cpabsd Posted March 25, 2014 Report Share Posted March 25, 2014 Corp has a book loss for 2013. They distributed $132,706 excess distributions. I understand I have to issue a 1099. Is this a 1099-div? On the books of the s corp, AAA cannot go below zero due to distributions. Where do I put the excess distributions on Schedule M-2 so that retained earnings is in balance? This entity has always been an S corp. Quote Link to comment Share on other sites More sharing options...
jshtax Posted March 26, 2014 Report Share Posted March 26, 2014 Loan to shareholder Quote Link to comment Share on other sites More sharing options...
Abby Normal Posted March 26, 2014 Report Share Posted March 26, 2014 I've never issued a 1099 and I don't think you should because it's already reported on the K1. Excess distributions are capital gains so if you were going to issue a 1099 it would be a 1099B. I would not treat it as a loan to shareholder because it's not evidenced by a note and the loan will never be repaid. 1 Quote Link to comment Share on other sites More sharing options...
Richcpaman Posted March 26, 2014 Report Share Posted March 26, 2014 Actually...Where did the cash come from? If there was no "Profit" how can they have distributions in excess of basis? Especially $132k worth of distributions... Then there is this possible answer: They borrowed money for something else or refinanced it, and took the cash. Leaving the debt in the business, so then they really have a "Debt-financed distribution" and the treatment of that is different. Its easy to just put it into the "S-Distribution" slot, but really, it isn't. Rich 1 Quote Link to comment Share on other sites More sharing options...
michaelmars Posted March 26, 2014 Report Share Posted March 26, 2014 what if there was heavy depreciation that wiped out profits but left plenty of cash in the business? 1 Quote Link to comment Share on other sites More sharing options...
Richcpaman Posted March 26, 2014 Report Share Posted March 26, 2014 what if there was heavy depreciation that wiped out profits but left plenty of cash in the business? Then in that case, and it happens a lot, is you then tell the client that you get to pick up Capital Gains taxes on all those distributions. And oh yeah, NEXT year when you have to pay off the loans and have no distributions? Yes, you get to pay tax then on that phantom income.... So, tread carefully here. Rich Quote Link to comment Share on other sites More sharing options...
michaelmars Posted March 26, 2014 Report Share Posted March 26, 2014 I was just pointing out how there can be cash in excess of profit or excess. 1 Quote Link to comment Share on other sites More sharing options...
Randall Posted March 27, 2014 Report Share Posted March 27, 2014 Distributions on K-1, no 1099. Basis tracked. Distributions in excess of basis, long term cap gains on 1040. Quote Link to comment Share on other sites More sharing options...
jklcpa Posted March 27, 2014 Report Share Posted March 27, 2014 Distributions on K-1, no 1099. Basis tracked. Distributions in excess of basis, long term cap gains on 1040. Yes, agree with Randall. Corp has a book loss for 2013. They distributed $132,706 excess distributions. I understand I have to issue a 1099. Is this a 1099-div? On the books of the s corp, AAA cannot go below zero due to distributions. Where do I put the excess distributions on Schedule M-2 so that retained earnings is in balance? This entity has always been an S corp. The retained earnings balance will differ from the AAA in this case since distributions can't reduce the AAA below zero. 1 Quote Link to comment Share on other sites More sharing options...
Abby Normal Posted March 27, 2014 Report Share Posted March 27, 2014 Then in that case, and it happens a lot, is you then tell the client that you get to pick up Capital Gains taxes on all those distributions. And oh yeah, NEXT year when you have to pay off the loans and have no distributions? Yes, you get to pay tax then on that phantom income.... So, tread carefully here. Rich I would rather have capital gains distributions than W2 wages. It's all money coming form the business to the individual. I used to dread it when there were distributions in excess of basis but then I realized it's not a problem. The losses get suspended to be used against future income. Quote Link to comment Share on other sites More sharing options...
Abby Normal Posted March 27, 2014 Report Share Posted March 27, 2014 The retained earnings balance will differ from the AAA in this case since distributions can't reduce the AAA below zero. It's amazing how many people get this wrong. Most of my S corps' AAA does not equal retained earnings. But then again, I have no idea why we track AAA. I've never used it in any calculations, even on liquidations. Quote Link to comment Share on other sites More sharing options...
jklcpa Posted March 27, 2014 Report Share Posted March 27, 2014 True. The real complication comes with an S that was previously a C with accumulated E&P involved, but that isn't the case in the original post. Quote Link to comment Share on other sites More sharing options...
