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One person S-Corp: Distributions, Dividends, Bonus - What to do when?

Could you explain the differences between these for a one person S-Corp? With no other employee/shareholders, the distinction is unclear to me. Do dividends only refer to passive income gains? Thanks.

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Distributions, Dividends & Bonuses, Oh My!

Hi 2ndMouse,

You're not alone. These are confusing to most people. :)

Bonuses are pretty easy. These are taxed just like salary so there's nothing special on the taxation of theses. There are some special rules regarding the income tax withholding on bonuses, but that usually isn't an issue for most small businesses.

Dividends don't usually apply to S-Corporations unless it was a C-Corp for one or more years before it made the S election. If you corp has always been an S-Corp, you don't have dividends.

Distributions are return of basis. Every shareholder has a basis. The idea behind basis is the money you invest in the company has already been taxed so the IRS doesn't want to tax it again when you take it out. Your basis increases when you put money or property into the corporation. And it increases when the S-Corp has taxable income because the S-Corp income flows to your personal return and you pay tax at your personal rate. If your S-Corp has a loss, it reduces your personal taxable income so that reduces your basis in the S-Corp. Likewise if you take a distribution out.

So the basic formula for basis = contributions + income - loss - distributions. Note there are some details that will complicate this, but that's the gist of the calculation.

If you take a distribution and that distribution brings your basis below zero, then the that amount over your basis is taxed as capital gains.

I know this is a complicated topic. I hope this helps clarify the issue a little.


distributions over basis two years in a row

This answer is clse to what I need to know. My accountant classified our distribution in excess of basis for 07 as long-term capital gain. So does that mean if I took more distributions than W2 income in 08, and did not contribute more property to the business, that my basis is still zero, or can it be negative...? Since this last year was the same as the year before, do I classify all distributions in excess of my taxable income as long-term capital gains? I also don't have a K-1 yet, as we filed for an extension for the S Corp. I am trying to get my personal taxes done on Turbo Tax and yet I don't understand this topic at all. I know the amount I took out of the company in distributions. How do I account for the distributions in a 1040? Thanks

Need the K-1 for the 1040

Hi Topher,

The short answer is you should file for an extension. You really can't file your 1040 without the K-1. If you do, you'll just need to file an amended return when you finally get the K-1.

Your basis is not affected by the relationship between W-2 wages & the distribution.

You only need to account for the distributions if they exceeded your basis. Otherwise, they don't show up on your personal return.

If the S-Corporation had a loss, you don't have the basis to absorb that so those losses would be suspended & all of your distributions would be taxable.

If the S-Corp had a taxable profit, your basis would be increased by that amount (assuming you own 100% of the S-corp). As long as the distributions are less than the profit, you have sufficient basis to absorb the distributions so they don't show up on the return, rather your basis is reduced by the amount of the distributions.

If the distributions are more than the profit, the amount by which the distributions exceed the profit is subject to capital gains tax.

You really need to wait for the K-1. If I was doing your return, I would calculate an estimate of your tax due including the entire amount of the distributions as capital gains. Pay that tax by the 15th with your Form 4868 extension form & go get a beer.

Once you get the K-1 you'll know exactly how to handle the distributions.

Hope this helps.

PS I'm curious how you can continue to make distribution in excess of profit for 2 years in a row. Where's the cash coming from??

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