1st time preparing s-corp (1120s)... need help.

[dmann]

I have done regular Corporation 1120 forms before, but this will be my first time preparing an 1120s for a client. The s-corp distribution aspect is confusing me.

My client's s-corp had gross receipts of ~75k. He paid his two employees total wages of ~20kand himself and his wife ~40k (20k each). My client and his wife are officers in the business. He also paid the officers distributions of ~15,000. When preparing the tax return, I would report the employees total wages of 20k on 'Line 8 Salaries & Wages' and the officers wages of 40k on 'Line 7 Compensation of officers'.

Now do I include the s-corp distribution to the officers in the amount on line 7? How would I report this distribution? From my understanding, K-1s would be generated from this s-corp return, and the amount on those K-1s would be the distrubtions from the s-corp that needs to be reported on my client's personal 1040. Is this correct?

[dsi]

You've got the wages reporting right. However, the net profits of the s-corp flow through to the individual 1040, not the distributions.

YOur other concern would be calculating their stock basis, since it appears that their distributions, may be in excess of their basis?

[dmann]

Thank you for your response, so I have the wage reporting correct. I am still at lost on what to do with the distributions?

What do you mean their distributions is in excess of their basis? Did my client pay himself and his wife too much distributions? Can I not report the distribution, since the s-corp profits will flow to my client and his wife's personal return, and he would still have to pay tax on that amount?

[dsi]

Do you have a complete financial statement? Balance Sheet and Income Statement?

Also, are you preparing this return by hand?

[dmann]

Yes, my client supplied me with income statements (profit & loss statement), he did not give me a balance sheet.

I am preparing this return through TaxSlayerPro. I normally prepare individual tax returns, but this client has been a long time client of mines and I do not wish to lose his business by not filing his s-corp return for him. This is his initial s-corp tax return.

[dsi]

You should get the balance sheet as well. The BS will (if prepared properly) give you the necessary info to determine stock basis, as well as other info that will help with the preparation of the return. For example, you will have assets that need to be set up for depreciation.

[dsi]

Another thing, be sure to review their corporate records (articles of incorporation, bylaws, minutes, stock certificates).

[JoshinNC]

The distributions are reported on the K-1

Line 16 with a code c or d (can't remember which). As long as the distributions do not exceed the total value of paid in capital plus current year earnings you don't have to worry about exceeding basis.

[Snaggletooth]

Mann of the Hour

Thanks for visiting the board. Come back often. We try to help those who are delving into corporate returns if we can do so without expending a lot of time.

If you don't already have accounting training (not the same as tax training), please do so, at least to the understanding of how the income statement and balance sheet are entertwined. On Page 4 of the 1120S, you will be confronted with the need to report a balance sheet. This means you're going to have to know the structure of their equity capital accounts, as well as other balances such as Cash, Equipment, and Loans.

The "distributions" should not be a reportable factor for income, as they do not affect income. However, you should calculate a basis for each shareholder at the end of each year which moves from one year to the next. Distributions are a very important factor in the calculation of basis, and the taxpayer cannot report a loss that results in a basis below zero.

From your example, the Corporation has profits of $15K because the distributions do not factor into calculation of profit. The shareholder and spouse have $15K to report on the
K-1 as ordinary income.

[rosieea]

Distributions are reported on Sch K and carry to AAA on M-2. Be careful with AAA, since distributions cannot cause AAA to fall below zero. Accordingly, there could be a difference between retained earnings and AAA. For the shareholder, the distributions are reported on the K-1 but will not appear on the 1040, unless some or all of the distributions are in excess of basis. Any portion of the distributions in excess of basis is treated as a sale of stock on Sch D, form 1040.