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Drawing from Retained Earnings of an S Corp

Forum|Forum|8 years ago
February 1, 2018
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I just completed my first year in business and want to ensure I am handling my retainted earnings account correctly. I am the sole shareholder of an S Corp and want to know if I should leave my distributions in my Retained Earnings account or transfer them into a Owner equity account and draw from there. Since I am pass thru corporation the retained earnings which remained after I paid myself a salary is my distribution (not a dividend).

I am currently leaving the money in my business checking and drawing as needed debiting the retained earnings account.

For bookkeeping purposes, is it best to just leave it in Retained Earnings or Zero out the retained earnings and deposit it into an Owner equity account and use a Draw account to subtract from my equity?

Best answer by Rustler

In an s-corp there are no owner equity accounts, you have shareholder capital and additional shareholder paid-in capital accounts.

Those capital accounts can not be used the same way equity accounts are used in a sole proprietor or partnership. In a corporation, as a working shareholder you are required to be on payroll - are you?

A corporation, even with a sole shareholder is required to have a written shareholder meeting at least annually (some states make that more often) in that meeting you vote on whether or not to issue dividends or distributions to the shareholders. Dividends and distributions are handled differently for tax purposes, and shareholder capital.

Retained earnings is what is used to "pay" dividends and distributions, the remainder stays in the corp.

I think you need to sit down with a tax accountant and verify or get things correct

RustlerAnswer

In an s-corp there are no owner equity accounts, you have shareholder capital and additional shareholder paid-in capital accounts.

Those capital accounts can not be used the same way equity accounts are used in a sole proprietor or partnership. In a corporation, as a working shareholder you are required to be on payroll - are you?

A corporation, even with a sole shareholder is required to have a written shareholder meeting at least annually (some states make that more often) in that meeting you vote on whether or not to issue dividends or distributions to the shareholders. Dividends and distributions are handled differently for tax purposes, and shareholder capital.

Retained earnings is what is used to "pay" dividends and distributions, the remainder stays in the corp.

I think you need to sit down with a tax accountant and verify or get things correct

T

tj1701Author

Yes, I already pay myself a "reasonalble" salary and yes have had the required annual meetings. The retained earnings (profits) will be pass through taxable income on my personal taxes for last year and therefore cabable of being distributed out to the shareholders (just me). I could just write myself a check and zero out the RE account, but if I choose to leave it in there. Profit distributions are untaxed because I already will have paid taxes on it in my 2017 return.

My question is more of a bookkeeping one. Leave the profits in the company (as retained earnings) and draw it out as needed or distribute profits (according to bylaws) which in quickbooks I can do by putting it into an owner equity account or writing myself a check.

My accountant is aware I want to take the profit though I may not pull it all out.

S

StacyHaun

I would agree, an S Corp is a pass through entity, thus there are no retained earnings. It is passed to you personally and taxable whether you take the profit out of the business or not. If it was originally a C Corp that elected S treatment I would use the shareholder equity and move retained earnings to your account based off the K1 information to track basis. This would also take into consideration reductions to basis such as 50% meals or fines disallowed. A standard LLC that elects to be taxed as an S Corp would still have partner equity accounts for bookkeeping purposes. Basis would still have to be tracked via the K1’s and moving the R/E to the appropriate members based on percentages. There is no such thing as retained earnings in a sole prop or partnership. Electing S-Corp treatment doesn’t change that. You only have a retained earnings in a C Corp (or C Corp that elects S-Corp treatment - these retained earnings are taxed as capital gains if not passed to the member.)

Use your K1 as a guide of your basis each year to make your R/E to equity adjusting entry. Keep in mind retained earnings is an equity account, so you’re not shifting balance, you are just adjusting the equity to the correct account/s based on percentage of ownership You are entitled to take what you have been taxed on :)

N

NDLL

@tj1701

I understand what you are saying. You can do it either way, but I have a seperate equity account to make it a little more straight foward for my accountant and easy for me to show the owners what they have taken at any point throughout the year. We are a C Corp and I labled mine S/H Distribution with sub accounts for each owner. (We are a C Corp)

N

NDLL

To clairify - I do not move the funds all at once. When I cut a check to the owners I expense it to the S/H Distribution and then once a quarter I create a JE to capture the funds from the Retained Earnings.

T

tj1701Author

Thank You.

T

Teri11_2

@tj1701

Just saw this and must disagree. No need to distort your Retained Earnings account. I have been an S-Corp single-owner for over a decade. I keep Retained Earnings in that account with a cumulative credit total balance which shows how much money my company has earned since I started biz 12 years ago.

I have a separate Distributions account with a debit balance which show the cumulative balance of total amounts I have distributed to myself in the last 12 years, which I record when I pay myself with cash or

if I pay personal expense with company credit card, which ultimately is DR Distributions and CR Cash.

This allows me to see:

Retained Earnings ($5,000,000) Taxed as earned each year for last 12 years

SH Distributions $500,000 Cash Paid to Me (not taxed since already taxed above as earned

Net Equity ($4,450,000) Amount available for me to take anytime since already taxed above

J

Jim in New England

Hi Teri,

Thanks for the detailed response, this looks like my desired set up.

Regarding the retained earnings account, do you pay taxes on the amount the account grows in 1 year, per year? And when you withdraw from this account, does it have the same taxes applied to it as a normal dividend (therefore double taxed?)

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