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Ask Dr. Fiona Chen Your Own Question
Dr. Fiona Chen
Dr. Fiona Chen, Certified Public Accountant (CPA)
Category: Tax
Satisfied Customers: 300
Experience:  Former IRS Revenue Agent
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You really answer tax questions for free? How much does it

Customer Question

You really answer tax questions for free?
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Customer: How much does it cost? Are they CPAs?
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Customer: I just have a question about my husband's K-1 and if it means the company literally owes him the net amount shown? Or the gross amount?
Submitted: 2 months ago.
Category: Tax
Customer: replied 2 months ago.
Also, what does the retained income signify an on 1120s?
Expert:  Dr. Fiona Chen replied 2 months ago.

Dear Customer,

On a K-1 from Form 1120S, that is, the K-1 form an S Corp issuing to its shareholder, all items, information, listed in Part III, are income (loss) items the individual, the shareholder, needs to recognize on his/her tax return. Some of the items are for information only and have no tax effect on the shareholders tax return.

These items are not items the corporation owed to him. The only item I can see with the word of "net" is column 2 of net rental income or loss. That means the bot***** *****ne of the rental property income or loss for this taxable year. This is not the amount the company owed to him.

The K-1 is the flow-through tax liabilities which can be different from the actual cash to be received from the S Corp.

"Retained income" on a 1120S. Do you mean "retained earnings" under the balance sheet, page 4? This number can be positive or negative. This is accumulated earnings and losses the business has had throughout the years. This number is ***** the actual cash in the business. If you are interested in understanding the financial strength and position of this company, it is suggested that you make an appointment with a CPA to sit down and review. Otherwise, by looking at some numbers on a part of a form is unlikely to give you a correct picture of the business.

Please feel free to follow up with questions.


Fiona Chen, MPA, Ph.D., CPA, ABV, CFF, CITP

Customer: replied 2 months ago.
When I say net profits on the K-1 I mean the profit before any write offs. If we have to pay taxes on the profit amount on our K-1 does that mean we should get a distribution for that amount of profit at some time?
Expert:  Dr. Fiona Chen replied 2 months ago.

Dear Customer,

The simple, short answer is NO.

A K-1 may say that we need to recognize say K-1, line 1, ordinary income, 500. It does not mean that we will get 500 in distribution.

For one example, a company may have a gain of 500 (our portion) of income for this year 2015. But it may need to use the money to pay back loan.

For a second example, if we have 500 positive income for this year, which we need to use to purchase goods next year. Then, we cannot distribute to shareholders now.

If you have like more fundamental questions on whether the company has been treated its shareholders correctly, you may need still have a professional consultation. I don't want to disregard some of the possibly important questions you have for this particular business. I am answering question from a more technical S Corporation and K-1 viewpoint.



Customer: replied 2 months ago.
Thank you. What if the shareholder will be leaving the company and it's a mutual decision for the company as a whole. Is that shareholder owed his share of profit reported his K-1 for 2015 and again for 2016? Assuming he's never taken a distribution and the company is profitable.
Expert:  Dr. Fiona Chen replied 2 months ago.

Dear Customer,

This is not a simple question.

Owe to whom? The shareholder does not owe the amounts on the K-1.

Whatever are reported on the K-1 issued to the shareholder, the shareholder needs to report on the tax return.

For the shareholder to depart from/leave the company, there is a value to his/her share. There are a lot of considerations such as the value of his shares and to whom he is going to sell his shares. The agreement needs to be signed by everyone. If you feel that some money needs to pay to you, that discussion needs to be held. So, you may need to consult with a CPA as well as an attorney. Also, if you think that there are cash or cash equivalent, profit, remaining in the company and your husband should get a portion of that cash, the subject needs to be raised.

This amount is in addition to and can be with the value of the stock shares.



Customer: replied 2 months ago.
If a shareholder has never received any money (in wages or distributions) but has to report K-1 profit on a personal income tax return and pay the taxes on that amount, shouldn't they receive money at some point? Are we paying taxes on money that just stays in the business? I'm sure it's my fault I'm not understanding that part. And in regard to retained earnings for a company, if that number is ***** that means the company is profitable correct? The company has been in existence for less than a year if that makes my question less complicated.
Expert:  Dr. Fiona Chen replied 2 months ago.

Dear Customer,

If the company has been in business in less than one year, it probably has gone from 2015 to 2016, and that is why you received K-1s.

There are two aspects to your questions.

1) Yes, it is proper for an S corporation to be profitable; and yet in the same time, for this S Corporation not to distribute any cash or property to its shareholders. It is normal.

2) If you don't feel comfortable and would like to question some aspect of proper management of the corporation in terms of the fiduciary duty and fair treatment of the corporate officers or major shareholders to the minority investment shareholders, it is a separate question and should be looked into separately.



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