Tax Guru – Ker$tetter Letter

Subject: S-Corp

Hi Kerry,
I just read your webpage on S-Corp vs C-Corp and was hoping you could help me with one problem I am having at work. I work for 2 partners, one owns 90% of the business & the other 10%. Each files a 1040 with their perspective S-Corp net profit. My question is if the they only distribute lets say 400K of a 600K taxable net profit and the remainder is in the bank account as operating capital, then when would they be able to distribute the remaining 200K they are being taxed for? Also is there an account I should open to keep track of there proportionate taxable income they are not receiving? Thanks for your help.

A:

Accounting for an S corp’s equity accounts is essentially the same as it is for a partnership. There should be a Capital account for each shareholder to keep a running tally of his/her capital contributions, capital withdrawals (aka Dividends), as well as annual shares of the net income or loss. This will enable you to see the amount of each owner’s equity that can be taken out tax free.

You should have the professional tax advisor who prepares the 1120S assist you in setting up your QuickBooks or other formal accounting system to be in sync with the tax returns.

Good luck. I hope this helps.

Kerry Kerstetter

Thanks for your help Kerry I do appreciate it.