I started S-Corp with 40K loan to start it. Now the S-Corp has 8K profit that I took out as distribution. Do I pay taxes on this 8K

"we took out" Is this a Partnership?

Me and my wife are equal shareholders.. so we took out the money as distribution

There are a number of facts missing here, but I will provide some guidance:

• As you most likely understand, S corporations do not generally pay tax.  The income and loss is passed through to the shareholder's and the tax is paid at the individual level.
• When you invest in a pass through entity like an S corporation, you need to keep track of your basis in the investment.  This begins with your capital contribution and is adjusted annually for the applicable lines on the Schedule K-1.
• As long as your basis is positive, any distributions taken out will not be taxable.  The reason for this is these just represent earnings that have already been taxed.
• The issue I see here, is you don't indicate if you made any capital contribution or whether the S corporation was profitable.  So without that information it is impossible to say whether or not the distribution is taxable.
• The other issue is whether or not you paid yourself and your wife any salary.  This is a very hot issue with the IRS; S corporation shareholders taking out distributions and not taking wages.  Prime for an IRS audit letter.
• Finally, why aren't you just calling the distribution a loan repayment?
• Since we are talking about the loan, do you have a formal loan agreement between you and the S corporation and have a stated interest factor?  This is another area where the IRS may just claim that the loan is really just a capital contribution.  Not a real big deal, but could change some economics.
• Here is a link to the K-1 instructions that will provide some guidance on maintaining your basis in the S corporation https://www.irs.gov/pub/irs-pdf/i1120ssk.pdf

Thanks a lot for the answer. I will answer few missing points :
1. Yes we did pay a salary to ourselves via regular payroll.
2. I don't have a formal loan agreement, so I think this should be treated as more of a capital contribution to start the business.
3. If I call the distribution as loan payment only thing it changes on K-1 is that it shows as 16 E instead of 16 D. In both cases the cost basis is still positive and it doesn't seem to have any effect when I put these values while filing my personal taxes.

Was there income or a loss passing through?

No there was income, even after paying payroll we had about 10K profit left. So we took out 8K

Ok.  My suggestion would be to call your original contribution a capital contribution unless you begin paying interest on the "loan" and also begin making payments on the "loan".
Also, you need to begin tracking your basis; capital $40,000 + income $10,000 = $50,000 less distribution $8,000 = $42,000 ending basis (obviously rough figures based on your facts).

That makes sense and I do have a cost basis similar to how you have mentioned. However what is not clear is that on K-1 it shows up as 8000 on line as 16(E).  Then using this K-1 while filing my personal taxes its getting counted as my income.

That's because you have it coded as a loan repayment on the K-1.
A normal distribution is coded 16D.
If you are going to leave it as a loan, this will change how you track your basis.  Additionally, you will need to tell TT the basis in the note in order to avoid income recognition.

OK. I think this is the piece I am missing may be then. Where do I put the basis in Turbo Tax when filing my personal taxes so that it doesn't recognize it as income.

Unfortunately I can't help there.
Have you actually filed the S corp return and will be leaving this as a loan?
If you have not filed the S corp return, then you can go back and correct the K-1 to reflect as a distribution.
If you leave as a loan, then you need to be tracking capital stock basis and debt basis separately which can get complicated.  In this case, when repaying debt, you do run the risk that some of the repayment can be taxable if you use any of the debt as basis for losses.

I have not filed the S-Corp taxes yet. Thanks again for all the detailed explanation.

Welcome