Question:
I understand where retained earnings come from(accumulated earnings over years). But when it climbs significantly higher in one year, and I have all “said” info entered, (owner takes no draws or cash out for anything, he gets healthy W2 wages all year) then it seems like there’s something missing-possibly money spent toward assets?
Like, on the Sch M1 & M2:
Is there ways to reduce Ret. Earnings? What about the payments he makes toward big assets during the year? Can they be used anywhere? I have used the interest on these loans as a deduction and they are set up on depreciation.
I know Sch. L has to balance. I’ve been told to adjust either A/R or loans from shareholders to make this happen. What do you suggest?
Answer:
Any retained earnings would normally be added to investor equity. Since they already paid the taxes on it (and BIG personal taxes they did pay as a sub-s). Investor equity is the buffer, as the business becomes more profitable and retains profit the value for each unit of investment goes up, if the business is strapped and is operating out of the money originally invested then the investors value drops.
As far as reducing retained earnings; spend the money is one way, that would allow for purchases of big assets. This is where the 179 deductions plays in. For 2008 the 179 deduction is $250,000 for anything that depreciates in less than 20 years.
Related posts:
