Return of Paid-in capital

Forum|Forum|3 years ago
February 1, 2023
2 replies
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New to S corp in 2022, and I built an office for my business with my own cash. Now I have this paid-in capital that I thought I could return to myself by withdrawing tax-free income until paid back. But now I'm learning that all business income increases my basis too and that it would be tax-free distribution anyway. And how would I withdraw more than what the business makes?

The only thing I can see is that can I take more distribution because of the extra paid-in capital without 40% of it being salary, vs if I only withdrew from the business income and it had to be at least 40% salary.

Hope my question makes sense. I appreciate this community very much!

TurboTax Business Windows

AliciaP1

As an S-Corporation you are required to pay yourself a "reasonable salary" and report appropriate payroll taxes. This does not affect your basis (value of) in the business. You can only take a distribution up to the amount of your basis in the business and your basis is affected by your contributions, distributions, and the company's net income(loss) for the year.

See Should I pay myself a salary as an S-corp owner? for more information.

So for example, if you started your business in 2022 and if your paid-in capital (contribution) for 2022 was $10,000, your business net income was $25,000, your gross salary paid to yourself was $30,000, and your distributions for 2022 were $28,000 your basis at 12/31/22 would be $7,000 (10,000 + 25,000 - 28,000 = 7,000). If you make no contributions in 2023 and your business reports a $10,000 loss, you are not eligible to take any distributions regardless of your payroll for 2023 because your basis in the business is $0.

@SCORP2

[Edited 02/10/23 | 10:57 AM PST]

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SCORP2Author

Hi, thank you for your answer. I understand all that, but I put $200,000 into building an office building also. How do I get that back on top of the 50/50 salary/distribution from the income?

AliciaP1

If you classified the investment as a Shareholder Loan to the business, it would not be subject to the basis rules. You can then make payments on the loan to yourself from the business without incurring a tax liability unless you formatted the loan to incur interest. At that point, the interest paid by the business is a deductible expense and reportable on your Schedule K-1. When you enter your Schedule K-1 for your personal return will show the interest as taxable income. In either case, you will need a document (like a memo) on file that defines the amount, usage, and term of the loan as well as if it will accrue interest or not.

@SCORP2

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