S-Corp. distributions

 

You should know that your ability to use any losses that pass through from an S corporation to you personally depends on your basis in the S corporation's stock and debt. Basis is also important for other purposes such as determining the amount of gain or loss you recognize if you sell the stock. Your basis in the corporation is adjusted to reflect various events such as distributions from the corporation, contributions you make to the corporation, and the corporation's income or loss.

Calculating the S corporation shareholder’s basis correctly is important because it measures the amount the shareholder can withdraw or receive from the S corporation as a distribution without realizing income or gain.

Often, the task of tracking basis is neglected because, when a profitable company makes only minimal distributions, the number simply doesn’t matter—until a major change happens, such as a change in the shareholder’s ownership or the end of the company’s life.

If the company has losses, they are allowed as a deduction on the shareholder or partner’s tax returns to the extent the individual has basis. Without basis, those losses are suspended/carried over to offset future income or basis. If basis is unknown or incorrect, a shareholder might incorrectly deduct losses he or she is not entitled to deduct.

A constant struggle between CPAs and their clients lies in distributions—or “over-distributions”, to be more accurate. When a shareholder or partner takes all the basis out (and then some), the excess is a taxable capital gain—often an unwelcome surprise to shareholders accustomed to receiving distributions tax-free. Distributions are an important and common reason for good basis calculations and good basis discussions with clients ahead of time.

If you have taken distributions in 2012 (or a planning to) it’s imperative that you have enough basis in your S-Corp. so that they are not re-characterized as taxable capital gains. I will be happy to sit down and review your basis and go over other S-corporation planning techniques.

Please give me a call to set up an appointment.