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Shareholder Distribution negative balance

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Level 4
last updated ‎December 07, 2019 11:04 AM

I do a client's bookkeeping and taxes. Their taxes before were simple, schedule C, now they are an S-corp. Their shareholder distributions keep going negative in quickbooks under their owners equity account. So all distributions are now negative. I understand Net Income will close out to Retained earnings next year. In reference to the negative balance on the "owner's equity" should I adjust this entry to zero it out for the beginning of next year, or does it remain negative? 

Some other forums say make an adjustment but I am not sure to what account. Also where do you report these Distributions on 1120s? Will I close them out to retained earnings and will they just show there or do they show on Schedule M-2 line Line 7? These are two shareholders. Thank you. 

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Level 12
last updated ‎December 07, 2019 11:04 AM

When you spend funds as Distribution, that reduces Equity. The QB function for having more than one Equity Type account means you are posting these to "Owner" equity, but in an S Corp, that would be Shareholder Distribution. Then, for the first date of the next year, you will need to offset total Distribution to "real" equity = Retained Earnings.

Meanwhile, in your Bal Sheet reporting, you also see that Net Income from the P&L for that year is part of Equity. For the first date of their new year, this amount is seen in Retained Earnings, but is not a real entry and you don't make it.

And if you open that Chart of Accounts and double-click each Equity Type account, the one opening as a Report, not as a Register (and has no register) is Retained Earnings, no matter what it got named. So, if you did not start a new file, your Owner Equity account is named incorrectly. You would have started a new file for the S Corp.

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Level 12
last updated ‎December 07, 2019 11:04 AM

When you spend funds as Distribution, that reduces Equity. The QB function for having more than one Equity Type account means you are posting these to "Owner" equity, but in an S Corp, that would be Shareholder Distribution. Then, for the first date of the next year, you will need to offset total Distribution to "real" equity = Retained Earnings.

Meanwhile, in your Bal Sheet reporting, you also see that Net Income from the P&L for that year is part of Equity. For the first date of their new year, this amount is seen in Retained Earnings, but is not a real entry and you don't make it.

And if you open that Chart of Accounts and double-click each Equity Type account, the one opening as a Report, not as a Register (and has no register) is Retained Earnings, no matter what it got named. So, if you did not start a new file, your Owner Equity account is named incorrectly. You would have started a new file for the S Corp.

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Level 4
last updated ‎December 07, 2019 11:04 AM
Thanks for the detailed reply. In this case, the reason for the distributions is because the owner used the business credit car account for personal expenses, which thus far he has stopped. But I'm trying to see how to classify them going backwards. The expenses are on the bank feed, and yes I have changed the name of the chart of accounts for "shareholder" distribution. Basically I am trying to determine how to properly add personal expenses to an account in quickbooks. So far I've added "shareholder distribution" and the balance sheet keeps going negative. What account or journal entry should I do if I need to close this out? Thanks!
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Level 4
last updated ‎December 07, 2019 11:04 AM
Thanks for the answer qbteachmt!
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Level 14
last updated ‎December 07, 2019 11:04 AM

Distributions get closed to retained earnings, too.


ex-AllStar
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Level 4
last updated ‎December 07, 2019 11:04 AM
Thanks, where do these distributions get reported on 1120S? Which schedule? Thank you.
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Level 14
last updated ‎December 07, 2019 11:04 AM

There is a Line on Schedule K and K-1 for distributions. And if owners' equity is negative, the shareholders may have distributions in excess of basis.


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Level 4
last updated ‎December 07, 2019 11:04 AM
Others have said for S corps taking out "shareholder distributions" you technically need to put them as loans from the business that have to be paid back. Thoughts?
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Level 15
last updated ‎December 07, 2019 11:04 AM
Technically - um,,, no.  Not unless there's a formal note with interest drawn up AND there really is an intent to repay.
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Level 15
last updated ‎December 07, 2019 11:04 AM

Retained "earnings" ALSO get closed to each shareholder's equity account.  Which just *might* just take care of the negative amounts you are concerned about.

It sounds like this is your first S-Corp return.  I suggest seeking help, or a mentor (IF you are a professional tax preparer).

