How to treat S Corp distributions

You might want to post in misc.taxes.moderated, but I don't think it's a dividend, but a distribution in excess of basis. I think it just gets reported on the K-1, and the shareholders will have a capital gain.

I know it sounds odd, but that's how my tax CPA explained and handled it when I had a similar situation a few years ago.

"Beverly" wrote

Distributions from an "S" corporation **do not** get reported on a 1099-DIV.

The general entry would be to credit cash and to debit an equity account to reduce R/E (which include profits).

You should also be tracking the owners basis in the company, their investments + profits - losses - distributions generally equal their basis. You really don't want basis to go negative.

Since the shareholder(s) pay tax on the profits in the year earned, they can be distributed whenever there is sufficient cash to do so.

"If the S corporation has earnings and profits, there are several tiers through which the distribution must pass. Generally the distribution is tax free up to the amount of the S corporation's accumulated adjustments account. If the shareholder's basis in the corporation's stock is less than the amount of the accumulated adjustments account, the difference is capital gain. Any remaining distribution (if it is in cash) is tax free to the extent of previously taxed income if the corporation was an S corporation before

Beverly

SNIP

I think the use of the word 'dividend in that excerpt is merely descriptive. The E&P from which the dividend is paid has already been reported on prior K-1's. It's been a long time since I've studied E&P, but it can be different from Retained Earnings.

I think Bill summed it up....

All profits of an S-Corp are reported as taxable gains to the shareholder, who may or may not be employeers of the corporation.

I did get a little confused in the summary from Beverly. Not having much experience in S-Corp taxes, I am not sure of the answer. However, it sounded a little like a C-Corp that converted to an S-Corp. In a S-Corp, all distributions come from the shareholders equity account in which taxes have already been paid. It is only a divident if the company was a C-Corp that converted to an S-Corp as the retained earning at time of conversaion become looked and any distrbutions in exess of basis (shareholder taxes retained earning) then become dividend income (which do not qualify as a tax deduction to the corp and are taxable to the shareholders).

If this where just a normal S-Corp that was never converted, I would thing that distributions in excess of basis would be a loan to the shareholder or have some other tax consequence. Basically, it is only an issue once the distribution exceeds basis. So, not being a tax person, I can only try to recap what I remember from the CPA exam from a few years back.