1. Additional Paid in Capital S Corp
2. Disadvantages of an S Corp
3. Differences Between S and C Corporations
4. Earnings & Profits for Tax Purposes
5. Basis Computation

Updated October 7,2020: 

Additional Paid in Capital S Corp

If you want to know how much additional paid-in capital S Corp, then you’ll want to do your research before determining if an S Corporation is the best type of business structure for your company. Keep in mind that S corporations are referred to as flow-through entities. For that reason, the tax implication on the business’s net income or loss flows to the principals of the business. Therefore, those individuals are responsible for paying such losses on their own individual taxes.

Disadvantages of an S Corp

• Business losses can only be deducted up to the amount of capital that each principal put into the company

• The business’s pass-through income in excess of basis is taxable income

• Errors in the S Corporation’s financial statements may cause the K-1 statements that are issued to the stockholders to be inaccurate

• Regardless of whether or not a capital injection is realized as a contribution or debt, it is likely to be taxed to the principals

Differences Between S and C Corporations

• C corporations are taxed at the corporate level, whereas S corporations taxes flow to the principals of the business

• An S corporation can have only one class of stock whereas a C corporation usually has both preferred and common stock

• S corporations don’t pay dividends, whereas C corporations do pay dividends

Earnings & Profits for Tax Purposes

If an S corporation has no earnings and profit, then the business should capitalize via capital contributions rather than debt. That way, any distributions will reduce the shareholder’s stock basis, helping to avoid taxable income. If the first payment is considered additional paid-in capital, then any additional payments to the principal (owner) are considered dividend distribution (or wage) and will be taxable. A loan may be considered additional paid-in capital if an agreement doesn’t exist between the S corp and the principal.

It is common for S corporation shareholders to make cash advances to the corp during those years when the company’s profits are low. If there are multiple shareholders, ratable capital contributions should be made. S corporations can record additional capital contributions on its books as additional paid-in capital. This, however, doesn’t mean that the company is required to issue additional shares of stock.

Basis Computation

You can find adjustments to the shareholder basis in IRC Section 1367. For businesses operating as an S corporation, the code uses shareholder basis to do three things:

• Determine the amount that can be deducted from business losses

• Tax implications on corporate distributions

• Gains on the sale of stock

Therefore, the initial stock basis is calculated by:

[1] taking the amount of cash capital input into the business;

[2] adding the adjusted basis of the property that the shareholder contributed in exchange for the stock;

[3] add in any gains recognized on the transfer; and

[4] subtract any money or other property that was received.

Notably, S corporation shareholders must adjust their stock basis every year to determine the flow-through amount of income, loss, and deductions that can be taken.

If you are unfamiliar in this area, you may want to have a Certified Public Accountant (CPA) assist you in your tax returns, particularly if you are a shareholder or principal of an S corporation. There are several items that CPAs should take into consideration when looking at tax implications. These include:

• When calculating the stock basis, CPAs should consider both taxable and tax-exempt items, i.e., life insurance proceeds.

• CPAs can calculate a shareholder’s debt basis by the face amount of the loan that the shareholder makes to the corporation. The debt basis, similar to stock basis, cannot be below zero. When the corporation slowly repays the debt, the debt basis will decrease.

• Taxpayers can use the debt basis to increase deductions from the losses of the business after their stock basis has been used up.

• Stock basis must be $0 before the debt basis becomes available. With that said, any distribution in excess of the stock basis would be included in the shareholder’s income as a capital gain.

• If the flow-through of the business losses diminish the taxpayer’s stock basis, then any subsequent increases on the basis must first restore the debt basis before it is added to the stock basis.

If you need help with calculating the amount of money to be paid on your taxes if running an S corporation or want to learn more about the tax implications for operating this type of business structure, you can post your legal need on UpCounsel’s marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb.