Ok, maybe I'm confusing things with semantics.

I know you don't reduce APIC with distributions.

When the company pays back the shareholder for his contributions that were reported as APIC, can that amount be reported, not as a distribution, but as a reduction in the shareholder's APIC account without raising red flags?

The $200K amount the shareholder contributed in 2021 would be reported on the Basis Info Wks as Stock/loan contributions under the Stock Basis column. Accordingly, this amount would increase APIC on the Schedule L balance sheet since it isn't reported on Sch M-2.

As Jeff pointed out, this would increase the shareholder's basis.

Is this the correct way to handle this situation?

Thank you.