Return of Paid-in capital

[SCORP2]

New to S corp in 2022, and I built an office for my business with my own cash. Now I have this paid-in capital that I thought I could return to myself by withdrawing tax-free income until paid back. But now I'm learning that all business income increases my basis too and that it would be tax-free distribution anyway. And how would I withdraw more than what the business makes?

The only thing I can see is that can I take more distribution because of the extra paid-in capital without 40% of it being salary, vs if I only withdrew from the business income and it had to be at least 40% salary. 

Hope my question makes sense. I appreciate this community very much!

[AliciaP1]

As an S-Corporation you are required to pay yourself a "reasonable salary" and report appropriate payroll taxes.  This does not affect your basis (value of) in the business.  You can only take a distribution up to the amount of your basis in the business and your basis is affected by your contributions, distributions, and the company's net income(loss) for the year.

See Should I pay myself a salary as an S-corp owner? for more information. 

So for example, if you started your business in 2022 and if your paid-in capital (contribution) for 2022 was $10,000, your business net income was $25,000, your gross salary paid to yourself was $30,000, and your distributions for 2022 were $28,000 your basis at 12/31/22 would be $7,000 (10,000 + 25,000 - 28,000 = 7,000).  If you make no contributions in 2023 and your business reports a $10,000 loss, you are not eligible to take any distributions regardless of your payroll for 2023 because your basis in the business is $0.

@SCORP2 

[Edited 02/10/23 | 10:57 AM PST]

[SCORP2]

Hi, thank you for your answer. I understand all that, but I put $200,000 into building an office building also. How do I get that back on top of the 50/50 salary/distribution from the income?

[AliciaP1]

If you classified the investment as a Shareholder Loan to the business, it would not be subject to the basis rules.  You can then make payments on the loan to yourself from the business without incurring a tax liability unless you formatted the loan to incur interest.  At that point, the interest paid by the business is a deductible expense and reportable on your Schedule K-1.  When you enter your Schedule K-1 for your personal return will show the interest as taxable income.  In either case, you will need a document (like a memo) on file that defines the amount, usage, and term of the loan as well as if it will accrue interest or not.

@SCORP2

[SCORP2]

How is that different to call it loan vs paid-in capital? Isn't that also non-taxable?

[Mike9241]

it's unclear to me who owns the building (who has title to the property)  which makes a great difference in what must be done for tax purposes. 

[AmeliesUncle]

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@AliciaP1 wrote:

As an S-Corporation you are required to report at least 50% of all the income you take out of the business in any given year as payroll.  

LOL.  Where on EARTH did you come up with that idea?

[AliciaP1]

A Shareholder loan is treated as a reimbursement to the shareholder (unless the loan agreement states there will be interest accrued) and does not count as value for distributions to be taken against, while paid-in capital is an increase in basis value to the shareholder.  The will allow distributions taken against it, but only to the extent that the shareholder's reasonable compensation is calculated correctly.  So, yes both can be non-taxable, but the loan repayment always is and the paid-in capital may not be depending on other distributions and income (or loss) from the business (which calculates into basis).

@SCORP2