S-Corporation Dividends for Tax Payments

[taxlady2008]

In 2019 when the economy was going strong, ABC S-corporate recorded a loan to the 100% shareholder to pay estimated taxes (booked as a shareholder loan).  Normally, the following March (2020), dividends are paid for the remaining tax due to the shareholder and to pay off the loan which paid the est taxes.  The loan would be paid off with the dividend payment.   With the 2020 economy tanking, the taxpayer now has a $500,000 loss.  If the dividend is declared, the taxpayer would owe capital gains tax on the distribution because he has no basis to take the distribution from.  Has anyone else run into this?  What did you do?  I am thinking of keeping it on the books as a loan and wait until the company makes money in order to make the dividend payment which pays off the loan to the shareholder for the tax disbursements.  If we would have declared and paid the dividend in 2019, this wouldn't be an issue because the shareholder had basis.  Now, with the loss, he has no basis (loss in excess of basis). What is everyone else doing?  

[qbteachmt]

"ABC S-corporate recorded a loan to the 100% shareholder to pay estimated taxes"

It doesn't matter what the person did with the funds.

"dividends are paid for the remaining tax due to the shareholder"

S Corp has no dividends provision, and there is no "tax due" to anyone. Were you posting these payouts as if that is Expense?

What you have is, someone trying to justify a Distribution.

"and to pay off the loan which paid the est taxes."

You don't give them more money; you write off that loaned balance as a distribution.

"With the 2020 economy tanking, the taxpayer now has a $500,000 loss."

Was there a loan document signed? Were any payments ever made? Was interest imputed? Or is there not really a loan involved here?

[taxlady2008]

I actually book it as an employee advance and then the shareholder repays it with the dividend.  No interest or loan documents are drawn up because its usually outstanding for a short period of time.  The only accounts that are hit are cash and employee advance.  When the dividend is given, it is employee advance and dividend account.  No expense count is involved since the Scorp doesn't own tax.  When the company was successful in 2019, it wasn't a problem to give the distribution because he had basis to cover it.  We don't pay the dividend until the following year which is why the issue since now there isn't enough basis for the distribution due to the large loss in 2020.  I am thinking I have two options, Pay the dividend and have the shareholder pay capital gains tax or convert the advance to a loan (with loan documents and interest) and wait until his basis is back up to issue the dividend and payback the loan.  I don't think I have an other options?  I would have to think a ton of people are in this same boat.

[qbteachmt]

You would treat that Advance as if it was a Distribution originally. There was never a Dividend to an S Corp Shareholder, to turn around and repay an Employee Advance, but then you called it Shareholder Loan. That's really just running in circles.

I'm not sure which things you need for reference. Here are some helpful links:

https://proconnect.intuit.com/community/form-1120-s/help/shareholder-basis-input-and-calculation-in-...

https://proconnect.intuit.com/community/schedule-k-1/help/distributions-loan-repayments-frequently-a...

https://proconnect.intuit.com/community/schedule-k-1/help/basis-limitation-frequently-asked-question...

https://proconnect.intuit.com/community/lacerte-tax-discussions/discussion/how-do-i-enter-gain-on-ex...

[taxlady2008]

 I re-read what I wrote and I didn't really explain myself properly in the first question.  Thank you for the information.