What Happens to Money Left in an S Corp?

What Happens to Money Left in an S Corp?

S corp shareholders report income, gains, and losses from the corporation on their individual tax returns and pay taxes at their ordinary income tax rates. They avoid double taxation on any income or earnings from the corporation.

S corps can distribute profits to shareholders, retain them as earnings, or do both. The major potential problem with retaining cash in the S corporation arises if the owners have to pay large tax bills based on the corporate earnings they must report on their personal taxes.

When a shareholder dies, their shares become part of the estate and pass to beneficiaries. The new owner of the stock steps into the shoes of the deceased shareholder. Business can continue because a corporation is an independent legal entity that persists even as shareholders change.

S Corp Retained Earnings

S corp retained earnings are profits made by the business that are retained and not distributed to shareholders after taxes. The S Corp must distribute all pre-tax profits to shareholders for tax purposes. S corps divide earnings of dividends to shareholders, which are taxed only at the shareholder level.

How Is Money Left in an S Corp Taxed?

An S-corp’s shareholders report income, gains, and losses from the corporation on their individual tax returns. They pay taxes at their individual income tax rates, avoiding double taxation. S corp losses are deductible expenses for registered owners depending on tax basis. Three ways to take money: distributions, salaries, and loans.