TaxProTalk.com

Can a distribution of a S-corp be cancelled after it had been made?

Scorp sole owner took a distribution of $5,000 in 2018. But then he thought it was a mistake afterwards and there should not be a distribution. Therefore, he wrote a check of $5,000 to pay the same amount back to the Scorp.

By doing that, has he effectively cancelled the distribution and therefore there was no distribution in the first place?

Did th repayment occur in 2018?

RR 80-58 says

The legal concept of rescission refers to the abrogation, canceling, or void­ing of a contract that has the effect of releasing the contracting parties from further obligations to each other and restoring the parties to the relative positions that they would have occu­pied had no contract been made. A rescission may be effected by mutual agreement of the parties, by one of the parties declaring a rescission of the contract without the consent of the other if sufficient grounds exist, or by applying to the court for a decree of rescission.

Also, it requires the transactions occur in the same taxable year.

Distributions occur when I say they do. Seriously. I'm the one who makes that call, at year end, when books are closed. What your client did was advance himself some money which you'll track in a Note...and then he repaid it.

JR1 - you're likely the only one of us who could get away with giving such a simple, clear, practical, real-world, possibly undetectable, and easy-to-implement answer as what you just wrote. Kudos, my man! Give yourself a raise!

Thanks, Harry. Someone else will likely fire me, tho"! I did come to that many many years ago when IRS was attacking distributions when there were multiple shareholders and blowing the S election. At the time, I was still working with some other folks and we just concluded that there could never be a problem if we made the distribution at year end only. Pretty simple, actually. Tho' some may object to the notion of advance/notes in play all year until we clear them at year end. But even as I think about it, a profit distribution is a legal sort of thing...so it makes sense to me that once we declare it, it can be memorialized properly, etc....which monthly advances don't get.

It's, uh, like, you know, like it's ***a legal sort of thing*** - you have said more with fewer words than can be described with more words!!

Back to the question - if he is the only stockholder and it did not get reimbursed in 2018, but did in 2019 - a receivable at the end o 2018 to be offset in 2019 when repaid.

Exactly.