S-corp Distributions

[dsi]

I use Lacerte, and for the first time ever I am getting a Critical Diagnotic Warning for my S-corp client. It reads:

"The amount of distributions entered on Sch K, line 16D is greater than the total net balance available for distribution in all of the Sch M-2 accounts by $21,606. This amount of excess distributions has reduced the ending balance of R/E on Sch L, line 24"

So, what does this mean to me?

On the Informational Diagnostics I get the following message:

"The amount of distributions entered to reduce the AAA is greater that the balance available for reduction. The AAA is reduced by $22,441 of the amount you entered. Refer to the Distributions Summary Worksheet for additional information"

What? All suggestions welcome.

Thank you.

[JCH]

I think your software is warning you about basis issues in the S-corp for your client, but there are other more experienced S-corp practitioners than me on this board who will hopefully weigh in.

[Maribeth]

The shareholders have taken distributions in excess of their AAA account. You might have a problem with the basis that your shareholders have in the corporation.

In order to restore that basis, the shareholders will take into income the Excess Distributions. These distributions are considered LTCG and will be taxed at 15%.

Maribeth

[BOB W]

Look at the Financial Statement Balance Sheet/ Equity Section... If it is showing a negative number you could have excess distributions that could be taxable. Most preparers will move the excess, rightly or wrongly, to "Loan to Officer" depending on the amount as sometimes it is a timing issues that will self correct the following year.

Most times excess withdrawals are caused by increased credit card debt, giving more expenses (lower profit) and more available cash on hand. Some think they need to take all the cash before the year ends.

[dsi]

If I report the excess distributions as LTCG do I use the $21,606 or the $22,441?

[BOB W]

If I report the excess distributions as LTCG do I use the $21,606 or the $22,441?

Before I answer you need to update the shareholder's basis using the worksheet in the program. That will develope your excess distributions for 2009. Be sure to review Stock basis and Loan basis. The AAA account may need some look-back review over several years to make it work correctly.

Do you have any accounting background?

[TAX]

To Loan From Shareholder

You can also apply to Loan from share holder as a repayment of loan if any instead of distribution. Make sure though proper documentation exist.