USA S-Corp Pass-Thru & Distribution Check questions... 2019 was profitable. 2020 was not.


Joined
Apr 20, 2021
Messages
3
Reaction score
0
Country
United States
I have an S-Corp that I've been running for a handful of years. Since it has been funded mostly by my own money that I had invested into the company when I started it (on the books as a shareholder loan to the company), and then an SBA loan, we have not been profitable for most of the years, until just recently: we had a net profit in 2019, but it was followed by a loss in 2020. My accounts and I had finished doing our 2019 corporate taxes sometime in 2020 and once we filed a tax return showing the net profit and thus produced a K-1 which passed profits to me personally, my accountants said that the appropriate way to handle this was to have the company write out a check to me for the amount of money I'd owe for taxes due to this K-1 passed-through profit, and this check was written to me and cashed by me in 2020. Now that my accountants are working on our 2020 corporate taxes, they took that distribution check that they wrote to me, and subtracted that amount from the "Shareholder Loans" amount that was due to me on the tax return. Now here's the kicker: I took on an SBA loan a few years ago, and as part of the conditions of getting the loan, I had to agree to a "STANDBY CREDITOR’S AGREEMENT" "To accept no further payments on the Standby Loan until Lender’s Loan is satisfied" (With the Lender's Loan being the loan I personally made to the company). To me, it seems the way that the accountant is subtracting the distribution check (which again was cashed in 2020 but was for profits of fiscal year 2019), from the Shareholder Loan, is in violation of the SBA loan's "STANDBY CREDITOR’S AGREEMENT". Being totally surprised by this, I've been having some back-and-forth with my accountant to better understand the situation, and he is saying there's no way around this. I am not sure if he is incompetent or correct. I have a somewhat decent understanding of how the S-Corp pass-through and distributions work, but not enough knowledge to fully understand this situation. He is telling me that since we LOST MONEY in 2020, we cannot record the distribution check, which was for 2019 profits, as a distribution, simply because of the fact that we had a loss in 2020 (the year that the check was actually cashed). Below is some back-and-forth about it between my account and I:

ACCOUNTANT: "This check will be recorded as a due from shareholder – as this check is considered as distribution to you from the company and we cannot record shareholder distribution as the company is showing a loss"

ME: "The check that was made out to me for the tax year of 2019 for which the company was actually IN PROFIT. The check was sent out to me in 2020 but again it was FOR A PROFITABLE YEAR 2019. Does this change anything, or is the only thing that matters is what year the check was issued to us/cashed?"

ACCOUNTANT: "Yes it all depends when the check was sent out and cashed. It is still considered distribution. It will be due from Shareholder."

Can I please get a second opinion on this situation? Is my accountant right or wrong? And if 2020 had by chance been a profitable year instead of a loss, then this same check would not have been subtracted from the Shareholder Loan to the Company, and instead been recorded as a distribution (and thus also not in violation with the SBA loan's "STANDBY CREDITOR’S AGREEMENT" ?
 
Ad

Advertisements

Joined
Dec 19, 2020
Messages
80
Reaction score
11
Country
United States
Before you were advised to write a distribution check for the prior year profit- you should have been told whether or not the distribution check exceeded your equity basis in the corporation or it didn't.
When distributions are taken in excess of basis, that's a capital gain (taxable) distribution to you.
The alternative to charging distributions against equity to create a "negative" basis, is to charge a loan account to temporarily suspend the distribution from being taxable income or reducing equity even further.
 
Joined
Apr 20, 2021
Messages
3
Reaction score
0
Country
United States
Understood. Your advice gives me a lot of clarity, TYSM. I also passed the above reply to my account and his reply was:

"For the most part it does describe your situation specially that you are at a loss situation which means the following “how come you are distributing profit when you are losing”
Let me work the numbers as you described!.
Thanks and stay tuned."

Does this guy not know what he's doing?? Why does he all of a sudden excitedly act like a new door was just opened, after I forward an internet-stranger's advice to him? Until now, he's been repeatedly saying there's nothing that can be done aside from subtract it from the Shareholder Loan to the company...
 
Last edited:
Joined
Dec 19, 2020
Messages
80
Reaction score
11
Country
United States
Are you dealing with a firm partner or a junior accountant?
 
Ad

Advertisements

Joined
Dec 19, 2020
Messages
80
Reaction score
11
Country
United States
You could suggest to that person take a Continuing Education course on S Corps and
Effects Distributions have on Basis (and visa versa).
It's a very heavily discussed subject in the tax profession.
There are various sources that offer these programs - online, home study, zoom sessions
 
Ad

Advertisements


Ask a Question

Want to reply to this thread or ask your own question?

You'll need to choose a username for the site, which only take a couple of moments. After that, you can post your question and our members will help you out.

Ask a Question

Top