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Old 03-29-2015, 02:26 PM
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Not balancing - Need help with 1120S on retained earnings and owner draw

I'm working on finalizing the 1120S tax return (an extension has been filed and tax payment made prior to 3/15). The situation is my balance sheet (Schedule L and Sch M-2 need to be done but are not balancing.)

First For Sch L...

This business has one owner (100%). He pays himself an annual salary we file payroll taxes, W-2's, etc. but the owner often takes money out of the account to pay for items that are personal. I record these transactions as owner's draw because it's not business-related, such as clothes or downloading apple games/music. Now, I have $68K worth of owner draws for 2014. Where do I record this so my balance sheet balances? It says it's off because it's taking this year's profit after expenses and adding it to last year's retained earnings which is waaaaaay over what I have recorded.

Last year retained earnings were $45,595 + this year's income is $127,551 = $166,817 for this year's retained earnings that the tax program is coming up with. However, my Quick Books balance sheet says $69,360 for retained earnings this year. Does this number include last year's number or should I add it? If I add it I'm still out of balance by $47,862. If I don't add it I'm still off. The owner took $68,001.86 in draw's. Why is there such a big difference? How can I fix this? Where do I find it?

Your help is truly appreciated.

Thanks,

T



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Old 03-29-2015, 03:50 PM
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This business has one owner (100%). He pays himself an annual salary we file payroll taxes, W-2's, etc. but the owner often takes money out of the account to pay for items that are personal. I record these transactions as owner's draw because it's not business-related, such as clothes or downloading apple games/music.===============> I'm thinking you are confused between the two terms, i.e., owners draw and distributions. Or between an owner draw and a distribution for a single-owner S-corp.
Corp officers do not get draws. They need to be on payroll, as employees. Owners draw from a corp might be your partly taxable income; What you probably should do is treat all the draws as loans
and charge interest on the outstanding balance; in general, a shareholder can take money out of the corporation as a salary, loan, reimbursement, advance against profits or repayment of a capital contribution. The way the withdrawal is classified determines the tax consequences of the distribution.









Now, I have $68K worth of owner draws for 2014. Where do I record this so my balance sheet balances? It says it's off because it's taking this year's profit after expenses and adding it to last year's retained earnings which is waaaaaay over what I have recorded. ===================>>As mentioned above. On sch K1 of 1120S. a "draw" is an amount pulled from a sole proprietorship or partnership, whereas a salary is a payroll amount distributed to you by a corp. in general a corp is owned by multiple people. So, you can't take a draw as one of those owners. Instead, the IRS requires that officers in a corp receive a salary for their work. Your salary is distributed during the company's payroll process, just like the salaries of regular workers. When you receive a paycheck, typical taxes and deductions are withheld.



Last year retained earnings were $45,595 + this year's income is $127,551 = $166,817 for this year's retained earnings that the tax program is coming up with. However, my Quick Books balance sheet says $69,360 for retained earnings this year. Does this number include last year's number or should I add it?==================>>I giess it depends how the drAW IS TREATED BY THE s CORP/OWNER

If I add it I'm still out of balance by $47,862. If I don't add it I'm still off. The owner took $68,001.86 in draw's. Why is there such a big difference? How can I fix this? Where do I find it? ===========>>The S corp woner/EE’s draw needs to be reorted on his w2 on 1120s line 7, not part of r/e on SCh M2 of 1120S. To prevent S corps and their shareholders from avoiding payroll taxes by maximizing distributions and minimizing compensation payments, the IRS requires S corps to pay shareholders who provide substantial services reasonable compensation.



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Old 03-30-2015, 12:36 AM
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Quote:
Originally Posted by Wnhough View Post
This business has one owner (100%). He pays himself an annual salary we file payroll taxes, W-2's, etc. but the owner often takes money out of the account to pay for items that are personal. I record these transactions as owner's draw because it's not business-related, such as clothes or downloading apple games/music.===============> I'm thinking you are confused between the two terms, i.e., owners draw and distributions. Or between an owner draw and a distribution for a single-owner S-corp.
Corp officers do not get draws. They need to be on payroll, as employees. Owners draw from a corp might be your partly taxable income; What you probably should do is treat all the draws as loans
and charge interest on the outstanding balance; in general, a shareholder can take money out of the corporation as a salary, loan, reimbursement, advance against profits or repayment of a capital contribution. The way the withdrawal is classified determines the tax consequences of the distribution.









Now, I have $68K worth of owner draws for 2014. Where do I record this so my balance sheet balances? It says it's off because it's taking this year's profit after expenses and adding it to last year's retained earnings which is waaaaaay over what I have recorded. ===================>>As mentioned above. On sch K1 of 1120S. a "draw" is an amount pulled from a sole proprietorship or partnership, whereas a salary is a payroll amount distributed to you by a corp. in general a corp is owned by multiple people. So, you can't take a draw as one of those owners. Instead, the IRS requires that officers in a corp receive a salary for their work. Your salary is distributed during the company's payroll process, just like the salaries of regular workers. When you receive a paycheck, typical taxes and deductions are withheld.



