Solved: S-Corp: are you re-taxed on the same "retained ear...
cancel
Showing results for 
Search instead for 
Did you mean: 
Highlighted
New Member

S-Corp: are you re-taxed on the same "retained earnings" every year?

I notice in the retained earnings calculation, it includes adding the retained earnings from the prior year.  My understanding is for an S-Corp the retained earnings end up on your K-1 as an equivalent of a distribution for tax purposes.  But since it adds in the retained earnings from the prior year it appears you can be taxed over and over again for the same retained earnings.  What am I missing?

 

For example:

Year 1: retained earnings = $5000

Year 2: retained earnings = new retained earnings $1000 + Year 1 retained earnings = $6000

Year 3: retained earnings = new retained earnings $0 + Year 2 retained earnings = $6000

 

It looks like unless you book some kind of loss you'll be hit with taxes every year on retained earnings from prior years.  And indeed my "retained earnings" seem to be growing despite not being an actual amount in an account somewhere.

1 Best answer

Accepted Solutions
Highlighted
Level 15

S-Corp: are you re-taxed on the same "retained earnings" every year?

In a nutshell, S corporations pass through income and losses to their shareholders who, in turn, report the income and losses on their individual income tax returns (via their K-1s). 

 

Retained earnings (RE) are more of an accounting feature and are not taxed. Net income will increase RE, net losses and distributions will decrease RE. The upshot is, if the corporation is profitable consistently but never actually distributes money or property (assets) to its shareholders, RE will increase.

View solution in original post

2 Replies
Highlighted
Level 15

S-Corp: are you re-taxed on the same "retained earnings" every year?

In a nutshell, S corporations pass through income and losses to their shareholders who, in turn, report the income and losses on their individual income tax returns (via their K-1s). 

 

Retained earnings (RE) are more of an accounting feature and are not taxed. Net income will increase RE, net losses and distributions will decrease RE. The upshot is, if the corporation is profitable consistently but never actually distributes money or property (assets) to its shareholders, RE will increase.

View solution in original post

Highlighted
New Member

S-Corp: are you re-taxed on the same "retained earnings" every year?

Thank you!  That answers my question.  It sounds like it is some kind of accounting accumulator account that does not affect taxes.

Privacy Settings