Distributions to shareholders are tax free to the extent of stock basis of the shareholder. If the S Corporation makes distributions in excess of stock basis, the excess amount will be taxable to the shareholder. There are certain ordering rules that apply which will effect the taxation and they are as follows:
- Accumulated adjustment account: tax free up to stock basis- any excess subject to capital gain rates
- Previously taxed income: tax free up to stock basis- any excess subject to capital gain rates
- Earnings and profit: ordinary dividend tax rates
- Other adjustment account: tax free up to stock basis- any excess subject to capital gain rates
- Remaining shareholder’s equity account: tax free up to stock basis- any excess subject to capital gain rates
Also, there are elections that can change the ordering rules. For more details on modifying the distribution ordering rules please contact your local Rea office.
This article was originally published in Illuminations: Facts & Figures from people with a brighter way, a Rea & Associates enewsletter, 4/24/2008.
Note: This content is accurate as of the date published above and is subject to change. Please seek professional advice before acting on any matter contained in this article.