Excess distribution from a c corporation

[Naveen Mohan from New York]

I have a situation where client has taken money out from a C corporation where he has a zero basis in his stockholder position. right now it is not recorded anywhere except in the company checkbook. The distribution is $ 42,000 but retained earning  balance is only $ 10,000. I can classify $ 10,000 of distribution as dividend but how do I classify the remaining $ 32,000. It cannot be return of capital because he has no basis. 

He is already drawing a salary from the company.

thanks for your help.

 

Naveen Mohan   

[rfassett]

I would say, since it is a C, your only other option is a "loan to shareholder".  I do not often suggest this  because it inflates the balance sheet and banks frown on this, but your choices are limited.  I suppose a contra equity account would be better in that if does not inflate the balance sheet, but that is also a slippery slope.  You need to have a talk with your client and tell him to stop using the Corp as his personal piggy bank.  This does not work with a C.  If you go the "loan to shareholder" route, have the loan documented, i.e, have an actual promissory note drawn up.  Your other options would be things like contract labor and show it on his 1040 as other income.  Or increase his salary, but it is a little late for that if this is a 2014 issue.

Those are your options as I see them!

 

[Abby Normal]

It is return of capital even if E&P is negative. You have been calculating E&P every year, haven't you?

It is dividends up to the extent of current E&P.

Edit: If it exceeds his basis, it becomes a capital gain.

http://thismatter.com/money/tax/corporate-distributions.htm

Edited October 10, 2015 by jmdaviscpa

[michaelmars]

^^^^^^^^^^^^ ^ ^ ^ ^ ^ ^

THIS

[Patrick Michael]

It is return of capital even if E&P is negative. You have been calculating E&P every year, haven't you?

It is dividends up to the extent of current E&P.

Edit: If it exceeds his basis, it becomes a capital gain.

http://thismatter.com/money/tax/corporate-distributions.htm

Are the capital gains treated as long term or short term? 

 

[Abby Normal]

If the stock has been held more than 1 year it's long term.