What Is My Shareholder Basis?Posted on July 23rd, 2019
Outsourced Accounting Department, Inc.
Recently I’ve had a couple of clients ask me how much money they can safely distribute to themselves without triggering additional taxes. In essence, the question they were asking me is “What Is My Shareholder Basis?” The longer answer to this question is contained in these two articles: The Basis of S-Corporation Stock Basis, and S-Corporation Stock and Debt Basis. But at the risk of oversimplifying the matter, your shareholder basis is the (net) amount of money you’ve put into the business in the form of loans and/or equity capital, plus the profit you’ve accumulated over time (i.e., Retained Earnings). These amounts are found on the balance sheet. For example:
On the balance sheet in the above financial statements, under the Projected 2019 column it shows the following amounts:
Due to Member / Stockholder: $56,707
Total Capital: 60,875
Due From Member (10,000)
Shareholder Basis: $107,582
In this instance, Total Capital at Dec. 2019 consists only of the company’s Retained Earnings, and includes its 2018 Net Income of $18,704, plus its 2019 Net Income of $58,427, less “Dividends” (tax distributions) of $1,649 and $14,607 in 2018 and 2019 respectively, resulting in the ending Retained Earnings of $60,875.
However, note that in this business, the financial statements are prepared on an accrual basis, so the company’s 2019 balance sheet now includes the non-cash items of $41,096 in accounts receivable which is added to Net Income, and $25,149 in accounts payable which is subracted from Net Income. Assuming the company’s tax return is prepared on a cash basis, these amounts would be adjusted back out of Net Income (and therefore, out of Retained Earnings), resulting in a Shareholder Basis for tax purposes of $91,635 (page 4 of the above financial statements).
Thus, the maximum amount the owner can distribute to him or herself without incurring additional taxes (and ignoring the cash needed by the business to operate) is $91,635. Why? The Due to Member amount, less the Due From Member amount, is the owner’s own money that he or she has lent to the business, and the Net Income has already been taxed (through the K-1 on the owner’s personal tax return which, in this case, are the above tax distributions of $1,649 and $14,607).
Again, the tax codes are more complicated than the above illustration. So if you think the amount you want to distribute would put you close to your maximum, seek advice from your CPA or tax preparer.