Eli5: Returning Paid-in-Capital on an S-Corp

[Ama]

Hi Tax peoples,

Please help wrap my mind around this. If I put 100,000 into an s corp for working capital, and the first year it profits enough to have 200,000 in profits after all expenses, what is the tax efficient way to have the 100,000 returned to me?

 

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[MJ DeMarco]

Great question as it has revealed how rusty I am with accounting. I should know this without a doubt, but I can't say I do.

My guess...

You can pull it out without a tax hit, however, it becomes a balance sheet item and reduces the your basis in the company, as well as the paid-in-capital for the corp. Mind you, this is purely a speculation, so don't take as specific accounting advice.

Perhaps @CareCPA can chime in.

 

[ZCP]

per my understanding ....... as s corp, you pay tax on the profits on your 1040. so you won't be shielding anything from tax by 'returning the capital' instead of distributing the profit.

for what to do with the money, up to you. distribute the profits to yourself, or return some profits and the invested capital and keep the rest in assets. just shifts where it shows on the balance sheet (assets/liabilities/equity).

CPA can confirm

 

[CareCPA]

I'm not sure you're asking the correct question, but I also don't think everyone understands what an S Corporation is before they make the actual election.

An S Corp is a tax election, so you are either an LLC or a C Corp to start with. When you formed the entity, did you put money in simultaneously? If so, this was likely you purchasing the LLC/C Corp interests/stock.
This might be changing, I know some states you have to make a state-specific S Corp election as well, but I don't know if they allow you to form as an S Corp.

With an S election, the IRS says you need to pay yourself a reasonable salary before taking distributions. In this case, it may be beneficial if you had loaned the money to the entity instead.
There are various other ways of getting cash out of the business depending on your structure and other businesses (i.e. paying rent to yourself/another entity).

Really, pulling $100k (or any amount) out of the business is not a taxable event in itself since you pay the tax on the profit in the year earned regardless of whether or not you take a distribution.

It does sound like you may want to chat with your tax accountant to make sure you're in compliance with everything.

 

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