My wife and I own an S-Corp (50% each). The business has basically failed and the value of the company is 0. We have almost $800k in paid in capital in the balance sheet. We are keeping the company intact because of some existing litigation with a landlord. Is there a way to write down the value of the paid-in capital as an interim step before folding the company in 2014? All assets purchased (3 retail stores and fixtures) have been disposed of and the only business left is a small consulting business. There is a minimal income still coming in.

“ wife and I own an S-Corp (50% each). The business has basically failed and the value of the company is 0. We have almost $800k in paid in capital in the balance sheet. We are keeping the company intact because of some existing litigation with a landlord. Is there a way to write down the value of the paid-in capital as an interim step before folding the company in 2014? “=======>If you take a d/b from the S corp when retained earnings( I guess I need to call them as AAA/SH stock basis) of an S corp( actually not r/e as S corp usually passes thru its rev to SH) is negative( in order to accommodate this transaction ,by reducing APIC). Then,Distributions can use up basis in the AAA, then basis in APIC and Stock. I think you're technically supposed to just let retained earnings go more negative. As long as you,the shareholder, have basis, there's no tax issue. From a legal standpoint, yoiu may be creating liability. In general the distributions paid by an S corp to the S corp shareholders are not taxable to the shareholders. In some state, liability attaches to shareholders who receive d/b in excess of retained earnings . In other words, as an S corp shareholder and you receive a $100K distribution check from an S corp in which you own shares, you generally are not taxed on the $100K. As a shareholder, you pay taxes on your proportionate share of the S corp's profits. For example, if you and a buddy equally own an S corporation and the S corp makes $250k, you will each need to pay the income taxes on your $125k shares of the S corp's profits.Note that it won't matter whether or not this money is retained by the corporation. Even if the corporation keeps the profits, you will still be taxed on the profits.You don't normally book the reductions to APIC or stock and post the whole amount distributed to retained earnings. As long as those 3 accounts still net to a positive number you are ok. If that goes negative you must have a loan from shareholder, liability, in order to deduct tax losses or distributions from.

As long as the total distributions in excess of AAA account ; The AAA account is reduced to zero but not below and I know that is the rule. There is an override that allows the return to show a AAA balance that is negative. Couple of choices. Set up a note from the S/H to the corp to repay the excess distribution with interest and reclassify the excess as a s/h receivable, or stick the debit onto Sch L, Line 25 with an explanation. If it is not reclassified as s/h loan, it will result in cap gain recognition at the individual level as well.