Answers · S corporations
How Should S Corporation Distributions Be Recorded?
S corporation distributions generally reduce equity and stock basis; they are not deductible business expenses or substitutes for wages.
This question is answered in full on the main page for it.
How it works
The rule, and what it turns on.
Basic tax treatment is generally tax-free to the extent of stock basis, with excess potentially producing gain, subject to earnings-and-profits and other rules.
Example
Shareholder with $40,000 stock basis receives $25,000 distribution; basic result is a $25,000 basis reduction to $15,000.
Common mistakes
What we see go wrong, and what we do instead.
- Deducting distributions.
- Ignoring basis.
- Using distributions to avoid payroll.
A better approach
- Track distributions shareholder-by-shareholder and coordinate with reasonable compensation.
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.
Have this question about your own books?
Thirty minutes with someone who does this every day, and you will know where you stand. No obligation.