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    Excess Shareholder Distributions

    S-Corp has excess shareholder distributions. Now last year I put the excess in Loan To Shareholder. It had excess again this year and I am not going to shove more into this Loan. My hope was there would be enough income to clear the loan out. There wasn't of course and as I said they went over again this year.

    I want to put the loan to shareholder as a reduction of stockholder basis in the corporation, and report a gain from the sale of stock. Now to do this I want to make sure I have it straight:

    1. AAA can not be a negative but Retained Earnings can. This is how I will show everything in balance on the the balance sheet. Taxwise wants to carryforward the AAA amount to Retained Earnings. I believe I will just have to override it.

    2. This will reduce the shareholder's basis to zero. I am not sure I am understanding this exactly. Say the loan to shareholder is $20,000. The shareholders basis is already zero because of distributions. Does the $20,000 loan reduce it below zero and this will be caught up in later years when there is a net income? I am just zoned out on this.

    3. Do I need to accrue interest income for the one year of loan to shareholder and put this on the K-1?

    4. The loan to shareholder will be reported on Schedule D of the shareholder as a capital gain long term. I think this might be the only thing I have correct

    I really would appreciate any help. This is the first time I've had to deal with it.

    #2
    Not sure

    Dany, not sure of this as you seem to have more knowledge than I do, but here is a prior thread on AAA and excess distribution.

    Primary Forum for posting questions regarding tax issues. Message Board participants can then respond to your questions. You can also respond to questions posted by others. Please use the Contact Us link above for customer support questions.


    Sandy

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      #3
      Thanks so much Sandy. I believe now I am just stuck on the shareholder's basis and tracking it correctly. Will see if I can find some more info.

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        #4
        Figured out the shareholder's basis. It can not go below zero. But still would like to know on loan interest.

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          #5
          You need

          to compute interest on the loan. It will increase the shareholder's basis. You are correct, retained earnings can be negative and the Triple A account can not.

          Distributions in excess of basis go on Schedule D.

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            #6
            Thank you so much for clearing it up for me

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              #7
              Sigh...

              AAA can be negative, just cannot go negative based on shareholder distributions. For instance, just plain losses with no distributions could make AAA negative as well as R/E.

              Shareholder basis is the only item that cannot go below zero. And a reminder, AAA and R/E aren't necessarily equal.

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                #8
                And you can leave the M-2 blank if never an C-Corp.

                1120 S Instructions: S corporations with accumulated E&P must maintain the AAA to determine the tax effect of distributions during S years and the post-termination transition period.

                An S corporation WITHOUT accumulated E&P does NOT need to maintain the AAA in order to determine the tax effect of distributions.

                Nevertheless, if an S corporation without accumulated E&P engages in certain transactions to which section 381(a) applies, such as a merger into an S corporation with accumulated E&P, the S corporation must be able to calculate its AAA at the time of the merger for purposes of determining the tax effect of post-merger distributions. Therefore, it is recommended that the AAA be maintained by all S corporations.
                (Yelling mine, I don't know how to do italics.)

                To leave blank is my personal favorite if it doesn't equal RE. (For aesthetic reasons.) My software has a button to make it go away.
                JG

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                  #9
                  Outwest

                  you are correct.

                  I was thinking in terms of distributions as you said which can not make the AA account negative.

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                    #10
                    I should have added that myself. I read where losses can make it negative but not distributions.

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