Scorp Distribution in Excess of Stock Basis

[Harvey Lucas]

Hi Everybody,

Been awhile since I've been on the board.
Been a little busy with Tax Season.

We all know that a distribution to a shareholder from an Scorp in excess of his stock basis is considered a capital gain, says so in "The Tax Book" and also in "The Other Book"

However, both publications are silent regarding wether these distributions should be considered long term or short term?

Anybody?

Thanks
Harvey Lucas

[jerome]

Depends.

How long have you owned the S corp stock?

[dsi]

>12 months = LTCG

[DaveO]

When you report the Cap gains

Do you list the stock on the "D" as a sale or just report as Cap Gain Distributions?

[rosieea]

Do you list the stock on the "D" as a sale or just report as Cap Gain Distributions?

It's a deemed sale. Report on Sch D using 12/31 as the date of sale. Selling price is the excess amount of the distribution. Basis is zero.

[Harvey Lucas]

Excess Distribution or loan to Shareholder?

Thank you all for your replies.

Am a little curious how others handle distributions that are in excess of basis.

Often in the past, when a client was going to make an Scorp distribution that was going to exceed his basis, we would advise him to classify the distribution as a loan instead, or to be more correct we would advise him to initiate a loan from his Scorp as opposed to taking a distribution that would be in excess of basis.

We would do this to avoid paying a tax on the distribution. And the loan method seemed a more appropriate way to match taxation to years when the Scorp actually made a profit.

This would be the case when in a future year, the Scorp made a profit, flowed the money and taxation through to the shareholder who was then able to pay back his loan, plus interest.

However, if excess distributions are only taxed at 15% max LTCG, I am wondering if we should bag the loan approach and simply have the clients pay the small capital gains tax?

What do you do?

Harvey Lucas

[dsi]

The correct procedure is to report the XS distributions as CG, Sch D. I too have reclassified such XS distributions as "Loans", but that doesn't make it right. I no longer do this.

However, if it truly is a loan, then I will report it as such. I will need a copy of the minutes, etc that supports this. Most likley the client doesn't keep minutes, or much of anything else. That's been my experience.

[rosieea]

The correct procedure is to report the XS distributions as CG, Sch D. I too have reclassified such XS distributions as "Loans", but that doesn't make it right. I no longer do this.

However, if it truly is a loan, then I will report it as such. I will need a copy of the minutes, etc that supports this. Most likley the client doesn't keep minutes, or much of anything else. That's been my experience.

I agree. I have rarely seen proper loan documents between corporations and shareholders, and minutes? Forget it. I think "spinning" distributions as "loans" is wrong.

[Matt Sova]

Officer Loan

Come on now, do you mean to tell me that every time an S-Corp has excess distributions you treat it as capital gain??? What if they had an off year but things are looking better in the current year?

I have used an officer loan account like that and drawn up a quick note with no interest. The following year there are excess profits so we remove the loan to distributions in that year.

[dsi]

Just out of curiosity, did this shareholder have any wages?