When I incorporated my business as an LLC with S-corp election at the beginning of 2024, I really should have started with a zero balance in my bank account, but instead I transferred the bank balance from my sole proprietorship over to my business which has complicated things come tax time. About 18 thousand dollars of the distributions I paid myself last year were from that initial balance, and since I already paid taxes on that money through my 2023 schedule C, wouldn’t I be paying tax on that money a second time if I counted it as a distribution this year? So I need to know how to account for this money on my 1120-S so that I’m not paying tax on this money a second time this year. Since these were technically person funds, it seems to me that this should be classified as a loan from a shareholder, and the “distribution” that covered this would be a repayment of that loan. If I did it this way, I can see where I can put it as a loan from shareholders on Schedule L, but then how do I account for the money paid back to myself? I figure I need to deduct it as an expense in the deductions section so that it’s no longer a distribution, but I’m not sure how to categorize it. And if this is completely wrong and I’m barking up the wrong tree, how do I set up my return so that I’m not paying tax on this money a second time this year? Thanks for any help!
The original transfer of funds from your personal account to the S-Corp should be recorded as the purchase of Stock.
This increases your Shareholder Basis and is entered on the Shareholder Stock and Debt Basis Limitations Worksheet Line 2 for current year. This worksheet appears under Business Info >> Shareholder Information after you enter distributions (click Edit beside shareholder name).
Any distributions up to your shareholder basis is non-taxable, as they are considered a return of capital. Excess distributions are taxable income, as they represent the withdrawal of income.
Additional Info: IRS S Corporation Stock and Debt Basis
The original transfer of funds from your personal account to the S-Corp should be recorded as the purchase of Stock.
This increases your Shareholder Basis and is entered on the Shareholder Stock and Debt Basis Limitations Worksheet Line 2 for current year. This worksheet appears under Business Info >> Shareholder Information after you enter distributions (click Edit beside shareholder name).
Any distributions up to your shareholder basis is non-taxable, as they are considered a return of capital. Excess distributions are taxable income, as they represent the withdrawal of income.
Additional Info: IRS S Corporation Stock and Debt Basis
@PatriciaV Wow, this answers my question very clearly. Thank you so much!
@PatriciaV Thank you very much for the helpful and concise answer!