Understanding S Corporation Distributions
Before diving into the process of setting up accounts in QuickBooks Desktop, let’s first define what an S Corporation distribution is.
What is an S Corporation?
An S Corporation is a tax election under the IRS code that allows a business to avoid paying federal income tax at the corporate level. Instead, profits and losses are passed through to shareholders, who report them on their personal tax returns. This status helps businesses avoid the “double taxation” faced by regular corporations (C Corporations).
S Corps can issue two primary forms of compensation:
- Salary/Wages: Paid to employees (including owner-employees) for their work, which is subject to payroll taxes.
- Distributions: Paid to shareholders from the company’s profits, which are not subject to self-employment taxes.
Distributions represent the withdrawal of profit and should be tracked separately from other types of income and expenses to ensure the business stays compliant with IRS regulations.
Setting Up S Corp Distribution Accounts in QuickBooks Desktop
Step 1: Set Up Shareholder Equity Accounts
S Corp distributions are made from the shareholder’s equity in the business. You will need to set up appropriate accounts under the equity section of your Chart of Accounts.
Create a Shareholder Equity Account
- Open QuickBooks Desktop and go to the Lists menu at the top.
- Select Chart of Accounts.
- In the Chart of Accounts window, click the Account button at the bottom left and select New.
- Choose Equity as the account type.
- In the Subaccount of section, you can select Retained Earnings (if applicable) or leave it blank for a separate shareholder equity account.
- Name the account (for example, “Shareholder Distribution” or “Owner’s Equity”).
- Click Save & Close.
This account will be used to track the distributions made to shareholders. It is important to note that these distributions should only be made from the S Corporation’s profits, not from borrowed funds.
Additional Shareholder Accounts
If your S Corp has multiple shareholders, you may want to set up a separate equity account for each one to track distributions individually. You can create accounts like “Shareholder Distribution – John Doe” or “Shareholder Equity – Jane Smith.”
To create these, follow the same steps as above, but ensure you specify the shareholder’s name in the account title for easier identification.
Step 2: Set Up an S Corp Distribution Liability Account (Optional)
While distributions typically come from equity accounts, some S Corps prefer to use a Liability account to track the distributions until they are officially paid out. This is particularly helpful if there is a delay in actually making the distribution after the decision has been made.
- Go to the Lists menu and select Chart of Accounts.
- Click Account, then select New.
- Choose Other Current Liability as the account type.
- Name the account “Shareholder Distribution Payable” (or similar).
- Click Save & Close.
This liability account will reflect amounts owed to shareholders for distributions that have been declared but not yet paid. When you actually make the payment, the liability will be cleared, and the equity account will be updated.
Step 3: Record Shareholder Distributions
Once your accounts are set up, the next step is to properly record the distributions made to shareholders. In QuickBooks, this is typically done via a Check or Bank Transfer transaction.
How to Record Distributions:
- Go to the Banking menu at the top of the screen.
- Select Write Checks (or Pay Bills, depending on your workflow).
- Choose the Bank Account from which the distribution will be paid.
- In the Payee field, enter the shareholder’s name.
- In the Account column, select the Shareholder Equity or Shareholder Distribution account you created earlier.
- Enter the Amount to be distributed.
- If applicable, add any Memo notes for clarity, such as the distribution period or purpose.
- Click Save & Close or Save & New.
This transaction will reduce the bank balance and the Shareholder Equity account (or the liability account if you set one up) in your QuickBooks records.
Step 4: Verify the Distribution in Financial Reports
After recording the distribution, it’s essential to review your financial reports to ensure everything is correctly reflected. You can run the following reports:
Balance Sheet
The balance sheet will show the updated Shareholder Equity accounts (or the Liability account, depending on your setup) and the impact of the distributions on the company’s equity position.
- Go to Reports and select Company & Financial.
- Click on Balance Sheet Standard.
- Select the desired date range and click Run Report.
- Look for the Shareholder Distribution account (or the Liability account) to verify that the distributions are accurately recorded.
Profit and Loss Report
Since distributions are not considered an expense, they will not show up on your Profit and Loss report. However, you should still check to ensure that all other revenue and expense transactions are correctly recorded.
- Go to Reports, select Company & Financial, and choose Profit & Loss Standard.
- Select the date range and verify that the company’s financial performance is correctly represented.
Step 5: Track Distributions and Shareholder Basis
Tracking the shareholder’s basis is essential to ensure that distributions do not exceed the allowed limits. QuickBooks doesn’t track shareholder basis automatically, so you’ll need to maintain this information manually or via a separate system.
Many accountants recommend using a spreadsheet or a specialized tool to track each shareholder’s basis. Ensure that when you record S-Corp distributions in QuickBooks Desktop, they do not exceed the shareholder’s basis in the company to avoid tax complications.
Best Practices for S Corp Distribution Accounting in QuickBooks Desktop
Regularly Update Your Equity Accounts
Shareholder equity accounts should be regularly updated to reflect any changes in distributions, retained earnings, or contributions to the business.
Consult Your Tax Professional
S Corps are subject to complex tax rules regarding distributions. Always consult with your tax professional to ensure that distributions are properly calculated, and shareholder basis is tracked in compliance with IRS regulations.
Avoid Excessive Distributions
Distributions should never exceed the shareholder’s basis in the S Corp. If this occurs, the excess distribution could be subject to taxes and penalties. Maintaining accurate records will prevent this mistake.
Separate Salary and Distributions
Ensure that salaries for owner-employees are paid separately from distributions. Salaries should be recorded under payroll accounts, while distributions are recorded under equity accounts.
Conclusion
Setting up and properly managing S Corp distributions in QuickBooks Desktop is crucial for accurate financial reporting and tax compliance. By following the steps outlined in this guide, business owners can track shareholder distributions with ease and ensure their S Corp remains compliant with IRS regulations.
Always remember that S Corp distributions are separate from salaries and must be accounted for as part of the shareholder equity. Additionally, consulting with a tax professional and maintaining clear records will help ensure that the distributions remain within the shareholder’s basis and are not subject to additional taxes.
By understanding how to set up these accounts correctly, you can manage S Corp distributions in QuickBooks Desktop efficiently, which will save you time and money in the long run.
