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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.
For FB'ers: https://www.facebook.com/groups/BenRoberts/
 

#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.
For FB'ers: https://www.facebook.com/groups/BenRoberts/
 

#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…
 


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