Distribution excess of basis 1120

[michele]

SCorp took a large distribution beyond basis. I know I need to report it as a capital gain on 1040. Does this bring the basis on the Scorp basis back to k to 0. We are talking several hundred thousand dollars.

I know how this happened. They had a ppp loan that was very large. Yes they used for payroll. but they had a large profit plus the nontaxable ppp so they just took the money out of the corp. What makes it look worse they did not payoff the loans. so It created this excess.

thx Michele

[TaxGuyBill]

Was the PPP forgiven during the tax year?  If so, that increases Basis.

[michele]

yes it was . On the balance sheet shows him with -179,000 in retained earnings. but it does subtract it from the M-2 anaylis. The total from the m-2 shows a reduction of $283,000 in non taxable income..I would assume I would have to show as a capital gain on his  1040.  So in theory he has  a negative retained earnings and still 369,000in nontaxable earnings  on m-2 going forward. I don't like when they don't ask before they do this stuff. Sets you up for an audit when you are taking close to a 1,000,000 in distrubtions and not taking the kind of salary to justify this.

[TaxGuyBill]

I'm not any good at helping with the balance sheet stuff, but I'm still unsure about your comment about distributions in excess of Basis. 

You seem to have said the large distributions were from (1) large profit and (2) PPP.  Both the profit and forgiven PPP increase Basis, so distributions from profit or PPP would not be in excess of Basis.

In answer to your question, yes, Basis does not go below zero and the excess distribution would be a capital gain on the 1040.  But as I mentioned above, profit and forgiven PPP increase Basis, so I'm unsure if there really was a distribution in excess of Basis.

[abctax55]

"...I don't like when they don't ask before they do this stuff. Sets you up for an audit when you are taking close to a 1,000,000 in distrubtions and not taking the kind of salary to justify this."

Salary is based on the services performed/provided to the entity, based upon reasonable compensation for such services. Salary has NO direct correlation to the amount of the distributions or even to the net income of the entity.

PPP loans increase basis... make sure that amount is factored in. 

[michele]

thanks for input. When you are the owner of a thriving company  when your take a distribution

10x what you are paying yourself I think you are heading down the wrong path. Everyone wants to save on their taxes but reasonable compensation is just that reasonable.

thx

[sjrcpa]

If you had a large profit, especially in a COVID year, maybe you are entitled to take a large distribution.

[abctax55]

And 'reasonable' compensation is just that  and it's based on *services rendered*.

It is not based directly, or even indirectly, on net income of the current year. 

$100K in distributions vs how much in salary vs hours worked vs number of employees vs capital invested?

ALL come into play to determine the 'reasonable' compensation.