USA Excess S Corp Distributions

[Joe Flynn II]

I have a client (S Corp) who took distributions in 2017 in excess of the basis. they had $ 85K in retained earnings and $ 500 in capital stock and took $ 102K in distributions. There is only one shareholder and he started the business in 2017. I know that the excess of $ 17K (102-85) is considered a short term capital gain to the shareholder, but how does it get reported on the corporate tax return? His basis cannot be negative and is making my schedule L out of balance.

 

[Drmdcpa]

The triple A account is the control not Schedule L. In such situations I put the excess distribution as a shareholder loan this should balance your Schedule L and also avoid the capital gain on excess distributions.

 

[Joe Flynn II]

The triple A account is the control not Schedule L. In such situations I put the excess distribution as a shareholder loan this should balance your Schedule L and also avoid the capital gain on excess distributions.

I thought about using the shareholder loan, but he will continue to have these problems each year. Unfortunately, the 'distributions" are for non-deductible expenses for the business. the shareholder knows that he has to pay tax on the capital gains. I want to do it the correct way to avoid future basis issues down the road. I have a feeling he will have this same issue for the next few years.

In doing some research, I know that the excess distributions have to appear on Sched D as short term gains, but I'm not sure what else needs to be done in order to get Sch L to balance. can you have a negative in the AAA account? If so, where does it fit on the M-2?

 

[Drmdcpa]

Triple A can only go negative because of non-deductible expenses. If it does he should not be taking normal distributions. If it is going to continue, it should not. Set him straight. Non deductible expenses are not distributions. Perhap stop paying non-deductible expenses like life insurance and charitable donations out of the corp. I just had a conversation with an S-corp owner today about this very issue foreseeing her having this very same problem in the future.