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I am interested in finding out if there are any additional

taxes or problems that would...
I am interested in finding out if there are any additional taxes or problems that would occur when taking a distribution from an S-Corporation in which I am the sole owner. Last year I had reported and paid taxes for a taxable profit of $5,709, but due to cash flow reasons related to tax penalties I did not distribute any of this money.

More specifically I would like to know if I will be liable for any additional taxes if I were to distribute the money at the end of the third quarter. My line of reasoning is that there would be no issue with drawing from this equity account in the form of a check, and not have to concern myself any further as all relevant taxes have been paid on that sum of money. My tax penalties would simply lessen the basis of the distribution as they are a non-deducible loss.
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Answered in 3 minutes by:
9/22/2013
Stephen G.
Stephen G., Sr Income Tax Expert
Category: Tax
Satisfied Customers: 7,238
Experience: Extensive Experience with Tax, Financial & Estate Issues
Verified

Stephen G. :

Hello, my name isXXXXX & I'll be helping you today. My goal is to give you a complete & accurate answer that you can understand.

Stephen G. :

As long as you have current earnings and/or prior year earnings that have not been withdrawn, there is no further income tax impact of shareholder distributions of either current or previously taxed income;

Customer:

So as long as the ledgers essentially equal zero when creating that distribution all will be well?

Stephen G. :

Not sure what you mean by "ledgers essentially equal zero"?

Customer:

Sorry, let me clear that up.

Stephen G. :

You should have an AAA account;

Stephen G. :

Also, distributions are charged to current earnings first.

Customer:

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?

Stephen G. :

Yes. A non-deductible expense.

Customer:

Out of curiosity, this means there is essentially no way to recoup a fee like that.

Stephen G. :

It's the same as any other expense except it isn't deductible for tax purposes.

Customer:

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?

Customer:

Not that it would likely affect the ability to claim that loss.

Stephen G. :

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.

Customer:

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.

Stephen G. :

They want you to be a good boy from now on. :]

Stephen G. :

If you need to contact me again with any tax or financial questions, you can just ask for "Steve G" at the beginning of your question. Thanks again for using us for your tax and financial questions. You may get a short survey from the site; if it isn't too much trouble I would appreciate it if you would answer it; the survey results are used to rate our performance;

Customer:

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.

Stephen G. :

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.

Customer:

Thank you for clearing that up.

Stephen G.
Stephen G., Sr Income Tax Expert
Category: Tax
Satisfied Customers: 7,238
Experience: Extensive Experience with Tax, Financial & Estate Issues
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