S-Corp questions re: loans vs APIC

[Golden Rocket]

Not Advisable

It is not normally advisable for AAA to go into the negative, as that would be virtually impossible because liquidating distributions reduce capital stock AFTER earnings have been depleted. From your post, here are a couple possibilities:

1) You mentioned mileage reimbursements. An expense reimbursement is not a distribution. It is a deductible expense just as if it were paid to a non-shareholder third party. If mileage reimbursements are substantial, you might not be confronted with a "negative" on their AAA once you make the correction.

2) If they are really taking out more money than what their equity shows, it would be preferable to consider this as an advance to the shareholder rather than an overdraft of the AAA. If the advance is not paid back to the company, then at some point it should be treated as a loan and impute interest.

It sounds like this owner may not be willing to leave the cash in the company, even enough to cover its needs. If he only started with $100 and is sucking out every last nickel, he really needs some economic advice.

[WhiteOleander]

Never a C corp before, S Corp has ordinary income of $85,000 and AAA shows ending balance at 75,500, so when do you distribute this amount as a dividend?? Doesn't a 1099 DIV have to be issued?

Isn't the shareholder paying taxes twice, once for the $85,000 ordinary income on K-1 in 2006 and then again as a dividend say in 2007?? Aren't there some ordering rules as to how the distributions are made? In the above example, there were some loan repayments, of course not as much as what the AAA balance is. .

I am lost!

GR would you consider offering tutoring on S Corps? You seem to have so much knowledge. I for one would travel to you for private tutoring!

Sandy

Sandy,
An S-Corp that has never been a C-Corp does not issue a 1099DIV for distributions. If the shareholder takes out some money, it goes against the retained earnings. If he has used up the retained earnings, it goes against the stock basis. If that is used up, he pays capital gains on the distribution.

[S T]

White Oleander

Thanks so much for your post, my confusion was on the reference to Dividends.

So as I understand it, only if the S Corp had been a prior C Corp might there be a dividend distribution reported on 1099 DIV.

S Corps really don't pay dividends, the distributions are from retained earnings, loans from shareholders, or if in excess of basis then capital gain.

Am I now on the right track?

Sandy

[WhiteOleander]

Thanks so much for your post, my confusion was on the reference to Dividends.

So as I understand it, only if the S Corp had been a prior C Corp might there be a dividend distribution reported on 1099 DIV.

S Corps really don't pay dividends, the distributions are from retained earnings, loans from shareholders, or if in excess of basis then capital gain.

Am I now on the right track?

Sandy

Yes, that's pretty much the way it goes. :>)

[S T]

Thank you on S Corps

Golden Rocket and White Oleander,

Thanks so much for your posts. I am sure that there are more questions, but I think I am finally starting to understand the APIC, Loans and Distributions.

Shouldn't be this hard, but different rules for Partnerships vs S Corps and then whether or not a prior C corp converted to S Corp.

I vote for tax simplification to some degree!

Sandy

[Golden Rocket]

S T

Sandy, technically S Corps do pay dividends. It's just that they are non-taxable, and there is no requirement for a 1099-DIV.

This is illustrated in Tennessee, where that state does not recognize the subchapter S status. Even though there is no 1099-DIV, shareholders are taxed for state purposes on the dividends, even though there is no federal tax on them. New Hampshire might be the same way.

Another classic distinction between a distribution and a dividend: a dividend must be paid to all shareholders in proportion to their respective interests. A distribution could include any payment to a shareholder, ratable or not.

[S T]

Oh dear

Just when I think I understand!

So for Federal not necessarily a Dividend distriubtion, but we would have to look to State to see requirement?

Sandy

[Golden Rocket]

Still Easy

Sandy, I guess I drug this one out too far. I just wanted you to know that dividends occur whether the corporation is an S corp or not. I don't think you have anything to worry further. If it makes things easier, I would say that all dividends are distributions, but not all distributions are dividends. Dividends are paid periodically in proportion to ownership interest and have been a term-of-art in corporate structure before the Internal Revenue Code was ever dreamed of. In an S corp, Dividends do NOT equal taxable income.

I think the only potential for a problem at the state level is if you are dealing with a state that does not recognize S corps. This enables a state to "double-dip" charging corporate tax to the corporation, and then taxing the individual. I don't know how many states are in this category - Tennessee is one, possibly New Hampshire.

[S T]

I am so glad you are here

GR,

Thanks so much, you have raised many questions, so therefore I keep posting. Your knowledge and sharing has been a wealth of information on this subject the last few days, so I apologize if I have over extended my posts. Some of the terminology is what is creating confusion for me. And then to separate some of the rules between partnerships and S Corps adds even more confusion, as I am dealing with both issues right now.

Yes, I have not prepared a Tennesse return in a while, so I forgot their taxation measures, being in California or some of the Western States, I don't think there would be the distinction that Tn might make on the S Corps dividends/distributions.

Any other insight you can lend on this thread would be of great value!

Sandy