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

[lcascio]

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.

[Anonymous_ · Accepted solution]

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.

[lcascio]

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

[jeffreyrstcyr]

how do i show that i distributed earnings?

For example, i made $1000 in 2020 and $2000 in 2021 but I distributed them but TurboTax is showing my RE at 3000 on the balance sheet and will not allow me to correct the final numbers without showing "out of balance"

[inspiredcabinetr]

hey jeff i am on this same problem right now .

although my reading comprehension has never been my strong suit i think the gentle above answers it .

"net losses and distributions will decrease RE."

i believe its in the distributions part.

also if the original poster is still recieving emails on this ......

no .....if u are distributing the retained earnings it should NOT be accumulating 

-joe