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Ed Johnson, Tax Preparer
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State of Ohio. How are S-Corporation shareholder distributions

Customer Question

State of Ohio. How are S-Corporation shareholder distributions taxed? It is my understanding that distributions in excess of shareholder basis are taxed at capital gains rate (15% for $78K-$165K tax bracket, through 2010). The shareholders are employees receiving FICA taxed salaries before the distributions. Any help is greatly appreciated.
Submitted: 5 years ago.
Category: Tax
Expert:  Ed Johnson replied 5 years ago.

DearCustomer

 

Distributions of profits of an S-Corp are treated as dividends and taxes as regular income.

 

A capital gain would only be realized as dissolution of the business. Then the gain would be total distibution -(minus)- basis.

 

 

Customer: replied 5 years ago.
So shareholder basis is of no tax benefit until sale of the shares or dissolution of the S-Corp, correct?
Expert:  Ed Johnson replied 5 years ago.

DearCustomer not exactly.

 

The tax advantage is that you do not pay SE tax on the distributions.

 

For that reason, most S-corps attempt to keep the W-2 wages low and maximize distributions.

 

But caution is in order. The IRS requires that share holders who are officers in the company be paid on W-2 wages prevailing wages for the level of work performed and reasonable for the amount of revenues genearated by the S-corp.

Ed Johnson, Tax Preparer
Category: Tax
Satisfied Customers: 10760
Experience: GPHR Cert; U.S. Treasury Tax Advocacy Panel appointee
Ed Johnson and 10 other Tax Specialists are ready to help you
Customer: replied 5 years ago.
Thank you.
Expert:  Ed Johnson replied 5 years ago.

DearCustomer

 

Thank you for your question and your comments and feedback. Good luck to you.

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Ed Johnson
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GPHR Cert; U.S. Treasury Tax Advocacy Panel appointee