Randall Posted March 28, 2014 Report Share Posted March 28, 2014 It's amazing how many people get this wrong. Most of my S corps' AAA does not equal retained earnings. But then again, I have no idea why we track AAA. I've never used it in any calculations, even on liquidations. I wonder why we track it too. Once it goes to zero, it becomes meaningless on the return and makes no sense. Quote Link to comment Share on other sites More sharing options...
jshtax Posted March 28, 2014 Report Share Posted March 28, 2014 Why in the hell would you make someone pick up capital gains? Think people make it an advance or loan. Quote Link to comment Share on other sites More sharing options...
Abby Normal Posted March 28, 2014 Report Share Posted March 28, 2014 Why in the hell would you make someone pick up capital gains? Think people make it an advance or loan. On audit, the IRS would move it to distributions anyway. Might as well do it right to begin with. The shareholder clearly did not intend this to be a loan. "penalties of perjury, blah, blah, blah. Quote Link to comment Share on other sites More sharing options...
jshtax Posted March 28, 2014 Report Share Posted March 28, 2014 Oh please. Have them draft a loan letter up with some small amount of interest. You can't live your life scared of the IRS. Are we tax advocates or just a conduits of funds to the federal imperial government? 1 Quote Link to comment Share on other sites More sharing options...
Abby Normal Posted March 28, 2014 Report Share Posted March 28, 2014 Oh please. Have them draft a loan letter up with some small amount of interest. You can't live your life scared of the IRS. Are we tax advocates or just a conduits of funds to the federal imperial government? And then they never repay it and what do you do? Plus you're stuck with imputed interest which creates phantom interest income on the S Corp. No thanks! Quote Link to comment Share on other sites More sharing options...
Richcpaman Posted March 28, 2014 Report Share Posted March 28, 2014 And then they never repay it and what do you do? Plus you're stuck with imputed interest which creates phantom interest income on the S Corp. No thanks! Imputed interest on $132K at the blended rate now might be $1,000 in income and $270 in tax this year, or less. $132K in Cap gains is $35k in my state... That is one reason why not. Especially if it has to come back...Which it will. Rich Quote Link to comment Share on other sites More sharing options...
kcjenkins Posted March 28, 2014 Report Share Posted March 28, 2014 Why in the hell would you make someone pick up capital gains? Think people make it an advance or loan. Only if you discuss it and they say they DO expect to put it back into the business. Quote Link to comment Share on other sites More sharing options...
Randall Posted March 28, 2014 Report Share Posted March 28, 2014 I agree with KC. If it's a real loan, ok. I see a lot of loans from shareholders to the corp. But from the corp to the shareholder? These things never go off the books. Quote Link to comment Share on other sites More sharing options...
michaelmars Posted March 28, 2014 Report Share Posted March 28, 2014 Oh please. Have them draft a loan letter up with some small amount of interest. You can't live your life scared of the IRS. Are we tax advocates or just a conduits of funds to the federal imperial government? Agree with this. and next year you can charge it to distributions if they have income or you can put it on a w-2. We have had numerous audits where they accept that we post it to loan and the next year we pick it up as w-2. Most agents understand that we don't see the books on these small businesses till the year is over. Quote Link to comment Share on other sites More sharing options...
Randall Posted March 29, 2014 Report Share Posted March 29, 2014 Fine but if they have positive cash flow, they're going to want cash distributions. So you're back where you were the first year. And putting in the W2 makes it ordinary income instead of LT Cap gains. Quote Link to comment Share on other sites More sharing options...
jshtax Posted March 29, 2014 Report Share Posted March 29, 2014 Agree with this. and next year you can charge it to distributions if they have income or you can put it on a w-2. We have had numerous audits where they accept that we post it to loan and the next year we pick it up as w-2. Most agents understand that we don't see the books on these small businesses till the year is over. Exactly most of the time this is caused by bonus depreciation or section 179. Both of which are gone with the wind. Quote Link to comment Share on other sites More sharing options...
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