| S corporation with 2 shareholders each owning 50% of the issued stock. Shareholder 1 takes a distribution of $26k, while shareholder 2 takes no distribution. How can this be structured so that the $26k is not allocated 50% to each shareholder at the end of the year without making it appear as if there are 2 classes of stock?===============>> it is not allocated 50% to each shareholder at the end of the year; the S corp does not withhold taxes on distributions. Instead, the tax liability flows through the S corp to the shareholder #1. He needs to report the distribution on his 1040. in general,taxes on a shareholder #1?s distributions depend upon his contribution in the S corp and the past amount of distributions. Distributions are taxable capital gain income if they exceed the S corp basis of the shareholder #1. But the shareholder#1?s stock basis is decreased, but not below zero shareholder #1 and #2 have a stock basis and perhaps a loan basis. Stock basis consists of amounts invested in the S corp plus the shareholder's accumulation of undistributed profits. Loan basis consists of any amount the S corp has borrowed from the shareholder minus repayments.
The goal is to avoid shareholder 2 from incurring any tax liability as a result of shareholder 1?s distribution. Shareholder 1 should bear the tax consequence. =========>>correct as mentioned above; No taxable event occurs as long as your distribution does not exceedthe sh#1?s stock basis. If it does, his distribution is divided into the taxable and nontaxable amount. The IRS considers the amount that exceeds his stock basis as a capital gain that needs to be reported on Sch D and on his 1040 not your 1040. any distribution the stockholder receives from the S corporation will decrease his basis. This information can be found on each shareholder?s K-1, which is provided by the S corporation at the end of every tax year.
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