Accidental draws I want to put back in S Corp

[Raeka]

For 2022 tax year, some non-expense autopayments were set up in my business register. By the time I had vendor turn them off, $1,240 in autopayments were deducted from register. I want to put that amt. back into the S corp for that tax year rather than report them as distributions. How can I do that? I have negative retained earnings balance.

[AliciaP1]

Shareholder Distributions do not affect your Retained Earnings balance, but if you mean you have negative equity in the S-Corp (Shareholder Distributions in excess of Retained Earnings and Shareholder Contributions) you could have limitations on the amount of your non-taxable Shareholder Distributions.  

Per the IRS:

Importance of Stock Basis

It is important that a shareholder know his/her stock basis when:

• The S corporation allocates a loss and/or deduction item to the shareholder.
  In order for the shareholder to claim a loss, they need to demonstrate they have adequate stock and/or debt basis.
• The S corporation makes a non-dividend distribution to the shareholder.
  In order for the shareholder to determine whether the distribution is non-taxable they need to demonstrate they have adequate stock basis.
• The shareholder disposes of their stock.
  As with any asset, including S corporation stock, when the asset is sold or disposed of, basis needs to be established in order to reflect the proper gain or loss on the disposition.  

To return the $1,240 in Shareholder Distributions, you should immediately return the funds to your company and make an entry as of 12/31/22 to your books to accrue the reversal of the distributions booked in 2022.  When you complete your S-Corp return, do not report this amount as Shareholder Distributions in 2022 and do not report the deposit as a Shareholder Contribution in 2023 either.

See S Corporation Stock and Debt Basis for the calculations to be sure you are reporting the correct amount of Shareholder Distributions for your basis.

@Raeka

[Edited 02/15/2023 | 10:03 AM PST]

[Mike9241]

@AliciaP1 S-corp distributions are like C Corp dividend payments so they reduce retained earnings.  the credit is to cash for the payment so something must be debited to keep the books in balance - basic bookkeeping 101. so what do you suggest he debit? 

[Raeka]

Well, I didn't get an answer. What do you suggest I debit in that scenario?

Thanks

[Rick19744]

Based on your facts:

• It's not clear if the auto-payments were for personal items or business; you just indicate non-expense.
• If the auto-payments were for personal items:
  • You would need to debit cash for the $1,240 and credit capital

If the payments were not personal, then please provide some additional details.

[Raeka]

They were personal - non deductible health insurance payments.

But I ended up having more business expenses than my draws so I ended up with company owing me.

I listed it as shareholder loans and will reimburse myself this year.

Thanks for explaining.

[Rick19744]

Welcome.

[Mike9241]

too late. you took them out in 2022. it is now 2023.   distributions in excess of tax basis would be reported on your 1040 as capital gains. you need to properly fill out form 7203  on your 1040 for 2022 and of course file that 2022 S-corp return if it hasn't been done already. it could be that as capital gain, they may be taxed at zero for 2022.