capital gains but I do not know
where to list this on the S-Corp return for it to
carryforward to the shareholder. Does it go on the K-1? or
Page 3? Does a 1099-DIV need to be made (I'm thinking no on
this).

Any help would be appreciated since this is the first time I
have encountered this.

Side note: I'm wondering if some of the distributions need
to be reclassifed as payroll... do a corrected 941 return.
You seem to be in over your head, I would suggest you get
professional help.

When you convert a Schedule C to a corporation, S or
otherwise, you carry over the original cost, accumulated
depreciation, and holding period of the assets, as well as
their outstanding liabilities. There should be no impact on
distributions.

Before you start assuming that the difference between
distributions and net income is taxable you have to
calculate the shareholder's basis in the S Corporation.
ONLY after you calculate basis can you know if the
distributions are taxable, and the taxability of
distributions may not have any direct correlation to the S
corp's net income.

Lastly, IF (read that as a BIG IF) you really have taxable
distributions in excess of basis, it gets reported on the
personal return on Schedule D as a capital gain; either
short or long term depending on the holding period.

Get some professional help and good luck,

Gene E. Utterback, EA, RFC
 
H

Harlan Lunsford

techiegirl said:
Business went from Sch C to S-Corp. Carried forward assets.
Two of the assets still had liab. The liab. is over the adj
basis of assets.

Because of this the shareholders distributions are over
their basis by $1700. Officer that does perform serices, did
not take payroll, only distributions. Which I am concerned
about. Net income $27000, distributions $28700.

How do I show the excess taxable distributions of $1700? I
know they (shareholders) pay capital gains but I do not know
where to list this on the S-Corp return for it to
carryforward to the shareholder. Does it go on the K-1? or
Page 3? Does a 1099-DIV need to be made (I'm thinking no on
this).
Look at line 10 of the K-1. Never a case for a 1099-DIV
for an S corp.
Any help would be appreciated since this is the first time I
have encountered this.

Side note: I'm wondering if some of the distributions need
to be reclassifed as payroll... do a corrected 941 return.
Past February 28th. Don't even THINK about that one.
(grin

ChEAr$,
Harlan Lunsford, EA n LA
 
D

David Woods, EA, ChFC, CLU

techiegirl said:
Business went from Sch C to S-Corp. Carried forward assets.
Two of the assets still had liab. The liab. is over the adj
basis of assets.
That's income right there.
Because of this the shareholders distributions are over
their basis by $1700. Officer that does perform serices, did
not take payroll, only distributions. Which I am concerned
about. Net income $27000, distributions $28700.
How do I show the excess taxable distributions of $1700?
There is a line on Sch K for taxable distributions.
I
know they (shareholders) pay capital gains but I do not know
where to list this on the S-Corp return for it to
carryforward to the shareholder. Does it go on the K-1? or
Page 3? Does a 1099-DIV need to be made (I'm thinking no on
this).
1099 needs to be issued I believe. When in doubt, read the
1120S instructions.
Any help would be appreciated since this is the first time I
have encountered this.

Side note: I'm wondering if some of the distributions need
to be reclassifed as payroll... do a corrected 941 return.
So....you'd convert cap gain to loss with no basis to deduct?
 
D

David Woods, EA, ChFC, CLU

Harlan Lunsford said:
techiegirl wrote:
Look at line 10 of the K-1. Never a case for a 1099-DIV
for an S corp.
I wouldn't go that far. I did one earlier this year for an
s-corp that was a former C, had eaten through AAA and
wouldn't reclass the money as a loan. That was specifically
recognized as a dividend and a 1099-DIV was required.
 
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T

techiegirl

I apologize. I wrote incorrectly in that it is
distributions. I did some recalculating.

Am I sure that the liabilities were transferred to the
S-Corporation?
Well client says it was.
This is the first year of the S-Corp.
Calculating Shareholder Basis:

This is what happened:
Adjusted basis of assets transferred: $22,000 (rounding
numbers off) Liabs. that came with the assets: $30,000
Leaves: $7,000 that liabs. went over basis of assets.

Distributions to shareholders in cash: $27000

Net income: $27198.

I thought this $7,000 had to be added to distributions.
Which would make distribtuions equal $34,000. I read in a
pub that it would be if the liab. went over assets
transferred. So I thought it would go over to Schedule D on
the 1120s.

But after reading this and other information. This really
should not show on the 1120s. As mentioned above should
really only show on the K-1 worksheet that calculates
shareholder basis. Then it is just carried on to the
individual level.

Is that correct?
 
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P

Phoebe Roberts, EA

techiegirl said:
Am I sure that the liabilities were transferred to the
S-Corporation?
Well client says it was.
IME, clients sometimes use words that have both a specific
tax meaning and a "general usage" meaning in a way contrary
to the tax meaning.

It's entirely possible that your client actually got the
debt retitled in the corporate name, and that he's only
listed as a guarantor (or not at all). In which case he has
(potentially capital but probably 4797 ordinary) gain at the
time of the contribution, to the extent that the total
liabilities transferred exceeded the total basis in assets
transferred, under Sec 357. And his beginning stock basis
is zero.

But it's also possible that what happened was that the
corporation started making payments on the liabilities, but
the shareholder is still legally on the hook. In which case
the shareholder has interest income to the extent the corp
paid interest, an offsetting deduction (which could arguably
go either as investment interest expense on Sch A or on Sch
E pg 2), and no gains at all. In that case, his beginning
stock basis is whatever the basis of the assets was.

Only way to tell is to look at the note / ask the bank.

Phoebe :)
 

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