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S Corp - When is your S Corp distribution taxable?

Not all S Corporations are subject to the same rules when it comes to this question. How distributions from your S Corporation are treated may depend on its history. Did your S Corporation ever operate as a C Corporation? Or, was your business designed to be an S Corporation right from formation? In this video, Tyee focuses on the later, distributions from a business that has always been an S Corp. He also focuses on distributions of cash, saving the issue of distributing non-cash property for another topic. Assuming your business has always been an S Corp, then the taxation of your cash distributions follows the basic principle common to other flow through entities. One of the key characteristics of the S Corp is that it doesn’t generally pay federal income tax. The exceptions to that concept only occur when the S Corp was previously a C Corp. Rather than paying income tax on the business profit, the S Corp reports its income in an annual tax filing and to its owners. The owners then pay tax on the business profits that “flow through,” to their personal tax returns. In this way, the S Corporation is similar to partnerships or the LLCs that are taxed as a partnership. Analyzing the taxation of cash distributions from a flow through entity revolves around the owner’s tax basis in the entity. By tax basis, we mean the owner’s after tax investment in the business. It’s the amount the owner should be able to get out of the business without having to pay tax because it’s generally established with after tax dollars. An owner’s tax basis in their S Corp is what we call their stock basis. We use this convention even if the owner’s are really members of an LLC taxed as S Corp rather than shareholders of a corporation. For more information and advice on the topic, please watch the video.