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How to handle S Corp owner contributions that are greater than distributions taken?

Forum|Forum|4 years ago
February 21, 2022
2 replies
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S Corp 100% owner contributed $200K+ more into his business than the amount of distributions taken. He incurred a huge loss in 2021 due to legal expenses related to an ongoing lawsuit. This is the reason for his additional contribution.

For banking and other purposes he would like this additional amount to be shown in the equity section of the balance sheet.

How do most of you handle this situation?

I know a lot of tax preparers report this as a shareholder loan to the corporation. However, with these small S Corps there never is a loan agreement and no interest is charged.

If it is reported as "Due to Shareholder" then it is reported as a current liability on the balance sheet and no basis is reported either.

I don't think it should be reported as Additional Paid in Capital since the owner intends to get the money back as soon as possible. For instance, if the owner takes more distributions than he has basis the next year or the following year then he can't reduce APIC for the excess distributions.

I want to check to see if any of you know a way to handle this that will give the taxpayer basis and show the additional contributions in equity.

Thank you.

ProSeries Professional

This topic has been closed for replies.

Best answer by sjrcpa

Thanks @sjrcpa.

I understand that you don't reduce APIC for distributions. That's why I am saying that the amount paid back to the shareholder for his additional cash paid into the business is not reported as a distribution but is reported as a reduction of APIC. No distribution, just paying back the additional cash the owner had to put into the business.

Are you saying that the APIC can't be paid back and that any money paid back to the shareholder is still reported as a distribution against RE? And even if RE goes negative from distributions that the shareholder still has basis since there is an APIC balance?

Sorry to drag this out. I really appreciate your help.

"Are you saying that the APIC can't be paid back and that any money paid back to the shareholder is still reported as a distribution against RE?"

Yes

"And even if RE goes negative from distributions that the shareholder still has basis since there is an APIC balance?"

Shareholder still has basis because he still has basis.

IRonMaN

Level 15

"For banking and other purposes he would like this additional amount to be shown in the equity section of the balance sheet"

You can't have the best of both worlds. Either it is equity or it is a loan. If he is going to be paying himself back as soon as possible, that sure sounds like a loan and not equity to me.

Slava Ukraini!

J

jeffmcpa2010

Level 10

If there was no "concurrent in time" paperwork that would normally be in place for a loan, then it would not be a loan. (I'm talking about a written note, including appropriate interest and specified repayment terms.)

If it is not a loan, then it is in fact additional capital contributions which go to the equity section.

It really does not matter if it is Additional Paid In Capital, as with him being the sole owner of the S Corp, he can take distributions at any time without tax consequences so long as they do not exceed his tax basis in the Corp.

BTW If he gets additional bank loans, you may want to ask to review all the loan covenants to be sure that there are not restrictions on distributions, so you can advise him about when he can return his investment without violating those covenants.

D

david3Author

Level 7

So he can take future distributions in excess of retained earnings (to pay himself back) against APIC? I thought distributions could not be reported against APIC and could only be reported against RE.

If this is the case, then APIC is the best solution. Please confirm that I'm not misreading or misunderstanding your answer.

Thank you.

J

jeffmcpa2010

Level 10

You could be right on the repayment, now that you phrase it that way, I'm not entirely sure, as I haven't run through that situation in a number of years.

EDIT:

I did just find this on google

"S corporations, in general, do not make dividend distributions. They do make tax-free non-dividend distributions unless the distribution exceeds the shareholder's stock basis. If this happens, the excess amount of the distribution is taxable as a long-term capital gain."

I had been thinking that it was Basis that mattered that distributions not exceed, and I feel like this says the same thing

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