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Old 03-05-2011, 03:51 PM
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Do I Need To Amend My S-Corp Return?

For some odd reason, my CPA listed my shareholder distributions as loans and did not include the distributions on the k-1. Is this something I need to amend my 1120s for? When I asked her about it she said it was no big deal because money flows in and out of corporations regularly and can be "wiped away at any time".

I also noticed that she reported an excess of $500 in office expenses then what is shown on my income statement. I tried to figure out where she came up with this number but to no avail. When I asked her about it she said she didn't have time to teach me how to do a tax return and insisted it was correct.

I calculated that if I were to amend my return, the net result would be $7.50 owed to the state. Are these reasons enough to amend my return?

Could really use some advice! Thanks!



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Old 03-07-2011, 02:52 AM
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“For some odd reason, my CPA listed my shareholder distributions as loans and did not include the distributions on the k-1. Is this something I need to amend my 1120s for?”----> Shareholder distributions are deemed to be a return on the investor/employee’s investment in the S corporation,not loans for the entity. So, distributions to a shareholder must be included in the shareholders taxable ordinary income though the distributions are not subject to FICA tax and are not considered self-employment income subject to self-employment tax. The distribution will also reduce your s/h basis. It strikes many people as silly that they take their own money out of their savings account, put it into their own business, and then pay themselves a salary, plus all those taxes, with their own money.
“I also noticed that she reported an excess of $500 in office expenses then what is shown on my income statement. I calculated that if I were to amend my return, the net result would be $7.50 owed to the state. Are these reasons enough to amend my return?”---->I guess you need to file amended return. Reasons to amend a corporate tax return include discovering mistakes that were made by corporation owners or accountants, locating misplaced financial information that can change your corporate tax liability, and replying to an audit by the IRS. Corporate tax returns can be amended very easily if further information is required or discovered. If it was a calculation error, then the IRS will find and correct it ;however, since it was an error in your income and expenses you'll need to file an Amended Return.



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Old 03-07-2011, 03:16 AM
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Thank you for your response, Wnhough. I wanted to clarify that my CPA did include ordinary business income in (box 1) on the k-1, just not the amount that was distributed out of this income (box 16). Since we are taxed on the net income regardless of whether or not it was distributed, do you still think it's necessary to amend the return? I was told that reporting distributions are just for "informational purposes" and that the IRS requires you to keep track of your own basis. Not sure if that is correct though, as I've been given lots of inaccurate info from accountants through the years.

It is possible that my CPA got the extra $500 in office expenses by taking a percentage of expenses we incurred for utilities but my calculations don't quite add up to $500, more like $250, unless I'm missing something. In light of this and the above additional info, would you still recommend amending the return?



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Old 03-07-2011, 04:49 AM
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“I wanted to clarify that my CPA did include ordinary business income in (box 1) on the k-1, just not the amount that was distributed out of this income (box 16). Since we are taxed on the net income regardless of whether or not it was distributed, do you still think it's necessary to amend the return?”---->No, I don’t think so; matter of fact,I misunderstood(misinterpreted) that your CPA listed your ordinary income on K-1 in box #1 as loans. It is my bad; However, as she did include your ordinary business income on K-1 box1, it is OK. For example, distributions from your S Corp,i.e., any non-deductible, non-capital expenses and depletion including a property distribution, I mean cash distribution, on line 16d, as you know, are not taxable. The amount of this distribution will be used to reduce your cost basis in the stock. It is your responsibility to track your individual basis. All information for computing your basis is on Form 1120S Schedule K-1. Your basis in the S corporation helps determine how much tax you owe for the period, 2010.
“ I was told that reporting distributions are just for "informational purposes" and that the IRS requires you to keep track of your own basis.”---->Correct; agreed.
. “It is possible that my CPA got the extra $500 in office expenses by taking a percentage of expenses we incurred for utilities but my calculations don't quite add up to $500, more like $250, unless I'm missing something.”
- Sorry , not sure.
“ In light of this and the above additional info, would you still recommend amending the return?”---> No, I don’t think so. You are OK.



