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taxmanrog
taxmanrog, Certified Public Accountant (CPA)
Category: Tax
Satisfied Customers: 389
Experience:  Licensed CPA, MA, MST with 29 year's experience. Teach Accounting and Tax courses at Masters level.
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TAXMANROG CPA ONLY…………………………………………………….. This reduction

Resolved Question:

TAXMANROG CPA ONLY……………………………………………………..

This reduction is the source of the distribution in excess of basis, currently. Shareholders realize the only possible option for them, maybe, is to defer the tax to some future date.

The Shareholders are concerned that the Corporation is not allowed to reclassify the Corporate Supply expense from Shareholder Distribution to Shareholder Accounts Receivable. The answers to these questions will help them decide….
1. If shareholders take Cash Distributions is excess basis, does the IRS allow the Shareholders to reclassify the Cash Distribution to Shareholders Receivable to defer the distribution in excess of basis? Why would the IRS allow this? Is this a common Practice?
2. It appears this is highly unusual tax accounting puzzle that does not fit into any mechanical tax accounting remedy. The unusual way of viewing the Shareholder paying the first tax etc., is too justify maybe being able to Reclassify Supply Shareholder distribution to Shareholder Receivable. Is there anything in tax law that would prohibit the reclassification of Supply Shareholder distribution to Shareholder Accounts Receivables?

If the IRS allows Shareholders to take cash out of an S-Corporation as a shareholders Accounts Receivable Loan, and defer Capital Gain tax, without question and being normal, this may rationalize the Supply Shareholder’s Distribution reclass to Shareholders Accounts Receivable?

I found Judge Learned Hand….very interesting man/quotes
Have a Good Night

John
Submitted: 11 months ago.
Category: Tax
Expert:  Lindie-mod replied 11 months ago.

Hello,

I'm Lindie, and I’m a moderator for this topic. I sent your requested professional a message to follow up with you here, when they are back online.

If I can help further, please let me know. Thank you for your continued patience.

Best,

Lindie

Expert:  taxmanrog replied 11 months ago.
Welcome to Just Answers! Thank you for giving me the opportunity to assist you! I will do my best to help!

I believe that at least part of the distribution can be reclassified as a Shareholder Receivable. The percent (you mentioned 5% or so?) that is used personally by the Shareholders is definitely a receivable for the Company. This is a common practice, for many different types of expenses. I have a client that travels using a company credit card. On his trips he will occasionally have to purchase items that are personal in nature - a new shirt, a souvenir for his children, book, software, movie for watching in the room - all personal in nature. When the company credit card bill arrives, he highlights the personal items, and the company pays the credit card in full, and he repays the company for the cost of the personal items.

How have the Shareholders dealt with the personal use items in prior years? Have the Shareholders always reimbursed the Company for the personal use?

The IRS would not normally allow a simple distribution to be reclassified as a distribution. They want their money! However, if you have a reason to reclassify, as you do with at least part of this distribution, the reclassification is allowed.

Please let me know how this issue has been handled in the past?

Thanks!
Customer: replied 11 months ago.

Hello Roger...


The subject matter is not 5%. The subject matter has always been 95%.


 


Historically Shareholders never had any personal use in the Corporation. This only happened one time 4 years ago with supplies.


 


You stated an option was to reclass the shareholders supply distribution to Shareholders Receivable. You are now stating this is a problem.


 


The point the shareholders have been making is they received nothing….the company used the supplies because of a one-time error. The shareholders paid more taxes as a result. Shareholders believe they should not be taxed again as though they received something; because they did not. Their only validations for their positions are the facts presented to you.


Shareholders have reviewed your answers this morning and it appears your conclusions are:



  1. Three years statues of limitations had passed and therefore to amend the return would not resolve any issues.

  2. Prepaid Supply Expense will not work because the supplies were used up in the year purchased.

  3. Reclass Shareholders Supply distribution to Shareholders Receivable will not work because the IRS will not allow Shareholders to defer S-Corporation Distribution in Excess of Basis.

  4. Stating the facts regarding the supplies, will not change the IRS position in not allowing the Shareholders to reclass Shareholders Supply distribution to Shareholders Receivable, and the Capital Gain Tax on Supplies not received by Shareholders must be paid.


Shareholders are back to the Original Question. Even though the Shareholders have received no supplies, the IRS requires the Shareholders to receive the supplies as Shareholders Distribution and paid Capital Gain Tax. It appears there are no M-1 adjustments, book entries, tax accounting procedures, or valid acceptable argument to remedy this.


 


The Shareholders have concluded this morning based upon all your answers; they will accept the Shareholders Supply Distribution (Even though Shareholders received no supplies) and paid a 2nd Capital Gains Tax.


 


Do you agree with the Shareholders Conclusions?


 


Thank You as Always,


 


John

Expert:  taxmanrog replied 11 months ago.
Yes, I agree.

I based my earlier answers on what a typical corporation would do, and what the IRS would be able to determine, or "catch". Your corporation is highly ethical, which is refreshing as I said before. Most companies would have simply deducted the supplies in the current year, or at the very least the last open year. Most also would have made adjustments to the Shareholder basis, as I alluded to in my early answers.

