What are the steps? -> Positive Net Income to reduce Paid in Capital thus having no taxable income?

Forum|Forum|5 years ago
February 28, 2021
14 replies
116 views

Hi TurboTax Business Tax Experts,

I can use your guidance. I reduced my paid in capital by paying myself back with my net income. Now, how do I document this? What forms, line items? I tried the step-by-step approach but couldn't figure it out.

Because I used my NI to reduce my paid-in-capital, that net income should NOT be taxable.

Please advise or let me know if I'm missing a concept/step. TYVM!

Tom

@Anonymous_ @bluedeb @xmasbaby0 @DawnC @ColeenD3 @AmyC @MaxTax00 @DaveF1006

TurboTax Business Windows

Carl

Level 11

What is structure of your business? Sole proprietorship? Single member LLC? Multi-member LLC? S-Corp? C-Corp? Partnership?

What precisely did the business "pay back" to you? A qualified loan that you made to the business? Maybe it was a return of investment in the business? Something else?

I doubt I can help, but you never know. But with more details you'll have a better chance of getting a response from someone who can help, if I can't.

tschapiraAuthor

Level 2

Hi @Carl11_2 and other Tax Experts,

My business is an LLC with S-corp status. In 2018 and 2019, I put money into the firm from personal funds (member contribution) to pay for expenses (e.g. start-up expenses, regular business expenses, etc).

So let's say, I put $100K into the business from my personal account to my business account. Not as a loan but as investment INTO the firm.

In 2020 taxes, I had positive NI, (e.g. $50K) and I want to use that funds as capital paid out back to me.

I'm using forms 1120s, K-1s, Schedule M-1s, M-2s, but i don't know how to account for this.

Thoughts or guidance? Thanks in advance.

Anonymous_

Level 15

@tschapira wrote:
Please advise or let me know if I'm missing a concept/step. TYVM!

You are missing the concept that paid-in-capital (or contributed capital) essentially represents your equity stake in the company.

Net income enters the taxability matrix regardless of how you want to otherwise treat it and you can either withdraw (distribute) the net income or use it for business purposes (i.e., keep it available for business use, which will increase retained earnings in an S corporation or increase partners/members capital accounts in a partnership or LLC).

Regardless, you cannot deduct paid-in-capital from net income to reduce, or eliminate, your tax liability.

tschapiraAuthor

Level 2

Hi @Anonymous_,

I'm a single member,100% equity, so all my monies that I pour into the firm doesn't change my equity stake. My equity stake (dollar amount) has risen because I've invested so much into it, but now I want to withdraw.

Here is a scenario

1. Year 1 - I invested $100K into the firm. Had no income

2. Year 2 (2020), I made no investments into the firm but had 50K income

I should be able to take my 50K out of the firm and not pay taxes on my monies. Right? That's my goals.

Anonymous_

Level 15

@tschapira wrote:

Hi @Anonymous_,

I should be able to take my 50K out of the firm and not pay taxes on my monies. Right?

No, that is not the way this works.

The $50,000 of income is subject to federal income tax regardless of how much you initially invested in the firm and regardless of whether or not you withdrew the income.