K1 income has never been received. Why is it taxable? If so, why do people become shareholders of S corp?

[MinhT · Accepted solution]

An S-corp is a pass-through entity. It does not pay taxes and all its profits/losses are allocated to its shareholders through the forms K-1. Each shareholder is taxed on their allocation of profits reported on the K-1, even if the profits have not yet been distributed.

On the other hand, when you receive distributions form the S-Corp, these distributions are not taxable.