[SAMiller34]

To close a S corporation, one must zero out the balance sheet.

Could someone go over the journal entries to do this? Specifically, what is the journal entry to close retained earnings, especially if it is negative?

[morgaine300]

What has happened to all the assets and liabilities? Are the owners taking these? It'll make a difference in the entries.

Considering it's an S corp, you can apply the retained earnings to the capital balances of the owners, including if it's negative.

[SAMiller34]

What has happened to all the assets and liabilities? Are the owners taking these? It'll make a difference in the entries.

Considering it's an S corp, you can apply the retained earnings to the capital balances of the owners, including if it's negative.

Thanks for answering. All the assets have been sold - and I took care of those and the liabilities. I just couldn't remember what to close R.E. to. On the tax return, I had to "distribute" this loss to the owners. It makes sense if there is something left to distribute, but doesn't seem right when it's negative.

[ArcSine]

If all assets have been liquidated, all debts paid off, and any residual cash / assets distributed, it sounds like all that remains of the balance sheet is a debit (negative) bal in retained earnings, and probably some positive balance elsewhere in equity (owner's investment, e.g.). And if all entries have been in balance all along, then this negative RE bal and the positive amount in OE are of equal magnitude, just going in opposite directions.

If so, you simply wash the two against each other with one final JE, and it's a wrap (as you did on the tax return). It might seem counterintuitive to do so, since it's not really a 'distribution' of anything. But the proper interpretation isn't so much 'distribution', as 'adjustment of the OE to its correct amount'.

For example, suppose I start a corp with a $100 initial investment. The only thing the company does is to pay a $30 expense, then I decide to liquidate. At this point the bal sheet shows $70 cash, ($30) RE, and $100 in OE. I return the 70 bucks back to my personal wallet, leaving neg've 30 in RE, and pos've 30 in OE, on the balance sheet.

But the +ve 30 OE bal is misleading... after the corp lost 30 bucks, I'm only entitled to get back the 70. (Of course I'll claim a $30 loss on my personal return, since I invested 100 and got back 70. But that has nothing to do with the corporate books.)

Thus, cancelling the negative 30 in RE against the positive 30 in OE with a final JE just restates that OE balance down to its correct amount of zero.

Hope that helps a bit, and best of luck with the windup.

[morgaine300]

You are actually "distributing" the loss among the owners. Distributing income is actually the same thing. You're thinking about the idea of distributing cash, which is not what you're doing (yet), and distributing net income among the owners isn't giving out any cash either. While a distribution does generally mean you're paying cash dividends, the use of the word absolutely does work here as a plain English word.

[SAMiller34]

You are actually "distributing" the loss among the owners. Distributing income is actually the same thing. You're thinking about the idea of distributing cash, which is not what you're doing (yet), and distributing net income among the owners isn't giving out any cash either. While a distribution does generally mean you're paying cash dividends, the use of the word absolutely does work here as a plain English word.

I also have a mental block with the idea of distributing anything, since you can't make distributions greater than the basis of the stock, right? So do I have to show the "sale" of the stockholder's worthless stock on his 1040 when really it was just dissolved?

[morgaine300]

Oh jeez, been a long time since tax class. I've worked for a lot of S corps, but not one with negative equity.

But something seems screwy here. If all the assets are gone and liabilities paid, then you seem to have a negative on the equity side that balances with nothing. You'd either have to have negative assets, which isn't going to happen, or some liabilities to balance that out. Your balance sheet doesn't balance. What's wrong there?

[SAMiller34]

Oh jeez, been a long time since tax class. I've worked for a lot of S corps, but not one with negative equity.

But something seems screwy here. If all the assets are gone and liabilities paid, then you seem to have a negative on the equity side that balances with nothing. You'd either have to have negative assets, which isn't going to happen, or some liabilities to balance that out. Your balance sheet doesn't balance. What's wrong there?

The assets were sold (for a loss) and the liabilites were A/P, visa payable, and line of credit - none of which had been paid or will be paid, so I closed that to capital investment. The Retained Earnings and Capital Investment balance each other - so I can close it out on the books okay. I guess the question I really should have asked is - how do I balance the M2 on the tax return, (the answer being negative distribution), and in so doing, what should flow over to the k-1 (still, the negatve distribution) and then what needs to be shown on the stockholders 1040 (sale of stock?)

[morgaine300]

Well, I've been doing this mostly from an accounting point of view. I'm not a tax expert (contrary to popular belief, not all us accountants do taxes), and even though I've done quite a few 1120S's, it's been over 10 years. And I don't do personal taxes at all (other than my own, and occasionally a really easy one), so I don't know about the 1040. I know an s corp is treated like a partnership for tax purposes, and the books are pretty much kept in the same sort of manner as well.

I went to the IRS site and just even looking around, I think it would not be good of me to start making a guess at this. If I was forced to do it (like for a job), I couldn't certainly sit down and look at it and figure it out. But that would take me quite some time, and it's a heck of a lot easier to do when you have the books sitting in front of you.

I know accounting seemed like the logical place to ask this, except what I said before - not all accountants do taxes. We do have a specific tax forum though. They sometimes pop in here, but since no one has posted, you'd be better off asking over there:
https://www.askmehelpdesk.com/financ...-b-u-font.html

Sorry I can't help more than that, but good luck!