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jgordosea, Enrolled Agent
Category: Tax
Satisfied Customers: 3161
Experience:  I've prepared all types of taxes since 1987.
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We are selling a block of insurane business from our S Corp.

Customer Question

We are selling a block of insurane business from our S Corp. and then dispersin @70K for personal expenses. Is this 70K considered ordinary income on our 1040? How is it taxed?
Submitted: 5 years ago.
Category: Tax
Expert:  jgordosea replied 5 years ago.

Whether or not distributions are made from the S corporation to the shareholder during the year the profit or loss and the capital gains are passed from the corporation and reported on the individual tax return of the shareholder.

The shareholders will be taxed on the profit as ordinary income and the capital gain at those rates that are reflected on the Schedule K-1 for the tax year.

When there are earnings or gains that will be reported for the year on the K-1 any distribution of those earnings does not, in itself, create a taxable event. Rather the distribution is just giving to the shareholder what will be (or has been) reported as income subject to tax.

When the gain from the sale of the block of insurance is capital gain it will be capital gain to the shareholder to report.
When the gain from the operations of the corporation are ordinary earnings the shareholder will report ordinary income.

Only when there are distributions that are more than the earnings or gains of the corporation are those distributions possibly subject to tax if there is more distributed than the basis the shareholder has in the corporation.

The income retains the character and holding period as it passes from the corporation to the shareholder.

Please ask if you need clarification.
Thank you.

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