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Lane
Lane, JD, CFP, MBA, CRPS
Category: Tax
Satisfied Customers: 10453
Experience:  Law Degree, specialization in Tax Law and Corporate Law, CFP and MBA, Providing Financial & Tax advice since 1986
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retained earnings and loan with S-corp. I hate to ask a retained

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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

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

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Thanks again,
Lane