Schedule K-1 from S Corp EASY QUESTION..

[miatax]

I have a client who has an S Corp that is on extension.

Only activity in 2008 were accounting fees - $350 and annual filing fee - $50 ( A/P of $350 and Due to S/H $50).

Since he closed bank account in 2007, I should have done this entry then but I didn't. I have at the end of 2007 a Due from Shareholders of$2,500, A/P of $500 and R/E of $1,500.

How is my R/E affected and how should the M-2 look? Where do I show the distribution of the funds from the prior year and what is my AAA balance at the end?

This is so easy and I just don't know what I am missing.

Please help so I can finish his 1040. I think his K-1 will still just show a loss of $400. Please correct me if I am wrong. Thanks.

[miatax]

I'm sorry I may be asking such a dumb thing... I only do 2 of these returns per year and these are almost favors for close friends that have become clients. I don't do this year round as I'm in the private sector... help...

[OldJack]

Your numbers at the end of 2007 do not balance? How can you expect us to get your answer that would be in balance?

[miatax]

My mistake... I didn't even notice... R/E is $2,000...

Due from S/H = $2,500

Assets = $2,500

A/P = $500

R/E = $2,500

L+OE = $2,500

[OldJack]

Assuming the accrual method of accounting is going on. Assume the S-corp has never been a C-corp.

I think you mean R/E = $2000 in the next to last item, otherwise your 2007 numbers still would not balance.

As I understand it your 2008 ending balance sheet would show $2,450 in assets ($2500-$50) with Accounts Payable of $850 ($500+$350) and Retained Earnings of $1,600 ($2000-$400).

Your M2 line 1 would be $2,000 the beginning balance in the AAA column.

Your M2 line 4 would be $400 the loss for the year in the AAA column.

Your M2 line 6 would be $1,600.

Your M2 line 8 would be $1,600 the ending balance in the AAA column.

[miatax]

Yes. It's on accrual.

This would be the case if I left the Due from Shareholders alive, but does this make sense? There is no balance in the bank account and the money all went back to him.

That is why the only activity really left at the end of the 2008 year is a liability of $400. I want to reflect this information correctly. Let me know your opinion. Thank you for the help.

[OldJack]

That is why the only activity really left at the end of the 2008 year is a liability of $400. I want to reflect this information correctly.

Well... I don't know how you can say there is only a liability of $400. This is a corporation that is like a separate person. The shareholder owes the corporation $2,450. He should pay up! You must remember that the shareholder does not "own" anything in the corporation. Rather, he owns a piece of paper that allows him to receive tax attributes, profits, losses, and/or distributions from the corporation. The $2,450 could be treated as a tax-free distribution, but that would probably result in it being taxable to the shareholder as it would most likely exceed his tax basis in the corporation.

Now if you are talking about liquidating and canceling the corporation with the secy of state that is actually the same story. The Shareholder should pay his debt and the corporation should use the money to pay the liabilities. The corporation would then pay the shareholder(s) the remaining assets (cash) and issue a 1099 showing a liquidating distribution so the shareholder can claim a capital gain or capital loss on their personal tax return.

[Terry D EA]

I gotta agree with OldJack on this one. People should ask for sound advice before they assume anything. Good luck

Terry D.