IRS adjustment on books

[ILLMAS]

Let's say a corporation owner had their "Due from" loans reclassified in an audit in the following way:

Total due from owner $500,000

Adjusted to 

$300,000 to Dividends

$200,000 to Capital Gains

So the due from owner went down to zero, how should it appear on the corporations BS?

Under equity, -$300,000 Dividends paid and -$200,000 capital gains 

Thanks

MAS

[Lee B]

Based on your post it's kind of unclear whether this is a C Corp or an S Corp?

[ILLMAS]

C-corp

[Lee B]

Did the $300,000 in Dividends reduce Retained Earning down to zero ?

If this is a C Corp, I don't understand the $200,000 to Capital Gains unless the IRS is saying that the $200,000

constitutes a sale of the owners stock, in which case it's capital gains to the owner, not to the C Corp.

In a situation like this, the IRS usually would split the $500,00 between salary and dividends, not to capital gains?

[ILLMAS]

Did the $300,000 in Dividends reduce Retained Earning down to zero ? Yes

The access amount was tacked on to the owner as capital gains, I understand the capital gain portion has nothing to do with the C-corp, however I am trying to figure out the adjustment to equity, I believe the accounting software will not allow to create a JE to affect retained earnings.  If I were to create a JE to reclassify the loans 100% to dividends paid, that solves the issue, but in reality only $300,000 is dividends paid, and I am having a hard time find a name for the $200,000 portion on the C-corp side.  

Thanks

[jklcpa]

I would book the journal entry entirely as dividends if your software will not allow an entry directly to retained earnings. If the company had reported the expenses properly in the prior periods, those expenses would have been closed to retained earnings and possibly created a deficit. This shareholder may, or may not, have to paid tax on the full $200K as cap gain. Remember that dividend taxation is controlled by E&P and accumulated E&P which is not always the same as retained earnings. The shareholder may have a nontaxable return of capital, and with the level of adjustment you are talking about, it may be well worth the time to do the calculations, if you are able.

Here's a link to another discussion about this same topic here on this forum and

this page that has comprehensive examples of how the calculations work:   https://thismatter.com/money/tax/corporate-distributions.htm

[ILLMAS]

52 minutes ago, jklcpa said:

I would book the journal entry entirely as dividends if your software will not allow an entry directly to retained earnings. If the company had reported the expenses properly in the prior periods, those expenses would have been closed to retained earnings and possibly created a deficit. This shareholder may, or may not, have to paid tax on the full $200K as cap gain. Remember that dividend taxation is controlled by E&P and accumulated E&P which is not always the same as retained earnings. The shareholder may have a nontaxable return of capital, and with the level of adjustment you are talking about, it may be well worth the time to do the calculations, if you are able.

Here's a link to another discussion about this same topic here on this forum and

this page that has comprehensive examples of how the calculations work:   https://thismatter.com/money/tax/corporate-distributions.htm

Thank you