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Excess Distributions S-Corp

Technical topics regarding tax preparation.
#1
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Scorp shareholder took too much money out for 2018. Only about 13,000 too much, but too much, so we have an excess distribution situation. I know most (including myself) would book this as a Loan to Shareholder, but in this case we don't want to do that.

My assumption is I report on Schedule D, with 13,000 LT gain, zero basis and just call it "excess Distributions XXX, Inc EIN#:XX-XXXXX".....correct?

But in all this I got to thinking (scary).......Is this excess distribution just TREATED to be a sale of stock for tax purposes, or is it ACTUALLY a sale of stock?? If the latter, what happens to the S-corp if no one owns the stock??

Just making sure I am not invalidating his S-election in some way.

Thanks!
 

#2
sjrcpa  
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It is a long-term capital gain and is not an actual sale of the stock.
No issues with S status if he is the sole shareholder.
 

#3
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Thanks SJR........I thought so , but wanted to be absolutely sure.
 

#4
Andrew  
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I have a client with similar situation. My software puts the excess distribution automatically as LT CG on 1040 when importing the K-1.
 

#5
Nilodop  
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Why would it automatically be long-term?
 

#6
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Have you worked this through using the ordering rules for S-Corporation stock basis?

Here is a very good explanation on this: https://www.irs.gov/businesses/small-bu ... debt-basis
 

#7
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What's the proper entry in the S corporation's equity section to record this "excess" distribution?
 

#8
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Nilodop wrote:Why would it automatically be long-term?



How common are excess distributions in the first year? Isn't it usually money flowing the other way; from the owner into the business? Unless somebody buys into a going business maybe ...
Because on T.A. ten was the most you were allowed
 

#9
Nilodop  
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Uncommon, unusual, sure, but not automatically never. Need to determine holding period of S stock.
 

#10
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Why not just book it to Loan to Shareholder and take $13k less distribution for 2019 so it nets out.
 

#11
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swgordon wrote:Why not just book it to Loan to Shareholder and take $13k less distribution for 2019 so it nets out.


Because, more often than not, this person will drain all the cash our the next year too.
~Captcook
 

#12
Nilodop  
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Harry asked about the entry in the equity section.
 

#13
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"Why not just book it to Loan to Shareholder and take $13k less distribution for 2019 so it nets out."

Because it is NOT a loan - it's a distribution. To call a distribution a loan to even things out and to avoid the tax effect of what actually went on is not correct.

Put my $$ on the pony that it was never intended to be a loan or we would not be having this conversation.
 

#14
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Andrew wrote:I have a client with similar situation. My software puts the excess distribution automatically as LT CG on 1040 when importing the K-1.


Mine, also, puts it as a capital gain via K1. It reduces equity section, automatically. It is only LTCG if the S-Corp has existed for at least a year.

What software is original poster using? UT makes this scenario fairly simple to deal with, and it will likely continue happening. Once they exceed their basis, they typically continue draining cash out and never restore basis where it is not a capital gain scenario. A few of my S-Corp clients routinely do this...actually, just completed a return for one whose LTCG as a result of excess distributions was quite a bit higher due to running so many personal expenses through business account.

I would not book as a loan. Most "loans" are never structured properly, let alone repaid.
 

#15
Nilodop  
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It is only LTCG if the S-Corp has existed for at least a year.
. Actually we'd look at how long the shareholder held the stock, and we'd need it to be more than one year.
 

#16
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I would venture to suggest that at least 54.7% of the readers didn't pick up on your very subtle distinction between at least a year and more than a year, Len.
 

#17
jon  
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In theory if the same stockholder remains in the S Corp (sole Stockholder) there is probably a chance that he will have to repay something, or take income in without a distribution all of which can then be offset by Loans to Stockholders later. If you think he is always going to take loans out without paying traditional loans or vendors then he will be out of business and who cares.
 

#18
Nilodop  
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What percentage missed the other very subtle distinction, the one about how long the s/h owned the stock, not how long the S corp has existed.
 

#19
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What percentage missed the other...? An even larger percentage, I would venture to suggest.
 

#20
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Had they read the analysis in the link that I provided in #6 above - no one should should have missed that one~

Very easy test question........
 

#21
Nilodop  
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Credit deserved and given, Michaelstar.
 

#22
JR1  
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For me, shareholder loan.
Go Blackhawks! Go Pack Go!
Remembering our son, Ben Jan 22, 1992 to Aug 26, 2011.
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#23
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All.....

Using Proseries and I have to manually adjust balance sheet and equity.

Holding period of stock is 8 years.

I will generally book excess distributions to Shareholder Loan if I am confident it will be repaid the following year and the excess was an anomaly. That is not the case here and the client agrees with taxing it at LTCG. I don't have many S-corps anymore and refuse to take on new ones because of the abuses of shareholders.

