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R. Klein, EA
R. Klein, EA, Accountant
Category: Financial Software
Satisfied Customers: 2882
Experience:  A member of the Intuit Ask a Tax Expert team and 10 years as QuickBooks Certified Pro Advisor.
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My M2 account was (83,264) in 2011 and in 2012 I had a profit

Resolved Question:

My M2 account was (83,264) in 2011 and in 2012 I had a profit of $44,328. I took a distribution in Dec 2012 of $15,710. When I calculatemy M2 account I get a note that says my distribution is limited to 0 and it does not show on my M2. What do I need to do?
Submitted: 11 months ago.
Category: Financial Software
Expert:  R. Klein, EA replied 11 months ago.

R. Klein, EA :

Hello. I will do my best to help you understand and resolve your question. If you do not understand my advice or need clarification, PLEASE ask a follow question or request additional assistance before providing a rating. Your positive ratings are important to me as the answer is important to you.

R. Klein, EA :

I am assuming you are talking about an S-Corporation.

R. Klein, EA :

In 2011, it sounds like your accumulated losses was over $80K greater than your basis you put in.

R. Klein, EA :

An S-Corporation can only make tax-free distributions when the basis is above zero, As of 2011, your tax return would indicate your losses exceeded your money you invested into the company.

R. Klein, EA :

In 2012, although you had a profit, your basis was still running below zero. A loss of $84K increased by $44K profits would make your account rise to minus $40K. You then distributed $15K, which brings your basis to minus $59K or so.

R. Klein, EA :

Losses in excess of basis cannot be deducted as a loss on your tax return (2011 and earlier). The 2012 profit becomes one to reduce the losses and increase your basis inside the company.

R. Klein, EA :

Because you had insufficient basis, the distributions are actually considered taxable income, in the form of long term capital gain, since you did not pay it out as wages or bonus.

R. Klein, EA :

Have you paid yourself a reasonable wage in 2011 or 2012? An S-Corp owner active in the business is generally expected to take a wage. Obviously this is impossible if you are losing money and have no cash, but otherwise, the IRS does expect a wage to be paid. What this means is that the IRS can arbitrarily decide that the distribution was. in fact, wages, rather than a distribution, and therby make the tax much higher and make you liable for self employment tax.

R. Klein, EA :

So, depending on your situation, you may decide to reclassify the distribution as wages or a bonus (treated like a wage). If there is an arguable case for a capital gain type distribution, then so be it, but in any case, it is likely not a tax-free distribution.

Customer:

I did receive reasonable compensation for working in the business. So how would I qualify the distribution as a capital gain?

R. Klein, EA :

Keep it as a distribution on the corporate return, but on your personal return, it is a gain on Schedule D.

Customer:

Sounds good. I have never done this so I know I am asking questions that may be redundant. Sorry!!!

Customer:

If I do this would how do I list it on my schedule D as a description and what would I list as the acquisition date? I figure I would put the sale date as the date I took the distribution.

R. Klein, EA :

It would appear on Form 8949 and then flow to Sch D.

R. Klein, EA :

THe purchase date is the date of your original investment, with a cost of Zero, and a selling date of the date of distribution with a price of whatever was distributed.

R. Klein, EA :

www.irs.gov/Businesses/Small-Business-&-Self-Employed/S-Corporation=Stock-and-Debt-Basis

R. Klein, EA :

If this information has been helpful, please provide a positive rating to close out the question. If you need additional help, feel free to ask a follow up before rating the answer!

Customer:

Ok I can see where you get that. So would I just list on the description on the 8949 as taxable distribution from Sub S Corp?? Or is there a standard description that I would use?

R. Klein, EA :

just list "Company Name" as the item. Nothing special

Customer:

OK Great!

Customer:

Thanks you very much

R. Klein, EA, Accountant
Satisfied Customers: 2882
Experience: A member of the Intuit Ask a Tax Expert team and 10 years as QuickBooks Certified Pro Advisor.
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