S Corp final return - zeroing out balance sheet items

[capristar]

We are filing a final return for our S Corp which owned several rental houses and sold them in 2021.  We have distributed all the money and posted the distributions to Retained Earnings on Quickbooks as our former cpa advised in the past.   The only remaining balances are common stock, which is the amount the owners contributed and retained earnings which now has a negative balance due to the large distributions this past year.  Turbotax is saying our retained earnings should have a zero balance.  Should we post the distributions to common stock first to zero it out?  Should negative retained earnings be shown as zero on the tax return balance sheet?  We're ready to file the return other than this.  Thanks in advance for any help!

[Rick19744 · Accepted solution]

A couple of comments:

• It is certainly possible to have negative retained earnings.
  • Hopefully this is just a diagnostic and doesn't preclude you from efiling
• What you don't mention is whether the balance sheet is zero; lines 15 and 27
• You should also know that any liquidating distributions should not be reflected on the Schedule K or the respective K-1. These liquidating distributions should be reported on a form 1099-DIV box 9 and 10 as appropriate.
• This form was due to the shareholder(s) by January 31st.
• I believe the due date to file with the IRS is end of February if paper filing and end of March if efiling.  Check to see if TT has this ability.

[AliciaP1]

Yes, you should zero out common stock and you should have an adjustment to Shareholder's Equity to offset Retained Earnings.

You will also need to file Form 966 Corporate Dissolution or Liquidation.  TurboTax does not support the file for S-corps, but you can find the form at Form 966 and mail it in separate from your final tax return.

[sdooley56]

Hi Rick,

Thanks so much for your input.  The balance sheet is currently zero except for the common stock and negative retained earnings which is what I was trying to figure out how to make zero.  I'm a bit unclear about how to do that.  Should part of the distributions be posted to common stock to zero it out?  Should the negative retained earnings be shown as zero on the balance sheet?  Does the final distribution not get reported anywhere on the 1120S, only on the 1099-DIV?

[sdooley56]

Thanks for your response Alicia!  Can you be a bit more specific as to what the entries would be to zero out common stock and the shareholders equity adjustment?  Would part of the distributions be posted to common stock to zero it out?  I don't have a shareholders equity account set up so not sure what to do there as far as offsetting retained earnings.

I will be sure to file the 966 form.  Thanks for letting me know about that.

[AliciaP1]

Shareholder's Equity is the combination of Common Stock, APIC, Shareholder Contributions and Distributions, and Retained Earnings.  Shareholder's Equity plus Liabilities are one side of the Balance Sheet while the other side is Assets.  Your Balance Sheet is in balance when the 2 sides equal each other.

On your tax return, you should zero out common stock against distributions since you liquidated the value of the stock when you closed the business.  Then you should use the Adjustments to Shareholder's Equity line to input the offset to Retained Earnings or report Distributions.  If your Balance Sheet is in balance these would already be offsetting numbers. 

[RANTHONYZ]

Would you verify that I have the right idea:

"zero out common stock against distributions."

1 move any amount in common stock to distributions (offset to zero).

2 common stock is company stock + shareholder stock?  Correct?

Adjust Shareholder's Equity offset Retained Earnings to zero?

or report Distributions ?  Is this an optional choice? 

Thanks, I'm a fish out of water with resp. to accounting.

RAZ