Excess S-Corp Distributions

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  • geekgirldany
    Senior Member
    • Jul 2005
    • 2359

    #1

    Excess S-Corp Distributions

    First want to say good to be setting up after the flu. I have been out of the office for 1 1/2 weeks. Just got back in today. Still weak but trying to get going.

    With that said I have a couple of customers that have excess distributions in s-corps. What I prefer to do is to report the excess distributions on the personal return and capital gains tax paid. The other option is for it to be catgorized the distributions as loan to shareholder. Almost always the customer will choose loan to shareholder. No problem until it goes over $10,000 then interest needs to accure against the loan.

    The difference in tax can be around a few hundred. I really would rather report the excess distributions and have cap. gains paid. Alot of times what happens though is that they owe on their state return because they don't get the cap gain break. So all they see is how much they owe in tax now, not what it will be in the future.

    I guess I am saying all this to ask:
    Do you let the customer choose what to do? Like I said when given the choice they almost always choose loan to shareholder. I got a new customer this year where their loan to shareholder is over $150,000. I don't want it to grow like this.

    Just needing some feedback.
    Thank you.
    Last edited by geekgirldany; 03-16-2009, 08:04 PM.
  • Gretel
    Senior Member
    • Jun 2005
    • 4008

    #2
    Dany, hope it's not too hard to get going again.

    I don't have many S-Corps but I would not give them the choice as how to report. Up to $10,000 or temporarily higher fine, but then it should go on 1040. Besides, if it is just avoidance to pay tax it doesn't make much economic sense. Cap.Gains will never be lower again and one day they will take out the money.

    Comment

    • dsi
      Senior Member
      • Dec 2005
      • 705

      #3
      I always let the client make the decisions. It is their business and their call, and they are the responsible party. However, I always advise them regarding their options and the related consequences associated with those options.
      Dave, EA

      Comment

      • geekgirldany
        Senior Member
        • Jul 2005
        • 2359

        #4
        Thank you guys for responding.

        I'll let it be the business owners decision. I know it is hard for people to understand about distributions and how they may/may not be taxable. I think most just see lower taxes even if just by a few hundred dollars.

        Comment

        • LCP
          Senior Member
          • Dec 2005
          • 432

          #5
          My software shows the excess distribution as a short-term capital gain. I wonder if I'm doing something wrong?

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