Owner's Draw -> Retained Earnings in the Red

[ILLMAS]

I have a partnership return that is composed of 4 brothers, they didn't take a salary but decided just to take money as owner's draw. The only problem is the retained earnings is negative and tax year is a lose. I recommended for them to take it as a loan and repay it, get back on the payroll and to withdrawal something in relation to their salary when profitable. The fact that they are not taking a paycheck and taking money from the business, would it be ideal to reclassify it was other compensation to officer and issue them a 1099?

Thanks,

[Wayne Brasch]

MAS,

I guess I'm a little confused about your question. Partnerships don't have a Retained Earnings account. That is for corporations. Partnerships call it Partners' Equity.

Wayne Brasch

[ILLMAS]

MAS,

I guess I'm a little confused about your question. Partnerships don't have a Retained Earnings account. That is for corporations. Partnerships call it Partners' Equity.

Wayne Brasch

Sorry, it's a 1120S and not a partnership.

[schirallicpa]

If they actually plan to repay, then Loan might work. Don't forget to have the loan agreement in writing with explicit terms and INTEREST.

They should be taking at least a small salary. The loss on the corp would offset the W-2 - well....if they have basis....which it sounds like they don't.

It may even work to their advantage to have small W-2 to show low earnings and take EIC. I have a client who has a s-corp in that situation. Gets almost half his salary back in EIC refund! He's putting the refund back into the business to build his basis back up!

[Dan]

You are required to pay yourself a reasonable wage if you are the owner of an S-Corporation. This means the S-Corporation must give you a W-2

Other money can be given to you in distributions.