Excess Shareholder Distributions

[geekgirldany]

S-Corp has excess shareholder distributions. Now last year I put the excess in Loan To Shareholder. It had excess again this year and I am not going to shove more into this Loan. My hope was there would be enough income to clear the loan out. There wasn't of course and as I said they went over again this year.

I want to put the loan to shareholder as a reduction of stockholder basis in the corporation, and report a gain from the sale of stock. Now to do this I want to make sure I have it straight:

1. AAA can not be a negative but Retained Earnings can. This is how I will show everything in balance on the the balance sheet. Taxwise wants to carryforward the AAA amount to Retained Earnings. I believe I will just have to override it.

2. This will reduce the shareholder's basis to zero. I am not sure I am understanding this exactly. Say the loan to shareholder is $20,000. The shareholders basis is already zero because of distributions. Does the $20,000 loan reduce it below zero and this will be caught up in later years when there is a net income? I am just zoned out on this.

3. Do I need to accrue interest income for the one year of loan to shareholder and put this on the K-1?

4. The loan to shareholder will be reported on Schedule D of the shareholder as a capital gain long term. I think this might be the only thing I have correct

I really would appreciate any help. This is the first time I've had to deal with it.

[S T]

Not sure

Dany, not sure of this as you seem to have more knowledge than I do, but here is a prior thread on AAA and excess distribution.

http://www.thetaxbook.com/forums/showthread.php?t=2738&highlight=negative+account

Sandy

[geekgirldany]

Thanks so much Sandy. I believe now I am just stuck on the shareholder's basis and tracking it correctly. Will see if I can find some more info.

[geekgirldany]

Figured out the shareholder's basis. It can not go below zero. But still would like to know on loan interest.

[veritas]

You need

to compute interest on the loan. It will increase the shareholder's basis. You are correct, retained earnings can be negative and the Triple A account can not.

Distributions in excess of basis go on Schedule D.

[geekgirldany]

Thank you so much for clearing it up for me

[outwest]

Sigh...

AAA can be negative, just cannot go negative based on shareholder distributions. For instance, just plain losses with no distributions could make AAA negative as well as R/E.

Shareholder basis is the only item that cannot go below zero. And a reminder, AAA and R/E aren't necessarily equal.

[JG EA]

And you can leave the M-2 blank if never an C-Corp.

1120 S Instructions: S corporations with accumulated E&P must maintain the AAA to determine the tax effect of distributions during S years and the post-termination transition period.

An S corporation WITHOUT accumulated E&P does NOT need to maintain the AAA in order to determine the tax effect of distributions.

Nevertheless, if an S corporation without accumulated E&P engages in certain transactions to which section 381(a) applies, such as a merger into an S corporation with accumulated E&P, the S corporation must be able to calculate its AAA at the time of the merger for purposes of determining the tax effect of post-merger distributions. Therefore, it is recommended that the AAA be maintained by all S corporations.

(Yelling mine, I don't know how to do italics.)

To leave blank is my personal favorite if it doesn't equal RE. (For aesthetic reasons.) My software has a button to make it go away.

[veritas]

Outwest

you are correct.

I was thinking in terms of distributions as you said which can not make the AA account negative.

[geekgirldany]

I should have added that myself. I read where losses can make it negative but not distributions.