How to treat S Corp distributions

[Beverly]

You know, this is one of the first times in "the real world" that I am
unsure of myself. My boss (non-accountant) often has loopy ideas on
how to treat something if it is not in his (read personal rather than
corporate) best interests to include suggesting we make our own
GAAP... haha.

Anyway, we are an S Corp that is making a distribution. My
understanding is that, if we have profit, the first part of the
distribution is to come out of retained earnings and the remainder, if
the distribution is more than retained earnings, is to come out of the
profits as a dividend (all in proportion to shares owned). Am I right
or wrong? Please explain to me if I am wrong.

Either way, how is this generally booked and do I send the
shareholders a 1099-DIV (and only in the amount that is classified as
dividends, right?)?

I feel stupid having to ask a question here, but would greatly
appreciate the help.


Beverly

 

[Bill Lentz]

You know, this is one of the first times in "the real world" that I am
unsure of myself. My boss (non-accountant) often has loopy ideas on
how to treat something if it is not in his (read personal rather than
corporate) best interests to include suggesting we make our own
GAAP... haha.

Anyway, we are an S Corp that is making a distribution. My
understanding is that, if we have profit, the first part of the
distribution is to come out of retained earnings and the remainder, if
the distribution is more than retained earnings, is to come out of the
profits as a dividend (all in proportion to shares owned). Am I right
or wrong? Please explain to me if I am wrong.

Either way, how is this generally booked and do I send the
shareholders a 1099-DIV (and only in the amount that is classified as
dividends, right?)?

I feel stupid having to ask a question here, but would greatly
appreciate the help.


Beverly

You might want to post in misc.taxes.moderated, but I don't think it's
a dividend, but a distribution in excess of basis. I think it just
gets reported on the K-1, and the shareholders will have a capital
gain.

I know it sounds odd, but that's how my tax CPA explained and handled
it when I had a similar situation a few years ago.

 

[Paul Thomas]

You know, this is one of the first times in "the real world" that I am
unsure of myself. My boss (non-accountant) often has loopy ideas on
how to treat something if it is not in his (read personal rather than
corporate) best interests to include suggesting we make our own
GAAP... haha.

Anyway, we are an S Corp that is making a distribution. My
understanding is that, if we have profit, the first part of the
distribution is to come out of retained earnings and the remainder, if
the distribution is more than retained earnings, is to come out of the
profits as a dividend (all in proportion to shares owned). Am I right
or wrong? Please explain to me if I am wrong.

Either way, how is this generally booked and do I send the
shareholders a 1099-DIV (and only in the amount that is classified as
dividends, right?)?

Distributions from an "S" corporation **do not** get reported on a 1099-DIV.

The general entry would be to credit cash and to debit an equity account to
reduce R/E (which include profits).

You should also be tracking the owners basis in the company, their
investments + profits - losses - distributions generally equal their basis.
You really don't want basis to go negative.

Since the shareholder(s) pay tax on the profits in the year earned, they can
be distributed whenever there is sufficient cash to do so.

 

[Beverly]

This sounds appropriate. I supposed what confused me is my textbook
from college which said:

"If the S corporation has earnings and profits, there are several
tiers through which the distribution must pass. Generally the
distribution is tax free up to the amount of the S corporation's
accumulated adjustments account. If the shareholder's basis in the
corporation's stock is less than the amount of the accumulated
adjustments account, the difference is capital gain. Any remaining
distribution (if it is in cash) is tax free to the extent of
previously taxed income if the corporation was an S corporation before
1983. Next, the distribution is a dividend to the extent of the
corporation's earnings and profits. The balance of the distribution,
if any, is tax free up to the shareholder's remaining basis in the
stock, and then causes capital gain."

Distributions from an "S" corporation **do not** get reported on a 1099-DIV.

The general entry would be to credit cash and to debit an equity account to
reduce R/E (which include profits).

You should also be tracking the owners basis in the company, their
investments + profits - losses - distributions generally equal their basis.
You really don't want basis to go negative.

Since the shareholder(s) pay tax on the profits in the year earned, they can
be distributed whenever there is sufficient cash to do so.

Beverly

 

[Bill Lentz]

This sounds appropriate. I supposed what confused me is my textbook
from college which said:

"If the S corporation has earnings and profits, there are several
tiers through which the distribution must pass. Generally the
distribution is tax free up to the amount of the S corporation's
accumulated adjustments account. If the shareholder's basis in the
corporation's stock is less than the amount of the accumulated
adjustments account, the difference is capital gain. Any remaining
distribution (if it is in cash) is tax free to the extent of
previously taxed income if the corporation was an S corporation before
1983. Next, the distribution is a dividend to the extent of the
corporation's earnings and profits. The balance of the distribution,
if any, is tax free up to the shareholder's remaining basis in the
stock, and then causes capital gain."

SNIP

I think the use of the word 'dividend in that excerpt is merely
descriptive. The E&P from which the dividend is paid has already
been reported on prior K-1's. It's been a long time since I've
studied E&P, but it can be different from Retained Earnings.

 

[brecker]

I think Bill summed it up....

All profits of an S-Corp are reported as taxable gains to the shareholder,
who may or may not be employeers of the corporation.

I did get a little confused in the summary from Beverly. Not having much
experience in S-Corp taxes, I am not sure of the answer. However, it sounded
a little like a C-Corp that converted to an S-Corp. In a S-Corp, all
distributions come from the shareholders equity account in which taxes have
already been paid. It is only a divident if the company was a C-Corp that
converted to an S-Corp as the retained earning at time of conversaion become
looked and any distrbutions in exess of basis (shareholder taxes retained
earning) then become dividend income (which do not qualify as a tax
deduction to the corp and are taxable to the shareholders).

If this where just a normal S-Corp that was never converted, I would thing
that distributions in excess of basis would be a loan to the shareholder or
have some other tax consequence. Basically, it is only an issue once the
distribution exceeds basis. So, not being a tax person, I can only try to
recap what I remember from the CPA exam from a few years back.