Distributions with Basis

[TaxGirl11]

Questions for my tax experts.  Would you recommend an S corp shareholder take distributions up to their basis each year?  If the company doesn't have the money to pay the distribution out, they can put it in a distribution payable account where the distribution has been granted but not paid.  If there is a positive basis in one year, but the next year they have a substantial loss that eats up their basis, they lost the ability to get money out of the company without paying capital gains.  I think it would be best to take money when you have basis and pull from it when you need it.  What are your thoughts?

[sjrcpa]

Why?

[IRonMaN]

I’ll second that why.

[WAAZCPA2762]

I will third that.  Dont' know why you would do that.  If you pay distributions to use up their basis, and the next year they incur a loss, you have no basis to absorb that loss and they then are not allowed to take that loss on their Form 1040.  I think you may have a capital gain situation then too.   You are aware of the "Reasonable Compensation" requirement that SCorp Owners need to pay themselves via W2 wages?  If the IRS sees that large distributions are being paid out and a reasonable wage is NOT they can assess the distributions as wages, which includes the requirment for payroll taxes, which at that point the SCorp is late in paying and is assessed penalties and interest on that.  

I don't think SCorps have the restriction on how much they can accumulate in Equity like C Corps do.  So there is no penalty for the Shareholder to leave the money in the SCorp, they've paid the tax on the net income already.  Take the distributions if they need to, but if there is no money in the bank to actually pay it, don't know why you would accrue it as a payable.  I guess another question would be how many shareholders are in the SCorp and does the operating agreement call for this? or for a certain amount to be distributed to a certain Shareholder?  If not, I wouldn't do it.  If the operating agreement does state this, it should be re-evaluated, if the distributions are leaving no cash left in the bank account it doesn't really look good for the SCorp or for the Shareholder.

 No money in the bank and an accrued payable for distributions to the Shareholder would seem to me that the SCorp and/or the Shareholder were in financial trouble.  No money in the SCorp bank to pay the company expenses, but you book a distribution to the Shareholder?   Pay a reasonable W2 wage and then pay distributions if the profit warrants it, but should be keeping some money in the bank for the company's future expenses and to further grow the company.  

[dkh]

you're saying clients have a year with basis (profits) but not enough cash to take distribution to wipe out basis    so you want to create a payable to pull this basis in a year with loss......

I follow your thought process but..........how is there not enough cash when they have profits but there would be cash available to pull from the distribution payable in a loss year ?

My clients generally have a poor cash flow in a loss year.

[Strongsilence-CPA]

1. @dkh I don't know.  Loans would provide cash and basis if the right type of loan

2. Capital gains from distribution > basis are okay if at 0% right?

3. My biggest S Corp client shareholder has high profits, high wages, flexibility in distributions, CA PTE (limited by SSTB), rental losses (passive, no material participation).  Exciting work for me but also a bit daunting for me to do good tax planning. The more I know, the more I don't know.

[qbteachmt]

One thing I can imagine is the corporation is asset heavy with illiquid, tangible and fixed assets (equipment, inventory), so the balance sheet looks fine but someone doesn't understand cash flow. It's hard to eat a fork truck.