Last year retained earnings were $45,595 + this year's income is $127,551 = $166,817 for this year's retained earnings that the tax program is coming up with. However, my Quick Books balance sheet says $69,360 for retained earnings this year. Does this number include last year's number or should I add it?==================>>I giess it depends how the drAW IS TREATED BY THE s CORP/OWNER

If I add it I'm still out of balance by $47,862. If I don't add it I'm still off. The owner took $68,001.86 in draw's. Why is there such a big difference? How can I fix this? Where do I find it? ===========>>The S corp woner/EE’s draw needs to be reorted on his w2 on 1120s line 7, not part of r/e on SCh M2 of 1120S. To prevent S corps and their shareholders from avoiding payroll taxes by maximizing distributions and minimizing compensation payments, the IRS requires S corps to pay shareholders who provide substantial services reasonable compensation.
Thank you for your reply.

He already receives a salary and therefore gets a W-2. Are you saying I should report his draws as part of his income and therefore add these amounts to his W-2? I've already done the W-2/W-3 so I'd need to amend this. Is there any other way to do this? He takes 'draws' in addition to his salary. I consider a 'draw' when the owner takes money out of the company that he is not particularly entitled to. He is basically a sole proprietor as there are no other owners. It's an S Corp. I know the IRS watches for abuse on corporate finances such as draws so he is receiving a salary.

You indicated to put the amount on line 7 of the 1120S. Only the draw right because he already has salary listed on line 8.

Thanks again,

Traci



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Old 03-30-2015, 02:45 AM
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He already receives a salary and therefore gets a W-2. Are you saying I should report his draws as part of his income and therefore add these amounts to his W-2? ===========>>>>One of the possible scenarios; as said, Corp officers do not get draws.aslonghis draw is treated as wage , it needs to neds to be reported on 1120S line 7 and on w2;for example, say, he owns 100% of the stock of the S Corp. he is also the corp’s president and only employee. The corp generates $100k of taxable income, before considering his compensation. If he draws a $100k salary, then the corp’s taxable income will be reduced to zero. he reports $100k of wage income on his individual income tax return on 1040 line 7 from his w2 , and the corp and he are liable for the necessary payroll taxes. The corp is required to pay $7,650 (7.65% of $100k) as its share of payroll tax, and the corp withholds $7,650 (7.65% of $100,000) from his salary toward his payroll obligation, resulting in a total payroll tax bill of $13.3k.
Another possible scenario is: say, Alternatively, he withdraws $100k from the corp as a distribution rather than a salary. The corp’s taxable income will remain at $100k and will be passed through to him and reported on his individual income tax return aslongas the distribution exceeds his inside basis, where it is not subject to self-employment tax. The $100k distribution is not taxable to him, aslongas the amount is less than his basis. By choosing to take a $100k distribution rather than a $100k salary, the corp and he have saved a combined $13.3k in payroll taxes. however, in light of these potential employment tax savings, the IRS has long challenged attempts by shareholder-employees to minimize compensation in favor of distributions.


I've already done the W-2/W-3 so I'd need to amend this. ===========>

I guess so aslongas you treat his draw as salary/wage as said above.

Is there any other way to do this? He takes 'draws' in addition to his salary. I consider a 'draw' when the owner takes money out of the company that he is not particularly entitled to. He is basically a sole proprietor as there are no other owners. It's an S Corp. I know the IRS watches for abuse on corporate finances such as draws so he is receiving a salary.=========>>>>>>>>>Then as said again, you may treat it as distribution from his S corp , in this case, you need to reduce his inside basis.

You indicated to put the amount on line 7 of the 1120S. Only the draw right=====>>>>>>>>>>>as said one of the possible scenarios in treating draw from a corporation.
because he already has salary listed on line 8.======>>>>>>>>>>his wage /salary on W2 needs to be reported on line 7 NOT on line 8. Distributions and other
payments by an S corp to a corporate officer must be
treated as wages to the extent the amounts are reasonable compensation for services rendered to the corporation.you need to enter on line 7 the total compensation of all officers paid or incurred in the trade or business activities of the corporation.The corporation determines who is an officer under the laws of the state where it is incorporated. You need to enter on line 8 the total salaries and wages paid or incurred to employees
other than officers ( aslongas the S corp hired an employee)during the tax year.



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Old 03-30-2015, 10:29 AM
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I am forever grateful for your assistance. You've helped me so very much as I was really stuck. Thanks!
T



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Old 03-30-2015, 03:47 PM
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Originally Posted by twell View Post
I am forever grateful for your assistance. You've helped me so very much as I was really stuck. Thanks!
T
thanks a lot.good luck~



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