1120S distributions exceed earnings

[indyscott]

I just came from assisting a client make some adjusting entries for their year end to prepare for another accountant to come do the 1120S. The other accountant, who did last year's return, had created a asset Loan to Shareholder account to hold the excess of amounts they took as dividend distributions that exceeded their earnings for the year. He'd told them that negative retained earnings would be a "red flag" to the IRS. But, he also had prepared a reversing entry on Jan 1, 2007 to shift the debit balances back to the owner's distribution accounts in the equity section.

The owner was asking me if this was the "right way" to handle this. I told him to ask the other accountant who did it to begin with. I also told him I would go back to my office and "hob-nob with my fellow wizards" to see what kind of ideas they had about it.

So, fellow wizards, what do you think of it? :scratch_head:

[RoyDaleOne]

I do it all the time.

[michaelmars]

ASHAMED TO say so do we

[Maribeth]

ASHAMED TO say so do we

As do we . . . . and wait for that magic year when they have lots of income. Or for that dreadful year when the bank wants them to clear up their shareholder loans and the "excess" ends up on Schedule D.

Maribeth

[OldJack]

Have to admit one of my S-corp clients had a small loan balance after I did his taxes this year. If the loan is less than $10,000 its usually not a big deal. However, this year I had a C-corp client that paid $20,000+ in personal expenses so I prepared a 1099DIV. You got to use some common sense with these things depending upon the facts and circumstances. :wacko:

[lbbwest]

Have to admit one of my S-corp clients had a small loan balance after I did his taxes this year. If the loan is less than $10,000 its usually not a big deal. However, this year I had a C-corp client that paid $20,000+ in personal expenses so I prepared a 1099DIV. You got to use some common sense with these things depending upon the facts and circumstances.

Benjamin Franklin said "Common sense is very uncommon." I don't believe it's getting MORE common. lbb

[indyscott]

Thanks to all for your replies. I've not ever paid very much attention to Sch K on the 1120S. I'm going to pay a little closer attention from now on.