S Corp Distributions

[DanaL]

If an S Corp officer (who is already taking payroll at a reasonable comp rate) takes distributions/dividends, this would reduce the equity on the Balance sheet and not hit the P&L, right? So what is the benefit of the distribution?

Does it also reduce their basis on the K-1?

What if dividends are also paid to someone who invested in the S Corp and said dividends are only to be paid for a year or two. Do those investors also get a K-1 for their 3% of profit and how would I enter that on the K-1?

[ConnieM · Accepted solution]

Yes, they reduce the basis on the Balance Sheet. If the distributions exceed basis, then the amount of excess distributions is taxed as a capital gain. The advantage of taking distributions is they are not taxable income, but rather return of equity.

Yes, it reduces the basis on the K-1.

If an investor owns 3% of the corporation, then yes, they get a K-1 for their 3% of net income from the P&L. Distributions, again, are not taxable unless they exceed that investors basis.

[Accountant-Man]

If the k-1 income taxable to the 1040 shareholder is $100, the the s/h pays tax on the $100 regardless of whether or not they take distributions.

If there is cash available, why not take some of that $100 to pay the tax. Since they are already taxing the $100, the cash is not a taxable distributions.

S corp s/h's rarely, if ever, get "dividends."

If your "dividends" scenario is true, that person is probably a lender, not a s/h, so they cannot get "dividends" or distributions.

FYI, <<Does it also reduce their basis on the K-1?>> Basis is not reported on the S corp K-1.

[ConnieM]

They don't distribute from the profit of the company like, say, Adobe, or Amazon do. But technically what a shareholder takes out of the corporation, other than payroll or reimbursements for expenses, is a distribution. It is distributed to them.

You are correct, though in that the basis does not show on the corporate K-1. My bad...they show on partnership K-1's. But you would still track the basis of the shareholder.

The 3% shareholder may well be a shareholder and not a lender. A lender would not get a percentage of the profit, nor would they get distributions. There would be a liability for the loan and then the corresponding expense for the interest. (Principal would reduce the liability). They could have "lent" the money to the majority holder for a piece of the pie. But, once they get that piece, they are now a minority shareholder for this question.

[qbteachmt]

"The 3% shareholder may well be a shareholder and not a lender. A lender would not get a percentage of the profit,"

Shareholders get distributions pro rata to the shares they own. If anyone gets distributions, they all get them and get them relative to their ownership position. If a "3% shareholder" is getting some other agreed-upon %, then that seems like part of what they got is their "lender" quotient, and you would need to separately track these amounts and reasons.

[rbynaker]

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@qbteachmt wrote:

"The 3% shareholder may well be a shareholder and not a lender. A lender would not get a percentage of the profit,"

Shareholders get distributions pro rata to the shares they own. If anyone gets distributions, they all get them and get them relative to their ownership position. If a "3% shareholder" is getting some other agreed-upon %, then that seems like part of what they got is their "lender" quotient, and you would need to separately track these amounts and reasons.

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Or worse, their stock gets preferred dividends for a specified period of time which blows the "one class of stock" requirement for the S Corp election.