S-Corps are subject to single taxation. Income earned is distributed among shareholders who report dividends on their tax returns. Shareholders pay taxes on the individual returns.
Knowing differences between dividends and distributions is important. S-Corporations don’t pay dividends but make tax-free non-dividend distributions unless distribution exceeds shareholder’s stock basis. Excess distributions are taxed as long-term capital gains.
While S-corps may save on self-employment tax, costs may exceed savings. S corps avoid taxes through single layer taxation and by distributing income to shareholders.
S corps cannot have over 100 shareholders. Shareholder distributions are only taxed individually.
S corp qualified dividends refer to dividends from earnings when operated as C corp. They are taxed at special rates.
S Corporation Distributions
Excess distributions exceed shareholder’s stock basis. Excess distributions are taxed as capital gains. Profits and losses flow to shareholders’ personal tax returns.
While there’s no set rule for distributions, an S corp must allocate them proportionally by ownership stake. An S corp must meet the IRS’s reasonable salary requirement before paying distributions.
To prevent distributions being reclassified as wages, record each one in the corporate record. All shareholders should receive a distribution proportional to ownership on the same date.
As a pass-through entity, S corporations distribute earnings through dividends to shareholders, only taxed at the shareholder level. Distributions may include untaxed amounts.
Unfortunately, Uncle Sam won’t let you take all money out as distributions, because the government wants tax money.