Answers · Bookkeeping
How Should Owner Distributions Be Recorded?
Owner distributions generally reduce equity and are not operating expenses; tax consequences vary by entity and basis.
How it works
The rule, and what it turns on.
Partnership and S corporation distributions require basis tracking. S corporation service-providing owners also have reasonable-compensation rules.
Example
An S corporation pays a $15,000 distribution: reduce cash/equity; separately analyze stock basis for tax.
Common mistakes
What we see go wrong, and what we do instead.
- Deducting draws as expense.
- Ignoring basis.
- Using distributions to avoid wages.
A better approach
- Separate payroll, reimbursements, loan repayments and distributions.
Authority
Where this comes from, so you can check it.
IRC §§1366(d), 1367 and 1368; Form 7203 and instructions; IRS S Corporation Stock and Debt Basis guidance.
Relevant case law
Radtke v. United States, 895 F.2d 1196 (7th Cir. 1990) - S corporation payments labeled dividends were treated as
wages for services.
David E. Watson, P.C. v. United States, 668 F.3d 1008 (8th Cir. 2012) - unusually low shareholder-employee salary
supported IRS reclassification.
Veterinary Surgical Consultants, P.C. v. Commissioner, 117 T.C. 141 (2001) - shareholder/officer performing
substantial services was an employee for employment-tax purposes.
Educational information, not individualized tax advice. Treatment depends on your facts, entity classification and tax year, and IRS instructions change. Confirm your own position with us before relying on it. Mint Associates does not provide legal services.
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