Distributions by an S Corp and LLC taxed as a Partnership

If I maintain separate accounts on the books for investment and retained earnings (profit & loss), for distribution purposes what do I pay out of first - retained earnings or investment? Assume on prior C Corp earnings or PTI. If the distribution exceeds the shareholder basis (investment + profit - loss - previous distribution), isn't the excess treated as a capital gain to the shareholders? Correct me if I am wrong - this capital gain would go on Schedule K (lines 7 or 8 on Form 1120S and lines 8 or 9 on Form 1065), then to K-1s and Schedule Ds. In the situation above, is the total distribution paid compared to the shareholder basis in total (of all shareholders - as on the balance sheet) or distribution amount to each shareholder compared to his/her basis? In the latter case, some shareholders' distribution could exceed their basis and some would not, depending on each case.

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Vijay Sharma
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