S Corporation Distributions

AskTaxGuru.com Junior Member, Tebow2259, asked:

What effect will S corporation distributions have on shareholders? Cash & Non-Cash

AskTaxGuru.com Moderator, wnhough, answered:

It depends; as you know, If your S corp has no earnings and profits ( I assume from when it was a C corporation), then all distributions are considered to be return of basis in the shareholder’s stock. Distributions up to the amount of basis are nontaxable. Distributions in excess of basis are capital gain. Distibution exceeding your S corp basis is capital gain UNLESS you do a shareholder loan.The S-Corp reports total income and expenses at the company level, and passes-through a share of net profit or loss to individual shareholders. Shareholder distributions are treated differently than wages because they are deemed to be a return on the investor/employee’s investment in the S corporation and not compensation for services rendered. Distributions to a shareholder must be included in the shareholders taxable income; however, the distributions are not subject to FICA tax and are not considered self-employment income subject to self-employment tax.No W-2 or 1099 need be issued by the S corp to the shareholder and the S corporation has no FICA matching requirement since no FICA tax is due.

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