Thanks all!
 

#24
JR1  
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And I refuse to take on C corps! lol
Go Blackhawks! Go Pack Go!
Remembering our son, Ben Jan 22, 1992 to Aug 26, 2011.
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#25
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and refuse to take on new ones because of the abuses of shareholders.

Seems a little over the top. Maybe you shouldn’t take on partnership clients and individuals either…I mean, there are “abuses” by those groups too…
 

#26
JR1  
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To me, it's about leading and teaching them what to do, and giving them confidence in letting you do the tax savings and keeping them away from trouble. I've just never had a problem over 3 decades.
Go Blackhawks! Go Pack Go!
Remembering our son, Ben Jan 22, 1992 to Aug 26, 2011.
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#27
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Jeff-Ohio wrote:
and refuse to take on new ones because of the abuses of shareholders.

Seems a little over the top. Maybe you shouldn’t take on partnership clients and individuals either…I mean, there are “abuses” by those groups too…


Yes, but the abuses are generally on a smaller scale and harder to hide on a personal return than a corp return. And I don't do many partnerships either. Just my opinion of course. I am sure all our practices see different types of taxpayers.

JR1 wrote:To me, it's about leading and teaching them what to do, and giving them confidence in letting you do the tax savings and keeping them away from trouble. I've just never had a problem over 3 decades.


Yes, I agree. I have a handful of S-corps left that have taken my advice and have done things right over the years. Those I will continue to work with, but new ones, nope.
 

#28
makbo  
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Nilodop wrote:Harry asked about the entry in the equity section.

Post #10 was a reply to the OP, not Harry.
 

#29
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Has anyone here taken a shot at *defining* what an "excess distribution" is? In that regard, I highly recommend this article: https://www.uakron.edu/dotAsset/3fe302e6-9075-419f-baf8-9dd2af5d9552.pdf in the Akron Law Review.
 

#30
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I've read the article, and I especially enjoyed the typo/transposition/misspelling on page 39.
 

#31
makbo  
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Harry Boscoe wrote:Has anyone here taken a shot at *defining* what an "excess distribution" is?

No. Maybe you are referring to a "distribution in excess of basis"? That's pretty easy, a properly filled worksheet spits the number out. The article linked does not mention "shareholder basis" or distributions in excess of same.
 

#32
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Maybe you are referring to a "distribution in excess of basis"?
No, I'm referring to the term "excess distribution." The Original Post in this thread stated that the shareholder "took too much money" [out of the corporation, by inference] and thereby created an "excess distribution situation." Somehow, vaguely, I remembered a legal article about "excess distribution" from a corporation's equity and I was quite surprised at being able to find the article easily here online. Some of the legal - as distinguished from tax accounting - aspects of paying too much out of a corporation are .. well .. they're sorta scary.

The article linked does not mention "shareholder basis" or distributions in excess of same.
The Appendix to the article, which analyzes the changes in this area made by the 1984 REVISED MODEL BUSINESS CORPORATION ACT, is especially interesting as it points out that in that act the lawyers stopped using accounting terms in defining what can be distributed and the consequences for exceeding that. If you don't read the whole article, let me just quote the second sentence in the article. Here's the second sentence: "In common law, there are limits on the amount of assets that can be distributed to owners."

Do you see where I might be coming from? It's not just about income taxes and accounting. There can be legal ramifications to paying "too much" from a corporation to its shareholders.
 

#33
Nilodop  
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There can be legal ramifications to paying "too much" from a corporation to its shareholders. Yes, there can be, but doesn't it only come up if a creditor, employee, etc. complains? Or is there a penalty/punishment just for doing it? And how would the state know? I think I remember I may have learnt something about this in the only law course (other than tax law) I ever took - business law 1. It had to do with impaired capital or my impaired memory.
 

#34
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"...doesn't it only come up if a creditor, employee, etc. complains?"
Yes, I'm sure that's the case.

Are you saying that in the OP scenario there *aren't* creditors, employees, etc., who might be getting stiffed by the "excess" amount the shareholder is taking out of this S corporation? Among other things, I think I remember that the article says it might make the directors of the corporation, as individuals, liable for the "excess" that the corporation paid out to its shareholder.

It had to do with impaired capital or my impaired memory.
...or maybe both. ;)
Last edited by Harry Boscoe on 26-Sep-2019 12:56pm, edited 1 time in total.
 

#35
Nilodop  
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Just making the point that as long as the owner(s), employees, directors are one and the same, it's only a problemfor crditors, who would look to the shareholders, who should pay up to the extent of the "excess distributions".
Last edited by Nilodop on 26-Sep-2019 1:25pm, edited 1 time in total.
 

#36
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...the shareholders, who shpuld pay up to te extent of the "excess distributions".
Yeah, they *should*... ;)
 


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