How JustAnswer Works:

  • Ask an Expert
    Experts are full of valuable knowledge and are ready to help with any question. Credentials confirmed by a Fortune 500 verification firm.
  • Get a Professional Answer
    Via email, text message, or notification as you wait on our site.
    Ask follow up questions if you need to.
  • 100% Satisfaction Guarantee
    Rate the answer you receive.

Ask Lane Your Own Question

Lane
Lane, JD, CFP, MBA, CRPS
Category: Tax
Satisfied Customers: 3736
Experience:  Juris Doctorate, CFP and MBA, Providing Financial & Tax advice since 1986
Type Your Tax Question Here...
Lane is online now
A new question is answered every 9 seconds

retained earnings and loan with S-corp. I hate to ask a retained

Resolved Question:

retained earnings and loan with S-corp. I hate to ask a retained earning question after the bashing the last question got.

I am the sole shareholder of an S-corp in CA and started the year with the S-corp having a $19,000 loan from me personally and a retained earnings of -$13,000. I have a plan to get the money out and want a check to see if it makes sense. I plan to make sure that I issue W2 to myself for the year of revenue - (yearly expenses) - 19K loan - 13k retained earnings. I plan to pay the loan back before 12/31 and I guess issue the 13K to myself as well. Of course I will pay a reasonable salary W2 to myself as well.

Thanks,
Bryan
Submitted: 10 months ago.
Category: Tax
Expert:  Lane replied 10 months ago.

Lane :

OK ... lets back up a bit ... because an S-Corp is a pass through ... (doesn't pay its own taxes but rather passes all profits out to the owners to be taxed on THEIR 1040 the year the profit was made), retained earnings is, in a way, a misnomer. you have already been taxed for any profits (by way of the K-1) ... by leaving any money in the S-Corp it IS retained earnings in terms of the accounting (the books of the business) ... but this is not like retained earnings in a C-corp, (where you've decided to keep it in the corporation rather than pay it out and be taxed on it) ... You have already been taxed on it ( or will be, if we're talking current year) ... The effect leaving profits in the s-corp has is to increase your basis.

Lane :

Now, necase the S-Corp IS a corporation, the wages you pay yourself, as you mention, IS an expenses of the corporation ... and the effect that this has is to make any other PROFITS than are reached for the year be treated as dividends (no self employment tax) BUT again, you don't get the choice of leaving the money in the in the business and NOT paying taxes on it al all ... the TAX effect leaving those profits in retained earnings has (in an S-Corp) again, is it simply increases you basis in the business (which CAN be useful if you do a stock sale OR if you have a loss

Lane :

HTe loan form you t company also increases your basis

Lane :

(sorry for the typos)

Customer:

I have the same understanding about the negative retained earning already have been taxed by way of the K1. This is why I think that I can distribute the money to me before the end of the year and pay no additional tax. I have a negative retained earning balance because I needed to issue myself enough W2 money to qualify for a loan. I was also concerned with not paying myself a reasonable salary in the IRS point of view.

Lane :

Sorry, I didn't see the minus sign ... just a sec

Lane :

Yes, you are absolutely correct.... it DOES relate back to what I was saying... pulling money out never has a tax impication at the time because the taxable event comes either at year-end on profits or upon sale

Lane :

OR where this will affect you is it will lower you basis and migh possibly affect the ability to take a future loss

Lane :

But, yes pulling your original contribution OR pulling profits left in the company (because the profits have already been taxed) will not be a taxable event

Customer:

Great. One last question. Do I need to do anything special to pay back the loan to myself or the retained earnings. In the past I just have been writing myself a check from the business checking account to me personally. Do not understand basis but might not need too right now.

Lane :

No, jusy keep good records of what you've contribute (either by way of loan or capital contributions.. and what you've pulled out) Both will go to basis (which, again may restrict your ability to take a loss later) OR create a larger capital gain when and if you sell ... a best practice would be to ave an actual loan agreement, but no FOR NOW it's a non-issue

Customer:

Lane thanks. I am completely satisfied with the service. bye now.

Lane :

That's great ... Thanks so much

Lane, JD, CFP, MBA, CRPS
Category: Tax
Satisfied Customers: 3736
Experience: Juris Doctorate, CFP and MBA, Providing Financial & Tax advice since 1986
Lane and 5 other Tax Specialists are ready to help you
Expert:  Lane replied 10 months ago.


Thanks for the rating!


