Determining Tax Treatment of S Corporation Distributions: Applying Section 1368 for Optimal Tax Results

Description

Critical to S corporation tax planning and reporting is the treatment of distributions made by the S corp to its shareholders. The rules for tax treatment of distributions from an S corporation are found in IRC Section 1368 and its accompanying regulations. Failure to follow the distribution rules can lead to serious tax consequences, up to the loss of the S election for the corporation.

Whether a distribution from an S corporation is taxable is dependent upon shareholder-level attributes, specifically the distributee’s basis and accumulated adjustment account balance. Additionally, if an S corporation has accumulated earnings and profits—either because the entity was a C corporation prior to an S election, or the S corporation acquired the stock of an existing C corporation that has its own earnings and profits. The existence of accumulated E&P also creates an additional consideration in determining whether an S corp distribution is taxable.

Advisers with appropriate knowledge of the S corporation distribution rules and ordering requirements will not only be able to report distributions accurately, but also to provide proactive distribution planning for S corporation clients.

Listen as our experienced panel provides a thorough and practical guide to the S corporation distribution rules.