Ernie

[S&D Associates]

What happens to NEGATIVE RETAINED EARNINGS after conversion from C corp to S corp?

[Bees Knees]

Nothing. It stays as is as a separate capital account. S corps only care about AAA (S corp earnings) and if there is positive money left in E&P (C corp earnings) that could cause an S corporation level tax when withdrawn or assets are sold. Any other capital account just sits there and does nothing but take up space on the balance sheet.

[taxmom34]

snaggletooth gave a long reply to your other post a few days ago. guess you didn't like his answer and posted same question again.

[S&D Associates]

Nothing. It stays as is as a separate capital account. S corps only care about AAA (S corp earnings) and if there is positive money left in E&P (C corp earnings) that could cause an S corporation level tax when withdrawn or assets are sold. Any other capital account just sits there and does nothing but take up space on the balance sheet.

So, if the current year has income of $28,000, The negative retained earnings from the previous C corp is not netted against it? The balance sheet retained earnings (line 24) would just show the 28,000 of income?

[Bees Knees]

So, if the current year has income of $28,000, The negative retained earnings from the previous C corp is not netted against it? The balance sheet retained earnings (line 24) would just show the 28,000 of income?

Line 24 of the 1120S is the net of all the separate types of retained earnings you might have. You have to keep a separate retained earnings line on your financial statements for C corp E&P, a separate line for the S corp AAA, and a separate line of any OAA if there is any tax exempt activity.

BTW, Schedule M-2 does not have to reconcile with line 24 of Schedule L. The difference is the C corp E&P shows up on line 24, but not on Schedule M-2.

[Snaggletooth]

Different Animal

snaggletooth gave a long reply to your other post a few days ago. guess you didn't like his answer and posted same question again.

Taxmom I appreciate the support, but this situation (negative Retained Earnings) is significantly different.

In my younger days "negative" Retained Earnings would be called an Accumulated Deficit. The existence of a deficit prior to conversion to S corp reveals some serious problems with tax planning.

In general, this can happen only in two ways: 1) corporate losses in excess of profits, or 2) excessive withdrawals or dividends to shareholders. The latter usually has much better treatment if they knew what they were doing, depending on other capital options.

If there are corporate losses, this means there is usually an NOL available for tax purposes, and this offset (the NOL) is lost if the conversion happens. It would be better to delay the conversion until the NOL is sucked up, and then convert.

Situations can be concocted late at night when people can't sleep for which the above is not true. But usually it is.