How to fill out K1, Distributions for an S Corp

[dnmalkin]

Hi,

I am doing an S-Corp for my business this year. I have decided to only do it for this year.

I am sole proprietor, so for basis, to keep it simple, I am the only employee and everything gets paid out to me 50/50 (50% Salary, 50% distribution). I will do as follows (sample figures):

Initial contribution:  $0

Earnings: $120,000

Expenses: $20,000

Of the remaining $100,000,

    $50,000 to Salary & $50,000 to Distributions

I assume that TT Business will then fill out K1

Would you tell what boxes should be filled in for this example on K1?

Perhaps something like:

Box 1: 100,000

Box 16D: $50,000

What box does $50,000 Salary go into on K1?

Also, would you explain why it is bad to keep a chunk of $50,000 undistributed? This would save money on taxes but I think you have to distribute it at some point in a future tax year.

Thanks

[PatriciaV]

Distributions to the members of an S-Corp are entered in TurboTax Business using the step-by-step interview under Business Info >> Shareholder Information. Using the interview process will ensure that the distributions are correctly reported on all forms in the return.

1. From the Shareholder Information Summary page, click Done Entering Shareholders.
2. From the Enter Shareholder Ownership Percentages, click Done.
3. Answer Yes on the Distributions to Shareholders page and click Continue.
4. Enter the total amount of Cash or Property distributed to the Shareholders and click Continue.
5. Continue to the end of this topic.

The distributions you entered are allocated according to the ownership percentages and reported on Schedule K-1 Line 16, Code D.

The S-Corp income is entered under Federal Taxes >> Income (or under Rental Real Estate Income, if the S-Corp owns rental properties) for whatever income source applies. Net income appears on Schedule K-1 Lines 1-3, depending on type.

Owner Salaries are entered under Deductions >> Salaries and Wages. Be sure to enter the amount under the correct box. Salaries for Officers who own more than 2% of the company are entered in Box 1. Salaries & wages are reported on Form W-2, which has a January 31 deadline for mailing to the recipient (this form is not part of the 1120S return). Salaries and other deductions are applied to total income to arrive at net income allocated to the shareholders on Schedule K-1.

Distributions are first applied to contributed capital. Return of capital is not taxable. Any distribution in excess of the shareholder's basis is taxed as ordinary income. If you have not made contributions to the S-Corp, retaining cash is a business decision, as the funds will be taxable no matter when they are distributed. 

You may wish to review the Shareholder Basis worksheet (Basis Limitations Worksheet) to see how allocated income and distributions affect your basis in the S-Corp. As stated on the form, this worksheet will help you complete Form 7203 that is part of your 1040 return.