We own a Sub-S corporation. Heretofore when there was a difference between Stockholer Draws and Annual Net Income, I put the difference to a Shareholder Loan Account. Now a CPA suggests that I create a new capital account called Stockholder Income Previously Taxed and move the whole note balance there, which would make a huge capital DEBIT. Is this correct?

Thanks so much,
Beth ann 31000

Did the CPA happen to explain why he suggested this? It appears to me that it is not income previously taxed, but income you have received which has not been taxed. The only reason I see in putting it to capital would be so the corp doesn't have to show interest income on the debt.

If you take more distributions than your accumulated earnings and you are not planning to pay it back (i.e. a note), you may have a tax liability on the excess distributions. I would be sure you understand the reason behind this before you do it, and what the tax effects could be. Your CPA definitely has more information than I do. In general I would not be making this entry.