My brain hurts. Distributions in excess of retained earnings.

[Safire]

If you have distributions in excess or retained earnings and your AAA account cannot go below zero, but your retained earnings account can, then what happens next year to that negative beginning amount for AAA account?

Do I have to remember to account for that somehow? If not accounted for won't it give me false readings on future retained earnings?

A return of capital? Do I need to issue a 1099?

[JON]

No

Never a 1099 for S Corporation distributions-unless from previous tax(C Corp) and then you make an election.

It would be a return of capital Schedule D or it becomes due from stockholders since it has to be from a timing difference ie loans that have to be paid, deductions excelarate etc.
Once you call it Schedule D if income you will probably get income later when timing difference comes back. Where did the cash come from for the distributions-Corp borrowings or money out insted of creditors. It means they have drawn more than the profits????

[Safire]

The problem is coming from the Section 179 deductions. That is what is throwing off the retained earnings. The money was there, but because of the 179, it looks like he didn't have enough to take what he did.

[JON]

179 and note payable for the equipment

Has to be note payable too. Guess what happens when loan payments are made and the deductions where taken 179. He picks up thincome in those years without the cash to pay it out. If the return on capital causes a gain on his Sch D he will get taxed on that and again when income happens and cash goes for loan payments not distributions. "Due from" is a choice offset loan as distributions in the years the income hits and the cash is gone to loan payments. Timing differences-they work out in the long run, because the accountant makes them work. Deemed PAID interest...

[Dan5]

Could you explain more about it?
""Due from" is a choice offset loan as distributions in the years the income hits and the cash is gone to loan payments. Timing differences-they work out in the long run, because the accountant makes them work. Deemed PAID interest..."
Dan

[Matt Sova]

Officer Loan Receivable

Let's say that the owner took out $25,000 more than what was available in the AAA account. Instead of creating capital gain at the personal level you create a note receivable on the corporate books. The officer owes the corp $25k.

Next year after distributions there is $40k in AAA, you book an additional distribution of 25k (removing the officer loan receivable), now the AAA has an ending balance of $15k. Sometimes it takes a few years to get it taken care of.

[OldJack]

Instead of creating capital gain at the personal level you create a note receivable on the corporate books.

I agree with Matt. I would also point out that even if it is not handled as a loan and shown as a distribution in excess of profits I have yet to seen where the IRS questions it and adjusts for a sale on a 1040 Sch-D. I suppose if the IRS was auditing the S-corp they would pick it up as a 1040 Sch-D, but evidently the IRS just doesn't have a computer program to check this on the S-corp tax returns and the 1040.