S-Corp Dividends

[lKgarcia2020]

My cpa had me record some distributions in 2019 as taxable dividends because we were trying to remove some old c-corp retained earnings.  I do not see those dividends on my K-1 for 2019 and there is still a balance in "taxable dividends" in 2020.   Can I do a journal entry to clear out that account for 2019 and put it into my "owners capital"?  

[M-MTax]

For a balance sheet entry?

[lKgarcia2020]

yes.

[M-MTax]

Are you out of balance by that amount? Make an offsetting entry. 

[lKgarcia2020]

I am not out of balance.  I just wonder if this stays on my books always or what exactly I do with it.

[M-MTax]

The question arises as to whether the cpa handled this correctly in 2019. Anyway, if that cpa is still around you might want to speak with that person and ask what he or she would do to offset the entry.

[ThomasM125]

A dividend would be an entry that only belongs in the year it is made. It should be cleared out to the owner's capital account in the year after it was made. So, from what you described, you would debit owner's capital account and credit the dividend account in the current year.

[lKgarcia2020]

Thank you.  

[lKgarcia2020]

One last question for my balance sheet which relates to owners capital.   The owners capital on my balance sheet in 2020 was an entry made in 2019 for an adjustment of my 2008 c-corp. (it was c-corp earnings that taxes were paid on in 2008).   I have closed out my distributions and the taxable dividends to the owners capital.  Is there an issue when deductions taken from owners capital is more than the salaries paid to owners? 

[gloriah5200]

If it continued to happen each year, it would look like disquised wages trying to save paying employment taxes on them and could draw IRS attention and cause them to want to "recharacterize them" as wages.

You need to have notes on it in the annual minutes of the corporation and documentation, in case IRS sends you an "inquiry" correspondence.

Generally, C Corporations pay dividends, not S Corporations.

[lKgarcia2020]

Thank you.  This should be just an adjustment for this year.  My first year doing my own return and so I'm able to really understand what my accountant was doing and clean everything up.  Loving TurboTax so far.