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Old 03-07-2011, 01:13 PM
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"No, I don’t think so; matter of fact,I misunderstood(misinterpreted) that your CPA listed your ordinary income on K-1 in box #1 as loans. It is my bad; However, as she did include your ordinary business income on K-1 box1, it is OK. ---> Actually, I should have been more clear. The distributions were incorrectly listed as loans on Sched L, line 7. Maybe she did this for balancing purposes? But since the net profit was correctly listed as ordinary income on K-1, box 1, I'm assuming that I'm still okay and do not need to amend, correct?
I plan to prepare my 1120 S this year so I know it's done correctly, and from what I understand, we're not even required to fill out Sched L, M-1 or M-2 because income or assets are under 250k. So there shouldn't be a problem in terms of 2009 ending balance not matching 2010 beginning balance since there will be no Sched L or M to compare it to. Do you concur?
I appreciate your responses, Wnhough. They've been most helpful and a relief.


Last edited by taxpadewon : 03-07-2011 at 01:16 PM.


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Old 03-07-2011, 11:34 PM
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“The distributions were incorrectly listed as loans on Sched L, line 7. Maybe she did this for balancing purposes?”----> I guess so( As you can see, it is TECHNICALLY incorrect to adjust for temporary differences though UNLESS actually, it IS adjusted for the timing differences; some people intentionally reduce AAA account by the depreciation temporary adjustment to make retained earnings on Sch L and M-2 in balance or etc). However, if the loan is from a shareholder(I am NOT sure if it is from you) and the loan is repaid to the shareholder,then in this case, as long as the repayment is made on the loan with a reduced basis, the repayment needs to be allocated in part to a return of your basis in the loan and in part to the receipt of income. If the income is not reported on Sch K-1 line 1, then you NEED to file your amended return to report the omitted income on line 1.On the contrary, suppose you have tax exempt interest income and didn’t report it on line 1, it is also technically incorrect, but no problem as the income is nontaxable to the IRS. (The IRS refers to distributions beyond reasonable levels of compensation as dividends. The services provided and gross receipts of the company determine what compensation is reasonable. The IRS taxes dividends as income not when distributed but rather in the year earned. Therefore, receiving the dividends does not necessarily mean the shareholder owes income tax on them.) Just for reference, the indebtedness that has been satisfied by the S-corporation, or disposed of or forgiven by the shareholder, during the taxable year, is not held by the shareholder at the close of that year and is not subject to basis reduction.
“ But since the net profit was correctly listed as ordinary income on K-1, box 1, I'm assuming that I'm still okay and do not need to amend, correct?”---> I think so; as long as you owe the IRS no tax liability.
I plan to prepare my 1120 S this year so I know it's done correctly, and from what I understand,
“we're not even required to fill out Sched L, M-1 or M-2 because income or assets are under 250k.”----> In general, as S-Corp is required to complete Sch L , M1/M2ONLY when its total assets at the end of the year or total receipts for the year are $250,000 or more. However, small businesses(corporstions.) keep records based on their checkbook or cash receipts and disbursement journal. This makes the reporting requirements for a small corporation similar to the reporting requirements for a Sch C sole proprietor ship.
“ So there shouldn't be a problem in terms of 2009 ending balance not matching 2010 beginning balance since there will be no Sch L or M to compare it to. Do you concur?”--->right, no problem.Asyou know, Sch L contains a beginning and ending balance sheet for S-corp. So, the amounts shown should agree with the corp’s regular books and records. They are not actually reported on a tax basis.I guess this what you mean.



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Old 03-08-2011, 12:21 AM
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"some people intentionally reduce AAA account by the depreciation temporary adjustment to make retained earnings on Sch L and M-2 in balance or etc). However, if the loan is from a shareholder(I am NOT sure if it is from you) and the loan is repaid to the shareholder,then in this case, as long as the repayment is made on the loan with a reduced basis, the repayment needs to be allocated in part to a return of your basis in the loan and in part to the receipt of income."--->Okay, you might have lost me here....the shareholder distributions were not loans at all, just distributions as listed on balance sheet. So there was nothing to repay. CPA just categorized it as that for some odd reason.
But the bottom line is that net income is correctly shown in Box 1, (aside from the questionable $500 office expense that CPA calculated) therefore correctly reported and shareholder distributions (which were incorrectly shown as shareholder loans on line 7 of Sched L) were not listed on K-1 box 16. However, as we've already established, distributions are listed for informational purposes only. Since the distributions that were taken out did not exceed net income reported, there is not an issue of taking out more than our basis, so no additional tax liability. So probably still okay with not filing an amended return? Thanks so much for your help!!!! Most grateful!



