Let's examine this part: "since he didn't 1099 it."

When you work for an S Corp, you are an Employee and get paid through payroll and get a W2.

If you are a shareholder, you never get a 1099-M from your own entity.

All of which means this: "The question is shouldn't the K-1 loss of ($50,000) be deduct from the $70,000 and leave a balance of $20,000 as income??"

Likely is not the right question to be asking. It seems the 1120S might need to be amended and payroll for 2019 needs to be fixed.

Thank you for your response.  

Since I have to work with what i am given, i have to figure out the best case to prepare his taxes. 

I can not go back to him and say, you have to go back and convert the $70,000 cash withdrawal  into payroll and issue yourself 2019 W-2.   I can ask him to do that moving forward.  

Any other suggestions? 

"I can not go back to him and say, you have to go back and convert the $70,000 cash withdrawal  into payroll and issue yourself 2019 W-2."

You could have last December when you first asked about the situation... just sayin'

https://proconnect.intuit.com/community/proseries-discussions/discussion/yes-i-prepared-the-1120-s-a...

And actually, yes you CAN ask him to go back and convert the $70,000 cash withdrawal  into payroll and issue yourself 2019 W-2.  The pain of doing it the right way should get his attention.

You can also decline to prepare the incorrect returns

"Any other suggestions?'

Well, you can both wait until the IRS "asks" for this to be done. Of course, it's going to cost a lot more, the longer you wait.

A cash withdrawal to an owner/employee is not deductible, so the company profit is really 20k. That should be on the k1. Have the preparer fix it.