The S corporation, just like the partnership, offers the principal tax advantage of being a conduit for taxable income, rather than a tax-paying entity.

Usually, profits and losses of the S corporation are not reported at the entity level; rather, such items flow through to the individual owners. Each shareholder includes in income his or her share of the S corporation’s ordinary income or loss.

Distributions to shareholders are nontaxable unless the shareholder completely recovers his or her basis in the stock. In such case, distributions in excess of basis are taxed as capital gains (i.e., as though the stock were sold).

Shareholders need to keep track of their basis: the initial shareholder’s contribution is increased by his share of profit and additional contribution(s). Basis is decreased by his share of losses and current distribution of cash and/or property not reported as income.

If an S corporation has earnings and profits from prior C corporation years, distributions from these amounts are usually taxable as dividends  and reportable on Form 1099-DIV.

Please note that the IRS might re-characterize some of those distributions to wages if the shareholder-employee is not paid enough for his services.

 

I created this blog to help understand certain basic aspects of U.S. tax law. Of course, each situation is unique and nothing that is on this site will ever replace the expert advice of a tax professional.

Please do not hesitate to contact me should you have any question

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