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L
LogineticsLLC
November 12, 2024
Question

How to record & correct owner draw that was not taken.

  • November 12, 2024
  • 1 reply
  • 0 views

My consulting business is LLC filing as S.  Just me and my wife as owners / employees.  We pay ourselves monthly, billing our clients bi-weekly.  

We have no need for additional owner equity.  We'd like to end the year with $0 in the bank, but practically that's not possible since we have to run payroll 12/31 to pay ourselves for December.  So we accumulate customer payments in December for a paycheck in January.

But on December 31st of 2023, we ended the year with more money in the bank than required.  This was attributed to us on the K-1 and was taxed on our personal returns.

 

I want to withdraw this money from the account before the close of 2024.  How do I record the transaction so that it's not taxed again?

 

1 reply

Rainflurry
Rainflurry
November 12, 2024

@LogineticsLLC 

 

As long as you have adequate stock basis, you can take that money out via a distribution anytime and it's not taxed because you already paid income tax when it was reported to you on your K-1.  Taking a distribution from an S-Corp is taxed as capital gain only if it exceeds your stock basis.  Your 2023 year-end basis is listed on your 2023 Form 1120-S, Schedule M-2, line 8.  Any contributions you've made or income the business has generated in 2024 increases that amount.  Any distributions, losses or other reductions in 2024 reduce your basis.

 

 

    L
    LogineticsLLCAuthor
    November 13, 2024

    There is no stock basis.  When we created the LLC, we simply put $1000 in the bank to open the account.  So our equity in the company is $500 each.  

     

    But the way profit is calculated and taxed is based on the difference between the beginning bank balance and the ending bank balance.  Let's say I neared the end of 2023 with $10K in the bank.  If I had done this correctly, I'd have drawn out that money before 12/31, categorized it as an owner-draw, and paid taxes on it, and ended with 0. But I did not.  So now that money flows through as $5K each to me and my wife as profit.  We paid that tax out of personal income on our joint 1040 as the $10K was never touched.

    Rainflurry
    Rainflurry
    November 13, 2024

    @LogineticsLLC 

     

    "When we created the LLC, we simply put $1000 in the bank to open the account. So our equity in the company is $500 each."

     

    You file as an S-Corp so the term "stock basis" is what tax accountants understand to be reported on Schedule M-2.  If you had $10K in undistributed income taxed in 2023, then your equity should have increased by that much.  Therefore, you should have $10K showing as Retained Earnings (RE) in the equity section of your balance sheet as well as on line 8 of Schedule M-2 of your 2023 return.  Do you see that?  Your question is from a tax perspective and the only way to know if you can distribute the $10K and not pay cap gains on that is to make sure you have adequate basis to cover the distribution.  I have personally been bit a couple of times by taking distributions from our S-corps in excess of basis and paid significant costs for doing so.   

     

    "If I had done this correctly, I'd have drawn out that money before 12/31, categorized it as an owner-draw, and paid taxes on it, and ended with 0. But I did not. So now that money flows through as $5K each to me and my wife as profit. We paid that tax out of personal income on our joint 1040 as the $10K was never touched."

     

    If it's as simple as that, then you can distribute the $10K anytime tax-free.  If it were me, I would confirm that I have adequate basis based on 2023 Schedule M-2, line 8, increased by any income not yet distributed in 2024 and reduced by any distributions taken in 2024.     

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