Former Chump... umm.... AllStar.
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Level 4
last updated ‎December 07, 2019 11:04 AM
Retained earnings gets closed to each shareholder's equity? Wouldn't retained earnings be reported on Schedule L of an 1120S? If you close Retained earnings that would give you a $0 for each year.  I've seen many 1120S and most if not all have beg, and ending balances for Retained earnings. Note: although I've seen many 1102s, I haven't worked on them, and trying to get understanding on it.
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Level 12
last updated ‎December 07, 2019 11:04 AM

This is Borrowing from the business: "the reason for the distributions is because the owner used the business credit car account for personal expenses, which thus far he has stopped."

Personally using Corporate resources = borrowed, or stealing. Take your pick. If the repayment is not Actual, then you would address it in Distribution at year end, yes, and still pro rata.

"But I'm trying to see how to classify them going backwards."

Other Asset = Loan TO shareholder.

"The expenses are on the bank feed"

Expenditure, not Expense.

"and yes I have changed the name of the chart of accounts for "shareholder" distribution."

But that wasn't what happened. The New Entity has New Equity, because the formation of the corporation entailed all sorts of things, including your other shareholder. Equity did not carry over as it was.

"Basically I am trying to determine how to properly add personal expenses to an account in quickbooks. So far I've added "shareholder distribution" and the balance sheet keeps going negative."

Because this person keep Taking and Taking.

"What account or journal entry should I do if I need to close this out? Thanks!"

On the first date of the New Fiscal Year, you offset the negative (= funds already removed from the business) with the RE (= new equity that would be provided by the prior year operations).

Run the Balance Sheet to see Total Equity. Stop worrying about negative distribution. It is always negative when there is Taking. Positive = contributions to the corporation.


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Level 15
last updated ‎December 07, 2019 11:04 AM
"...You are again asking a combination of "how to for QB" and "how to for taxes."
And s/he is doing the same thing on another forum.

I will reiterate that professional help is needed.  One canNOT learn S-Corp issues or tax prep by trial & error or via an on-line forum.

And I will warn that getting it wrong can have SERIOUS tax consequences at the Corp level as well as the personal F.1040 level for each shareholder.  Both for Federal & State purposes.

I'd bring up whether the "contribution" of assets/liabilities to this S-corp has been handled correctly.  And I don't think the question of whether distributions are equal vis a vis ownership has been answered.  And I'm just scratching the top of the minefield....
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Level 15
last updated ‎December 07, 2019 11:04 AM
Interesting....the post by the same person on the same issue on that other forum is now gone.
I'm going to lock this one for now to preserve it.
OK - I have it saved off, so I'll unlock it now.
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Level 12
last updated ‎December 07, 2019 11:04 AM

For this: "Retained "earnings" ALSO get closed to each shareholder's equity account."

And this: "These are two shareholders."

For mvp using QB, the Equity accounts would look something like this:

OBE <== never post here and it needs to be 0

Shareholder 1 <== parent level Equity

Sublevels: SH1 Distributions and SH1 Equity

Shareholder 2 <== parent level Equity

Sublevels: SH2 Distributions and SH2 Equity

Now you have Clarity. You issue distributions from their specific Distribution subaccount. You "roll up" that negative as of the first date of the new fiscal year to their specific equity subaccount. You would also split the Retained Earnings to each Equity subaccount for that date, so that the new year starts with $0 in RE (it's fully allocated to each shareholder).


"you technically need to put them as loans from the business"

Are you allowing them to take distributions not pro rata to their shares held?





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Level 12
last updated ‎December 07, 2019 11:04 AM

"Retained earnings gets closed to each shareholder's equity? Wouldn't retained earnings be reported on Schedule L of an 1120S?"

Do you have a CPA inhouse? As was mentioned in your topic here: https://accountants-community.intuit.com/questions/1896747-onboarding-clients-to-qboa-cash-or-accrua...

You are again asking a combination of "how to for QB" and "how to for taxes." This forum is a great place to learn how to use the Tax Preparation programs to prepare taxes for clients, for a Professional tax preparer that has to keep current with tax rules and regulations. It isn't a great place to learn tax accountant fundamentals.



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