Hi, I have to seek help for this again.
These few days I am just so confused. We have quite a bit S corp returns, and almost everyone has the negative basis issue that I have to reclassify from distribution to loan. However, my co-worker just told me a new method.
The distributions are mostly from loans. For example, for this S corp with one shareholder, credit card payables were $16,000, business line of credit balance were $24,000, therefore, he was able to take distribution of $40,000. I had to reclassify to loan. However, since those credit cards and business line were under the shareholder's name (he was a Schedule C before and those accounts carried forward), my co-worker suggested those loans should be reclassified to contribution therefore there is no distribution (contribution and distribution net zero). Does it makes sense?
Also, some of the S corp. shareholders use credit cards for both business and personal purposes (which is a bad practice), and personal expenses are coded to draws. My co-worker said there is a risk that IRS will determine that all expenses ran through those credit cards were personal, is that true?
Again, my co-worker said since credit cards were under the shareholder's name, IRS could determine it is a invalid S corp.??? And, creditors can go after the S corp shareholder's personal assets since there is no a clear cut of personal and S corp. anyway?
I am so confused, how are other CPA firms handle those. Please help!!!
These few days I am just so confused. We have quite a bit S corp returns, and almost everyone has the negative basis issue that I have to reclassify from distribution to loan. However, my co-worker just told me a new method.
The distributions are mostly from loans. For example, for this S corp with one shareholder, credit card payables were $16,000, business line of credit balance were $24,000, therefore, he was able to take distribution of $40,000. I had to reclassify to loan. However, since those credit cards and business line were under the shareholder's name (he was a Schedule C before and those accounts carried forward), my co-worker suggested those loans should be reclassified to contribution therefore there is no distribution (contribution and distribution net zero). Does it makes sense?
Also, some of the S corp. shareholders use credit cards for both business and personal purposes (which is a bad practice), and personal expenses are coded to draws. My co-worker said there is a risk that IRS will determine that all expenses ran through those credit cards were personal, is that true?
Again, my co-worker said since credit cards were under the shareholder's name, IRS could determine it is a invalid S corp.??? And, creditors can go after the S corp shareholder's personal assets since there is no a clear cut of personal and S corp. anyway?
I am so confused, how are other CPA firms handle those. Please help!!!