Is it allowed that 1120S balance sheet with retained earnings? Or the retained earnings need to be distributed by K1 to business owners?

[kwyp]

The net earnings from S Corp is supposed to be split into two parts: W2 income and distribution. 

If the balance sheet of S corp with retained earnings, assume retained earnings equals 25K. Does IRS allow S corp to carryforward its retained earnings to the coming year without paying tax? 

[TaxGuyBill]

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@kwyp wrote:

The net earnings from S Corp is supposed to be split into two parts: W2 income and distribution. 

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No, the individual taxpayer has earnings from W-2 income and pass-through income from the corporation (the corporation's profit after paying wages).  Distributions are separate.

In other words, the taxpayer will pay tax on the profit of the corporation (after W-2 wages), plus their W-2 wages, regardless of their distributions.

[BobKamman]

In other words, the profit that is not distributed is the retained earnings.

[kwyp]

Does  1120 S allow not distribution?

I think only C Corp can keep retained earnings to a limited amount thus to avoid paying tax 

[qbteachmt]

There is no "supposed" to be split. It's "supposed" to pay reasonable compensation for services, so marketplace wage. Not a Split of any specific type. What the IRS doesn't want to see is all distribution and no payroll for the shareholder. That's because the Supreme Court ruled that corporations are their own separate entity. The corporation needs to hire a human to do the work. That human is an employee. That means payroll.

Yes, an S Corp is not forced to make distributions. But that is a pass-through entity. Taking or not taking the excess money is not the taxable event. Making profit is the taxable event. Whether the "excess" money is held in the entity's bank account or distributed or spent on inventory, the entire (net income) of that corporate year still is taxed, because it got generated in a taxable manner, and this entity is taxed on that money. What you call the excess as retained earnings, is not the taxable amount. It's from the full taxable amount.

[kwyp]

Hi Bill, 

Thank you for your input. Here is my understanding about retained earning after search. 

Retained earning is after tax money, the tax is paid on Sch E on 1040 through K1. 

if retained earning stays with 1120S, if distribute, it is called owner's draw, it is a no tax related transaction.

If retained earning stays with 1120C, if distribute, it is called dividend, it will be distributed by 1099div. 

Please correct me if I am wrong. 

[qbteachmt]

"Please correct me if I am wrong."

Again, this is not a ProConnect software question. It's a tax lesson, and you need to look elsewhere, because what you get here are generalities and basics. Not the in depth give-and-take that will help you learn.

In general:

Retained Earnings are part of Equity, or "ownership position" in that the entity has this value in and of itself. That value is from the math (the Accounting Equation):

Assets = Liability + Equity

or, you can subtract Liability from both sides, and this still is the same statement:

Assets minus Liabilities = Equity

Or, what is owed stands against what is owned. I teach this lesson as, if I were to be hit by a bus, you would sell off everything I own (assets), pay off all amounts I owe (debts, liability) and the difference (equity) you can keep and party with.

"Retained earning is after tax money"

No.

Retained earnings is not Money, but value: Net Assets (the term used in not-for-profits and governmental entity accounting). Perhaps they don't have much money, but they have large shop tools, forktrucks, over the road equipment, buildings. That is reflected in Equity as the value reduced by the liability. Money is an asset. Buildings are an asset. Money in the bank might be loan proceeds. That means it's not been taxed. That's why Equity such as Retained Earnings is Value, not Money.

You likely need a class for learning basic accounting and how to read the financial reports: Income Statement (Profit and Loss report), Balance Sheet, Statement of Cash Flows. Also, operating and performance reporting would be useful.

Entities:

Sole Proprietorship, the person is their own business (even though they might also have employees). There is no separation of self from the business activity. All assets, liability, and equity belong to that person. That person can take money from the business at any time. This is an Owner. The taking is an Owner Draw. The business tax form of Schedule C is how this owner reports their business success or failure onto their 1040. "Form" 1040 is the tax return. "Schedules" such as C are attached details that flow to the 1040.

C Corp, an entity type that stands alone from the shareholders. There is no Owner. There is no Draw. No one at Ford or Microsoft or Walmart can just take money any time they want to. The shareholders get part of the success of the business as a dividend, which justifies their investment in the company. That investment is in the form of Stock shares. Just because money gets "distributed" (which is an adjective = spread out or shared), it's not a Distribution (which is a noun). The C Corp also files taxes and pays taxes and uses Form 1120. Related Schedules cover the various operations and details that corporation is involved with.

S Corp, an entity type for smaller shareholder pool, not all the different Classes of shares, and is sort of an alternative to being C Corp. There is no Dividend here. There is no Owner, so no Draw. If there is any distribution declared, all shareholders get an amount prorated to their shares held. Any shareholder working for the company is an employee; there are many rules for this as a way to avoid special treatment and avoid allowing the shareholder to shift personal costs to the business. That's why you'll see ">2%" or "10% or more" limitations and requirements. S Corp files Form 1120S. It is a pass through entity for Federal taxes, although some States now have a tax paid at the entity level.

Partnerships file a Form 1065. There is no payroll for partners. There are distributions (partner draws) pertaining to profit, and a provision for Guaranteed Payments. Things here can be inequitable, and one member/partner might be the controlling (general) partner. This entity type can elect to be treated as a Corporation. More often, they form a legal entity at the State level for risk and protection, and that is LLC, LLP, etc.

1099 is an information form. There are various types of reasons and differing limits for why the IRS wants to know about something. 1099-Div is not issued by sole proprietorship, S corp or partnership.

K-1 is the way you deal with the pass-through information, and a Sole Proprietorship has no K-1. There is no one else to notify, in other words.

This doesn't even begin to approach 501(c)(x) entities (charities and not-for-profits), or foundations, or governmental accounting, payroll, employment benefits, or details such as UBIT.

You really need to pick what you want to know, then go learn about it.

[kwyp]

Thank you for your explanation with precise tax concepts and understanding. 

Based on your input, here is my updated summary:

Retained earning is part of equity but after paying tax. (it can be cash or property) 

for LLC, transfer retained earning to personal, it is called owner's draw

for S corp, tansfer retained earning to personal, it is called shareholder's distribution 

for C corp, transfer reained earning to personal, it is called dividend issued by company through 1099div

[qbteachmt]

You really need to get off the internet. You are close in concept, but not quite right for purposes of tax prep.