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Old 03-08-2011, 01:13 AM
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"some people intentionally reduce AAA account by the depreciation temporary adjustment to make retained earnings on Sch L and M-2 in balance or etc). However, if the loan is from a shareholder(I am NOT sure if it is from you) and the loan is repaid to the shareholder,then in this case, as long as the repayment is made on the loan with a reduced basis, the repayment needs to be allocated in part to a return of your basis in the loan and in part to the receipt of income."--->Okay, you might have lost me here....the shareholder distributions were not loans at all, just distributions as listed on balance sheet. So there was nothing to repay. CPA just categorized it as that for some odd reason.”---> Correct; I know what you mean. I know that as you said, “ ....the shareholder distributions were not loans at all.” I just tried to give you an example as an illustration.



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Old 03-22-2011, 11:34 PM
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Wnhough, if you're still around, I have another question for you. I was wondering if I can "fix" the fact that my CPA did not report 2009 distributions on K-1 box 16, by adding them to 2010 distributions and reporting them both on 2010 K-1 box 16. Or would it be best to only report 2010 distributions on 2010 K-1? I realize that distribution are not taxable but do affect basis and am concerned that there is no record of distributions being taken out in 2009, in the event IRS ever questions basis. There were no losses or distributions in excess of basis for 2009 or 2010.
However, as we discussed, the shareholder is responsible for keeping track of their own basis. So if I make note of 2009 distributions on a basis worksheet, will that be sufficient for keeping track of basis, rather than adding to 2010 k-1.

Thanks!



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Old 03-23-2011, 09:09 PM
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“ I was wondering if I can "fix" the fact that my CPA did not report 2009 distributions on K-1 box 16, by adding them to 2010 distributions and reporting them both on 2010 K-1 box 16. Or would it be best to only report 2010 distributions on 2010 K-1?”--->I am not sure; it depends on your financial situation. You can defer the distributions to the following year; if you had sufficient cash flow from other sources for your living expenses, you could get by for substantially longer periods without taking any cash out of the business. That's not unusual when a business is just starting out. I guess the timing of these payments has no impact on when the income is taxable, except in limited circumstances.
“ I realize that distribution are not taxable but do affect basis and am concerned that there is no record of distributions being taken out in 2009, in the event IRS ever questions basis.”---->I am NOT quite sure.I guess It depends; cash distributions of profit, current year or prior year, are tax-free because you have, or will, pay income tax on the entire S-corp profit each year. So, in many cases, distributions made by an S-Corporation are not taxable to the shareholder. As long as you have adequate basis in the corporation, the distribution is tax-free;all distributions are considered to be a return of basis in the shareholders stock. So any distributions up to the amount of basis are nontaxable. Anything over the basis is a capital gain and is taxed to the shareholder as capital gain. So, needless to say,the amount of a shareholder’s stock and debt basis is very important. Unlike a C corporation, each year the stock and/or debt basis of an S corporation goes up and/or down based upon the S corporation’s operations.The K-1 does not state the taxable amount of the distribution. The taxable amount of distribution is contingent on the shareholder’s stock basis. As said previously, it is not the corporation’s responsibility to track a shareholder’s stock and debt basis rather it is your responsibility. Most practitioners engaged to prepare Form 1120S will determine the individual S shareholders’ stock and debt bases annually and advise the shareholders of their bases at the time Form 1120S is completed
“However, as we discussed, the shareholder is responsible for keeping track of their own basis.”--->Correct; it is very important to keep track of the shareholder’s basis. This is because a shareholder’s basis determines whether a taxable event has occurred for the shareholder as a result of some activity within the business. For example, assume that a shareholder takes a distribution of $10,000 but only has basis of $8,000, then a $2,000 (capital gain)taxable event has occurred. On the other hand, if the shareholder takes a distribution of $5,000 but has basis of $8,000, then no taxable event has occurred. In general, the S-Corp is not required to keep track of the shareholder's basis. That is the shareholder's responsibility. For a lot of small businesses, there's just one or two shareholders so it makes sense for the company to track it.
“ So if I make note of 2009 distributions on a basis worksheet, will that be sufficient for keeping track of basis, rather than adding to 2010 k-1.”--->I guess you may also keep company books or records.I guess you need the accurate basis worksheet. For example, you may compare AAA, accumulated adjustments account, to the shareholder’s basis; AAA simply keeps track of the running balance. The shareholder’s basis is much different because it is measuring how much basis is available. This is fairly simple but depending on the situation, things can become very complex. For instance, if the business incurs net income, ordering rules come into play that require loan basis( if the business has) to be restored first. You need to get some professional help from your tax practitioner.



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