C to S Corp (retained earning distribution)

[ILLMAS]

Let's say company has been in operation as C-corp for +5 years, owner has never taken out a distribution and has about $20K in retained earnings, if they convert to the an S-corp now, how is the retained earnings handled? 

[jklcpa]

You'll need to calculate accumulated earnings & profits of the C corp immediately before the election to be treated as an S corp.  S corps that were previously C corps with accum'd E&P have different determination of taxation of distributions. Any distributions paid after becoming an S corp come out of positive AAA, and then come out next of AEP and taxed as a dividend. That's a very simplified explanation, obviously, and can be much more complicated than that depending on your particular client's situation.

Two excellent articles from The Tax Advisor explain this very well:

Determining the Taxability of S Corporation Distributions: Part I

Determining the Taxability of S Corporation Distributions: Part II

Third article discussing calculation of E&P, also from The Tax Advisor:  

Earnings and Profits Computation Case Study

Sorry for the links, but I try not to reinvent the wheel or give incomplete explanations. 

 

[jklcpa]

13 hours ago, Edsel said:

Tried to delete the post above, but system would not allow it. 

I believe members are able to HIDE their own posts even after the 5 minute threshold for editing as passed.  It is accomplished through a selection under "Options" at the bottom of each post. My settings as moderator are different so please let me know if this is not the case, and I can hide or delete any of the posts.