If you'd like to work with ME again just say "For Lane only," at the beginning of your next question.

Thanks again,
Lane


JustAnswer in the News:

 
 
 
Ask-a-doc Web sites: If you've got a quick question, you can try to get an answer from sites that say they have various specialists on hand to give quick answers... Justanswer.com.
JustAnswer.com...has seen a spike since October in legal questions from readers about layoffs, unemployment and severance.
Web sites like justanswer.com/legal
...leave nothing to chance.
Traffic on JustAnswer rose 14 percent...and had nearly 400,000 page views in 30 days...inquiries related to stress, high blood pressure, drinking and heart pain jumped 33 percent.
Tory Johnson, GMA Workplace Contributor, discusses work-from-home jobs, such as JustAnswer in which verified Experts answer people’s questions.
I will tell you that...the things you have to go through to be an Expert are quite rigorous.
 
 
 

What Customers are Saying:

 
 
 
  • I really was impressed with the prompt response. Your expert was not only a tax expert, but a people expert!!! Her genuine and caring attitude came across in her response... T.G.W Matteson, IL
< Last | Next >
  • I really was impressed with the prompt response. Your expert was not only a tax expert, but a people expert!!! Her genuine and caring attitude came across in her response... T.G.W Matteson, IL
  • I WON!!! I just wanted you to know that your original answer gave me the courage and confidence to go into yesterday's audit ready to fight. Bonnie Chesnee, SC
  • Great service. Answered my complex tax question in detail and provided a lot of additional useful information for my specific situation. John Minneapolis, MN
  • Excellent information, very quick reply. The experts really take the time to address your questions, it is well worth the fee, for the peace of mind they can provide you with. Orville Hesperia, California
  • Wonderful service, prompt, efficient, and accurate. Couldn't have asked for more. I cannot thank you enough for your help. Mary C. Freshfield, Liverpool, UK
  • This expert is wonderful. They truly know what they are talking about, and they actually care about you. They really helped put my nerves at ease. Thank you so much!!!! Alex Los Angeles, CA
  • Thank you for all your help. It is nice to know that this service is here for people like myself, who need answers fast and are not sure who to consult. GP Hesperia, CA
 
 
 

Meet The Experts:

 
 
 
  • Wallstreet Esq.

    Tax Attorney

    Satisfied Customers:

    570
    10 years experience
< Last | Next >
  • http://ww2.justanswer.com/uploads/KU/KUMI95/2013-9-30_195031_kumar.64x64.jpg Wallstreet Esq.'s Avatar

    Wallstreet Esq.

    Tax Attorney

    Satisfied Customers:

    570
    10 years experience
  • http://ww2.justanswer.com/uploads/CU/Cuttinggirl/2011-10-29_03719_wcrop2.64x64.jpg Wendy Reed's Avatar

    Wendy Reed

    Enrolled Agent

    Satisfied Customers:

    3052
    15+ years tax preparation and tax advice.
  • http://ww2.justanswer.com/uploads/CATax/2009-08-04_204548_Mark.jpg Mark D's Avatar

    Mark D

    Enrolled Agent

    Satisfied Customers:

    985
    MBA, EA, Specializing in Business and Individual Tax Returns and Issues
  • http://ww2.justanswer.com/uploads/IN/insearchoftheanswer/2013-8-16_0233_attorney.64x64.jpg Richard's Avatar

    Richard

    Tax Attorney

    Satisfied Customers:

    3229
    29 years of experience as a tax, real estate, and business attorney.
  • http://ww2.justanswer.com/uploads/MY/MyVirtualCPA/2012-7-5_44024_cookmegan1.64x64.jpg Megan C's Avatar

    Megan C

    Certified Public Accountant (CPA)

    Satisfied Customers:

    6121
    Licensed CPA, CFE, CMA who teaches accounting courses at Master's Level
  • http://ww2.justanswer.com/uploads/JG/jgordosea/2012-6-7_43138_GordosVeritas.64x64.jpg jgordosea's Avatar

    jgordosea

    Enrolled Agent

    Satisfied Customers:

    2783
    I've prepared all types of taxes since 1987.
  • http://ww2.justanswer.com/uploads/OZ/ozaukeecpa/2012-6-7_193219_Picture1croppedandshrunk.64x64.jpg MequonCPA's Avatar

    MequonCPA

    Certified Public Accountant (CPA)

    Satisfied Customers:

    2231
    CPA, Over 30 yrs experience w/individuals and small businesses. Masters in Tax.