Your ethics are well placed, and I respect them. However, they will result in the distribution in excess of basis which will cost them tax dollars now on top of the tax dollars that they already paid through the not taking the deduction.

One question. Why are they looking at the distribution now, in this year? If the supplies were not deducted, and it is treated as a nondeductible expense, why wouldn't you reduce the basis in the year of the missed deduction, i.e., 4 years ago? Would that affect the distribution in excess of basis? Would they have basis in that year to absorb the reduction? I am just curious as to why this is an issue in this year. Was it just discovered in this year?

I ask because 1) I am curious, and look at each customer question as a learning opportunity, and 2) I have done E&P studies for C-Corps (E & P is a concept similar to the AAA account for S-Corps) where we have gone back and made adjustments to E&P in the year affected, even if it was beyond the statute of limitations. I believe that you could still amend the return to correct basis, even though it would not result in a refund.

Please let me know.

Thanks!

Roger
Customer: replied 11 months ago.

 


The Shareholders had left the profits in the Corporation for many years. This created lots of equity in the Corporation and high positive Shareholder’s Basis. Shareholders finally elected to take Cash Distributions recently, and discovered the supplies problem. So yes…there was lots of basis and high equity to absorb supplies very easily….



What do you think???.


Thanks, Roger!

Expert:  taxmanrog replied 11 months ago.
OK. If this is the situation, I would go back and amend the return to correct the basis. At a minimum, if you don't want to amend the return, I would go back and retroactively correct the basis schedules. Then, the shareholders could take a distribution large enough to reduce the basis to, but not below, zero.

If the shareholders already took the distribution (i.e., you are doing the 2012 tax return) since the return has not been filed, the shareholders can correct the distribution and pay part of it back. If the distribution is actually in 2013, even better! If they do not have time or the funds to pay it back, in this case you CAN create a due from shareholder. They can go back into the minutes and correct the distribution and reduce it, and eliminate the issue.

Your correcting entry would debit Due from Shareholders and credit Distributions. In this way you are correcting the error, and the Shareholders can wait until the end of 2013, and if there is profit (which gives them basis) then they can use another distribution to pay off the receivable!

This is probably the easiest and cleanest way, and everything is above-board.

Thanks!

Roger
Customer: replied 11 months ago.

 

Interesting…I will discuss these options with the other shareholders this evening

 

Are these statements correct?

  1. Book Expenses from an S-Corporation; must be expensed on the Corporate Tax return or the expenses will be transferred to Shareholders Distribution and reported as capital gains.
  2. If a Corporate Tax Accountant asked a Corporate CFO if particular expenses are ordinary and necessary expenses, in which some might be gray area for the Corporation; if CFO decides to take the safe approach and eliminate the questionable ordinary and necessary expenses, the shareholder’s will (1) Pay hire taxes (2) all eliminated expenses will be become shareholder distributions and Capital Gain to them.

 

Shareholders Appreciate all your help.....

 

Expert:  taxmanrog replied 11 months ago.

I apologize for the delay. My wife has chemo tonight, and my son had Boy Scouts, and I have been running around like a crazy person!

 

Your statements are correct. They also arrive at the logical conclusion - by being conservative, the shareholders pay more tax. That is logical! By being aggressive one minimizes tax.

 

It has been a pleasure working with you! I enjoy a mental exercise. IT is also refreshing to find ethical corporations! We constantly hear about how people try to get away with things. Clients always ask me how far they can go before the IRS suspects anything, or what can they deduct without raising any questions, or what can they get away with. It is not often that I find people such as yourselves! You are to be congratulated!

 

Again, thanks!

 

Roger

Customer: replied 11 months ago.

 


Hello Roger,


I hope your wife is feeling well.


 


Basis Question for an Individual….


An individual X owns Investment Residential Rental Property and this property appreciated in value over the years.


When X sells the Property for a profit, Capital Gains are reported.


 


Instead of selling the property X takes Cash-Out Loan on the equity of the Investment Property. Does X report Capital gains when the cash out is greater than the basis of the property or is Capital Gain reported only when the property is sold?


 


It is Friday and hopefully you will be able to relax and Enjoy the Weekend/Moment…..


 


Thank You….John

Expert:  taxmanrog replied 11 months ago.
John:

No, obtaining a loan is not a sale or taxable event, even when the loan amount exceeds the basis in the house.

Thank you for the wishes for my wife. She is fighting Stage 4 kidney cancer, which has spread to her liver. She will be having the kidney removed Tuesday. I appreciate any thoughts and/or prayers.

I will be at our regional Boy Scout reservation this weekend for training, from 7am Saturday until 7pm Sunday. It won't be relaxing, but it will be beneficial!

Have a great weekend yourself!

Roger
taxmanrog, Certified Public Accountant (CPA)
Category: Tax
Satisfied Customers: 389
Experience: Licensed CPA, MA, MST with 29 year's experience. Teach Accounting and Tax courses at Masters level.
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