Harlan Lunsford <hnslunsf...[at]bellsouth.net> wrote:

- quote -

This is the same as saying that a corporation can't declare
a dividend in excess of its retained earnings, right? Nor
can it declare a dividend at all if the RE is negative?

Presumably, if I'm understanding this correctly, this
requirement doesn't apply to a corporation organized as a
REIT. (I've been researching a company today that has been
happily declaring dividends for years with a negative RE).

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L K Williams wrote:
- quote -

Concur with my learned expatriate colleague living the good
life over there. Or at least I hope so what with the recent
coupe.

Anyway, state laws usually follow the uniform corporation
codes laws, and it IS illegal to diminish paid in capital.
The loan route would be reasonable, but for the OP, you
might want to seek some local qualified tax help from either
an EA or a CPA. (Note to CPA's; I try to alternate
placement of our designations in every other post. This
time it's Ea's turn. (grin))

ChEAr$,
Harlan Lunsford, EA n LA

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"ZGR81" <george.oyedele[at]internetworksrus.com> wrote:

- quote -

You don't say what state you are in and that could make a
difference. In most states, AFAIK, it is illegal for a
corporation to distribute funds from paid in capital. When
you filed your incorporation papers, etc. you specified how
much capital had been paid in. This information is to
protect the public from being defrauded by undercapitalized
businesses defaulting on its financial obligations.

What you probably should do is treat all the draws as loans
and charge interest on the outstanding balance (if material,
anyway.)

Unless you are talking about very large sums of money, I
doubt the IRS will be concerned if you don't pay yourself a
salary. In an S-corp environment a salary would be taxable
to you and deductible by the corporation. If this creates a
loss, that loss offsets the salary income on your personal
return.

However, this may not be a neutral series of transactions.
First, of course, the corporation would have to pay the FICA
and other payroll taxes, thus increasing the corporate loss
passing through to you. In addition, the salary could give
rise to other benefists, such as earned income credit, on
your personal return.

If you were my client, I would probably say to reclassify
all the drawings as loans, to document this with a written
agreement or note, and to charge interest on the loan.

Lanny K. Williams, CPA
Nawarat, Williams & Co., Ltd.
Income Tax Services for Expatriate Americans

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"ZGR81" <george.oyedele[at]internetworksrus.com> wrote:

- quote -

writing checks back & forth with no documentation is only a
prelude to future problems

you need to document loans, paid in capital etc
for loans there should be signed notes

payments for compensation (living exp etc) need to be salary

___________________________________
<<< Benjamin Yazersky, CPA [NJ & NY] > > -----> real address on hobokeni or hobokenx <-----

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I am the owner of a S Corp business started in 2005. The
business has not generated enough sales to pay myself a
salary. The 2006 income was less than $1,000. Considering
that I still have personal living expenses, what I have done
is draw cash against the paid-in capital as needed for
personal expenses. I have also done the reverse whenever the
business needs additional cash. However, on a YoY ('05 and
'06) basis, the paid-in capital went down by the amount of
cash drawn from the business in 2006.

I don't know what IRS reaction would be if they see a
decrease in YoY paid-in capital but I prefer to resolve any
potential audit pitfall before I file my 1120S. That is the
reason I have come to you experts with the following
questions. Your response would help me consider my options.

1. Can I restate the drawings as loans from the business
instead of reduction of paid-in capital?

2. Can it be treated as distribution? Is there a thing like
tax-free distribution?

3. Do I owe payroll taxes on the entire drawings or on a portion of it?

4. What would you do if you are in my shoes :-D?

I appreciate any help or insight that can be provided.

Thanks-
ZGR81

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