Can an S-Corp's distributions be greater than net income? TurboTax doesn't seem to allow it.

[giangreco]

Background: Established business, S-Corp. 2 owners, both taking reasonable salaries, as well as distributions.

In 2017, our net income was $50k, but we (2 owners) took $70k in distributions. (The excess came from cash in the bank, accumulated in previous years.) But in the Balance Sheet section, we have:

• Beginning Retained Earnings: $85k
• Plus: Book Net Income: $50k
• Less: Shareholder distributions: $50k

This results in our Retained Earnings remaining unchanged. But that's incorrect. The retained earnings have decreased, because the distributions are $70k, not $50k. But TurboTax won't reflect the actual distributions.

Would this be something for the 1120S Schedule L line 25, "adjustments to shareholders' equity"? I've been googling for hours but I'm not having any luck figuring out how to account for taking more distributions than net income. (The K-1 forms have the "right" value, but that doesn't help the retained earnings or the balance sheet line up.)

Thanks for any help anybody can offer!

[Rick19744]

Let me ask a couple of questions:
1) What is showing up as distributions on each respective K-1?
2) What is reflected on Sch M-2 column (a) line 7?
3) Is Sch M-1 column (a) line 8 still positive?
4) If question 3 response is "yes" what is the amount on line 8?
5) Adjustment to shareholder equity on line 25 is not the line that needs to be adjusted here.

[giangreco]

Hi @Rick19744. Thanks for asking clarifying questions.

1: K-1s: $35,000 each.
2: Schedule M-2 column (a) line 7: $50,000
3 & 4: Yes, looks like it. $50,000
5: Thanks. Didn't think so, but in the forms and the math, it looked like that'd at least get the numbers right.

That help? Thoughts? I'm stumped.

[giddyupjr]

I have a similar situation

Two owner s-corp (my wife and I).  Distributions taken (combined) of $120,885.  Bookkeeper subtracted business expenses and health insurance/HSA from these distributions to leave a final figure of $84,761 on 2017 P&L

On TurboTax Retained Earnings Reconciliation Summary

Balance Sheet:   Beginning Retained Earnings: $0
                           Plus: Book Net Income: $106,525
                           Less: Shareholder Distributions: $106,525
Subtotal:     Ending Retained Earnings per Return: $0
                 Ending Retained Earnings per Books: $6,891


K-1 shows $60,442 (me) and $60,443 (wife)
Sch M-2 column (a) line 7   $106,525
Sch M-1 column (a) line 8 is positive in the amount: $107,684

I cannot for the life of me get Retained Earnings Reconciliation Summary to match Return with Books.  Sch M-2 line 8 is $0 and Sch M-2 column (a) line 1 is $0.

The real 2017 Beginning Retained Earnings (based my own [not TurboTax] 2016 Balance Sheet Total Equity) should be $-14,973 and the Shareholder Distributions should be $84,761.

Nothing I do can in the Step by Step part of TurboTax Business can get these figures to change to the correct numbers.

Any help would be MUCH appreciated.

[Rick19744]

You need to start your own thread.  Combining threads leads to confusion.  Just copy and paste question into a new question in the S corp section.

[giangreco]

@giddyupjr Fwiw, I ended up just editing the forms directly. But either there's some strange tax law that TurboTax is aware of that nobody else is, or this is a bug. I take notes every year, and I definitely didn't run into this previously (even though it was the same situation). Hopefully we don't run into this next year.

[Rick19744]

I am not on a windows environment so not able to provide software input support, as TT Business only operates on windows, but here are my follow-up comments:

1. The K-1's appear to be correct
2. Schedule M-2 line 7 is not correct as this should be the $70,000 since you still have a positive figure on line 8.  So not sure how this is getting populated.
3. Schedule M-2 line 8 doesn't appear correct.  If everything was going as expected, I would expect to see $65,000 on this line.  But we know the distribution figure is not correct.
4. So if Schedule M-2 line 8 is reflecting $50,000 something is not making sense.  The math is not working here, so that tells me your beginning figure on Schedule M-2 column (a) line 1 is not the $85,000.  

[giangreco]

Ah, @Rick19744, you're right. The beginning balance (Schedule M-2 column (a) line 1) is zero! Thanks. Now to figure out how to set that to what it should be. (Not sure why it didn't carry over from last year. Should have, I'd assume.)

[Rick19744]

So this makes some sense, but not with zero beginning AAA.
Distributions cannot make AAA go below zero, but still doesn't explain why you have a $50,000 ending balance.

[giangreco]

@Rick19744 Yeah, in continuing to poke at it, I just overrode the distributions in the Schedule M-2 worksheet. That seems to get me where I want, but I wish I knew why TurboTax wasn't doing that automatically.

[Rick19744]

Well just be careful there as I do believe an override will preclude you from efiling.  Not a huge deal, just sayin.

[Rick19744]

Your AAA is important, but not as important as your individual basis.  Just make sure that you are keeping track of your tax basis in your investment.

[giangreco]

Overriding doesn't seem to impact anything wrt e-filing, thankfully. I wish I knew why TurboTax was doing what it was doing. Thanks for your help.

[Rick19744]

Welcome

[WonderWoman]

Why TT is doing what it's doing is likely explained by "Sch M-2 Wks" (Schedule M-2/Retained Earnings Worksheet) which takes distributions from AAA (and then even E&P if the S corp used to be a C corp).