Recently started a business and now wondering if you can receive distributions from your s-corporation tax free? Well, the good news is that it is tax-free BUT only to the extent that the distribution doesn’t exceed your basis. We go through all of the details below.
The Internal Revenue Code states that a non-dividend distribution from an S corporation to a shareholder is tax-free to the extent that it does not exceed the stockholder’s stock basis. If the S corporation had income or experienced another taxable event (i.e. sale) during the year then you would likely be subject to income taxes.
As a S corporation shareholder it is very important to understand how to compute your stock basis. Your stock basis starts with your initial capital contribution and then is increased and/or decreased based on the flow-through amounts from the S corporation. An income item will increase stock basis while a loss, deduction or distribution will decrease stock basis. Also keep in mind that each year you should be issued a K-1 to reflect the S corporation’s income, loss and deductions which are allocated to you. S corporation tax laws can get complicated so let us know if you have any additional questions.
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