Where exactly do I enter capital contributions on Form 1120S and how does it impact Schedule K-1?

So if I understand correctly, the capital contributions impact the balance sheet, but don't show up directly on the K-1 in box 16? What about section E of the K-1? Doesn't that show shareholder's capital account analysis? Shouldn't the contribution reflect there?

You're right to ask about Section E of the K-1. Capital contributions should indeed be reflected in Section E of Schedule K-1, which shows the shareholder's capital account analysis. It would appear as an increase in the capital account in the "Capital contributed during the year" column. Box 16 is specifically for distributions and other information, not contributions. So your contributions won't appear in Box 16, but they will be reflected in Section E of the K-1 to properly track each shareholder's investment in the business.

Does it actually show you specific line items or just general advice? I've tried other tax help tools that were pretty vague about S-Corp issues.

I'm kinda skeptical about these AI tax tools. How accurate is it with more complex S-Corp situations? Does it handle things like debt basis vs stock basis correctly?

It actually shows you the specific line items to use on each form. For my capital contributions issue, it specifically pointed me to Schedule M-2 line 2 and explained how to handle it on the balance sheet too. For more complex S-Corp situations, I've found it surprisingly accurate. It correctly distinguished between debt basis and stock basis when I had a question about a loan I made to my S-Corp. It cited the relevant tax code sections and explained how they apply to my specific situation.

Wait how does this actually work? Does it just connect you faster to the regular IRS line? I've spent hours on hold before.

Yeah right. No way you got through to the IRS in 15 minutes. I've tried calling them about S-Corp issues and waited for over 2 hours only to be disconnected. Sounds like a scam to me.

It actually connects you to the regular IRS line but uses a system that keeps redialing and navigating the phone tree until it gets through. Then it calls you when an agent is about to pick up. So you're talking to real IRS agents, not some third-party service. Honestly, I was surprised too. I've spent hours on hold before, but with this I just went about my day until I got the call saying an agent was ready. The IRS agent I spoke with was super helpful with my capital contributions questions for the 1120S.

Wait, now I'm really confused. The previous advice was to use line 2, but you're saying line 7? Can someone clarify which is correct? Also, does a capital contribution affect the AAA at all? I thought it just affected the OAA (Other Adjustments Account).

I need to correct myself - I was thinking of a different scenario. After double-checking the IRS instructions, capital contributions are indeed reported on line 2 of Schedule M-2 as "Other additions." Capital contributions don't affect the AAA directly - you're right that they affect the OAA. The confusion stems from where they're reported on M-2. Since M-2 tracks AAA, the capital contributions show up on line 2 but are part of the reconciliation rather than an actual addition to AAA.

I had a similar situation a couple years ago. Made a $250k capital contribution to my S-Corp and it triggered a review. Nothing came of it, but the IRS did ask for documentation showing the source of funds. Make sure you keep good records of any transfers and the personal source of those funds.

This is exactly the kind of comprehensive explanation I needed! Thank you for breaking down the difference between AAA and OAA - that's been a source of confusion for me. I've been wondering why capital contributions don't seem to flow through to retained earnings the same way income does, and now I understand it's because they're tracked separately in the OAA. One follow-up question: when you mention updating the balance sheet for paid-in capital, should this be reflected as "Additional Paid-in Capital" or just increase the existing "Capital Stock" line? Our S-Corp was initially capitalized with minimal cash, so this new contribution is significantly larger than our original capital. Also, regarding the documentation you mentioned - would a simple bank transfer record be sufficient, or should I also keep a corporate resolution documenting the capital contribution decision?

Great question about the balance sheet treatment! For your situation where the new contribution is much larger than the original capitalization, I'd recommend using "Additional Paid-in Capital" rather than increasing Capital Stock. This provides better clarity and follows standard accounting practices for contributions made after initial incorporation. Regarding documentation, both items you mentioned are important. The bank transfer records show the actual movement of funds, but a corporate resolution (or at minimum a board meeting minutes entry) documenting the decision to accept the capital contribution adds an important legal layer. It demonstrates that this was an intentional capital contribution rather than a loan or some other transaction. The IRS appreciates seeing both the corporate authorization and the financial trail, especially for larger contributions. It helps distinguish capital contributions from constructive distributions or other transactions that might be treated differently for tax purposes. If you haven't already, also consider having the shareholder sign a simple statement acknowledging the capital contribution and confirming it's not intended as a loan. This extra documentation can save headaches if questions arise later.

You've got it exactly right! Each shareholder's K-1 Section E will show only their individual capital contribution amount, not the total for all shareholders. Since each K-1 is specific to that particular shareholder's activity, it only reflects their personal transactions with the S-Corp. So if you have three shareholders and they contribute $10k, $25k, and $15k respectively, each person's K-1 Section E will show only their own contribution amount. The total $50k would appear on Schedule M-2 line 2 of the corporate return (Form 1120S), but gets allocated individually on each K-1. This individual tracking is important for basis calculations too - each shareholder's stock basis increases only by the amount they personally contributed, not by the total contributed by all shareholders. It's one of those S-Corp features that makes record-keeping a bit more complex than other entity types, but it ensures each owner's tax situation is tracked accurately. Your summary of the reporting requirements is spot on - you clearly understand the flow now!

Thank you for adding that timing clarification! That's such an important point that often gets overlooked. I've made that exact mistake before - writing a check in late December but having it clear in January, which messed up my tax year reporting. Your point about estimated tax payments is really valuable too. I hadn't considered how a large capital contribution might affect the overall tax planning strategy, especially if it changes the expected distribution patterns or impacts other shareholders' situations. One question on the timing - if someone makes a capital contribution via wire transfer on December 31st but it doesn't show up in the corporate account until January 2nd due to bank processing delays, how does the IRS typically handle that? Is there any safe harbor for electronic transfers that are initiated before year-end but settle after?