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Entering distributions in excess of retained earnings for Form 1120S in ProSeries

by Intuit Updated 7 months ago

When entering a distribution in excess of retained earnings in Intuit ProSeries, the Schedule M-2, line 7 only enters the distribution up to the amount of retained earnings.

Per IRS Pub. 542:

"Amount distributed. The amount of a distribution is generally the amount of any money paid to the shareholder plus the fair market value (FMV) of any property transferred to the shareholder. However, this amount is reduced (but not below zero) by the following liabilities:

  • Any liability of the corporation the shareholder assumes in connection with the distribution.
  • Any liability to which the property is subject immediately before, and immediately after, the distribution.

The FMV of any property distributed to a shareholder becomes the shareholder's basis in that property."

Where to find the excess:

Open the Schedule M-2 / Retained Earnings Worksheet, and scroll down to the Schedule M-2 / Retained Earnings Memo Smart Worksheet, line G. This is the amount of distributions in excess of retained earnings.

How this line is calculated:

Calculated on this line are distributions in excess of those allowable from retained earnings.

For example, the amount of distributions entered on the Schedule K, Shareholders Distributions and Dividends Smart Worksheet, line A, is greater than the allowable distribution amount available in retained earnings.

You may need to adjust the end of year balance in another Schedule L account, such as capital stock, to bring the end of tax year balance sheet into balance.

For certain circumstances you can force ProSeries to allow the distributions on the Schedule M-2 by completing the following steps:

  1. Open the client return.
  2. Open Form 1120S, p3-5.
  3. Scroll down to the Schedule M-2 section.
  4. Print the Schedule M-2 for reference.
  5. Select No to the If Yes, use automated Schedule M-2/Retained Earning Worksheet amounts? checkbox.
    • This will cause ProSeries to not complete the Schedule M-2 automatically.
  6. Scroll back up to the Shareholder Distributions and Dividends Smart Worksheet.
  7. Remove the amount entered here.
  8. On Form 1120S, page 3-5, line 16d, enter the amount of the distribution.
  9. Using the previously printed Schedule M-2 for guidance, manually enter the Schedule M-2.
    • You may need to override calculated fields.
  10. After completing the Schedule M-2 entries, manually enter the end of year retained earnings on Schedule L, line 24.
  11. Enter any other applicable Schedule L information.
  12. Check the Schedule K-1 and see if it reflects the cash distribution.
  13. Enter an override on the S Corporation Shareholder Stock and Debt Basis Limitations Worksheet to reflect the excess amount as needed.

There will be errors in the return. Refer to this article for instructions on turning off conversion error checking so that you can e-file the return.

ProSeries Technical Support can't provide tax advice or advise you on tax-specific treatment.

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