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As long as you have current earnings and/or prior year earnings that have not been withdrawn, there is no further income tax impact of shareholder distributions of either current or previously taxed income;
So as long as the ledgers essentially equal zero when creating that distribution all will be well?
Not sure what you mean by "ledgers essentially equal zero"?
Sorry, let me clear that up.
You should have an AAA account;
Also, distributions are charged to current earnings first.
Ok, then I guess my only confusion stems from the penalties incurred for late filings. As these are not deductible as an expense, are they essentially a loss that cannot be claimed?
Yes. A non-deductible expense.
Out of curiosity, this means there is essentially no way to recoup a fee like that.
It's the same as any other expense except it isn't deductible for tax purposes.
Alright, if we were to take things from a purely numerical standpoint it would mean the value of the company essentially drops that amount from a capital gains and losses perspective?
Not that it would likely affect the ability to claim that loss.
If you are talking about the fact that you have less cash after you pay the penalty, then yes the value of the cash account is less; as far as the value of the company, that's another whole issue; I doubt any tax penalty would reduce what someone was willing to pay for the company.
Yeah, I was considering it from a purely cash basis. Meaning that as a sole owner I essentially burnt the same amount of money in the fireplace from the IRS's point of view.
They want you to be a good boy from now on. :]
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As a final note, it would be best to maintain an equity account for situations of undistributed profits then. Most of the penalties came from poor advice received at the time of founding the company.
You should see on your 1120S that you are required to maintain an AAA account. It is called the "Accumulated Adjustments Account". All your income is posted to that account at the end of an accounting period and all shareholder withdrawals are posted to the same account. Any net credit balance is the amount of earnings that have not been distributed.
Thank you for clearing that up.