Tax Return entries for Owner Distribution of S-Corporation?
Posted on September 11, 2008 by admin
I am a 100% owner and sole employee/principal of an S-Corporation that was converted from a C-Corporation on 1/1/2006.
For 2006, I have paid myself $32k in W-2 income and have made Owner Distributions (not W-2 payroll) of $49k. As of 12/31/06, there is approximately $20k remaining as Profit (and in cash) for the company.
I understand that my personal tax return will include the $32k W-2 wages as well as the $49k distribution.
A few questions:
(1) I understand that Owner Distributions are a return of equity but am not sure where on an 1120-S (or K-1?) the entries appear for this distribution. I assume this is NOT a deduction for the company.
(2) As for the remaining $20k profit/cash, I believe that I am personally responsible for taxes on this amount for TY 2006, right? Does it make sense to distribute it? If so, in 2006 or 2007?
(3) Lastly, if I distribute the addt’l $20k in 2006, am I looking for trouble from the IRS to have $32k W-2 and $69k Distribution?
Thank you.
You should get professional tax preparation help, particularly since you converted from a C Corporation.
Generally an S Corp passes through all income and expense to the shareholders via the K-1 for inclusion on the shareholders’ returns.
Distributions of cash (and/or property) to shareholders only decrease the shareholders’ stock cost basis.
Without a lot more detail about the business, nobody can say for certain whether you will have trouble over the $32K salaries and wages. But I would sure be ready to defend that as reasonable fair market compensation for the work that you perform. The IRS tends to get a bit sticky about folks trying to dodge employment taxes.