Shareholder Distributions do not affect your Retained Earnings balance, but if you mean you have negative equity in the S-Corp (Shareholder Distributions in excess of Retained Earnings and Shareholder Contributions) you could have limitations on the amount of your non-taxable Shareholder Distributions.
Per the IRS:
Importance of Stock Basis
It is important that a shareholder know his/her stock basis when:
- The S corporation allocates a loss and/or deduction item to the shareholder.
In order for the shareholder to claim a loss, they need to demonstrate they have adequate stock and/or debt basis. - The S corporation makes a non-dividend distribution to the shareholder.
In order for the shareholder to determine whether the distribution is non-taxable they need to demonstrate they have adequate stock basis. - The shareholder disposes of their stock.
As with any asset, including S corporation stock, when the asset is sold or disposed of, basis needs to be established in order to reflect the proper gain or loss on the disposition.
To return the $1,240 in Shareholder Distributions, you should immediately return the funds to your company and make an entry as of 12/31/22 to your books to accrue the reversal of the distributions booked in 2022. When you complete your S-Corp return, do not report this amount as Shareholder Distributions in 2022 and do not report the deposit as a Shareholder Contribution in 2023 either.
See S Corporation Stock and Debt Basis for the calculations to be sure you are reporting the correct amount of Shareholder Distributions for your basis.
@Raeka
[Edited 02/15/2023 | 10:03 AM PST]
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