"S Corp Distributions: Tax Rules Simplified"

An S Corporation distributes income, deductions, and credits to shareholders, with tax treatment varying based on factors like stock basis and accumulated earnings and profits (AE&P). Distributions can be non-taxable, taxed as capital gains, dividends, or wages, depending on the type and circumstances.


S Corporation Distributions: Tax Rules and Regulations

An S Corporation is a pass-through entity, meaning its income, deductions, and credits are passed through to its shareholders for tax purposes. Distributions from an S Corporation can be taxed differently depending on various factors such as the corporation's accumulated earnings and profits (AE&P) and the shareholder's stock basis.

Distribution Type Tax Treatment Additional Notes
Return of Stock Basis Non-Taxable Distributions are tax-free to the extent of the shareholder's basis in the stock. Basis is reduced by the distribution amount.
Distribution Exceeding Stock Basis Taxable as Capital Gain Amounts distributed in excess of the shareholder's stock basis are taxed as a capital gain.
Distribution of Accumulated Earnings and Profits (AE&P) Taxable as Dividend Only applies if the S Corporation has AE&P carried over from previous C Corporation years.
Distributions of S Corporation Earnings Non-Taxable As long as the S Corporation does not have AE&P, earnings are passed through to shareholders and taxed on their individual returns.
Loans to Shareholders Depends on Circumstances If treated as a bona fide loan, it's not taxable. If not, it may be treated as a distribution.
Payment of Fringe Benefits Taxable as Wages Benefits provided to shareholder-employees are generally treated as wages and subject to payroll taxes.


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