1120S Shareholder Distribution

[Le Duc]

As a business owner, my ordinary income amounts to $50,000. At the beginning of the year, my stock basis stands at $15,000, and I have a section 179 deduction of $15,000.

Once I deduct the section 179, I am left with $35,000 to distribute. I'm uncertain about how to properly enter or classify the following details on my tax returns or 1099-DIV:

$15,000 as a return of capital, which is nontaxable. This distribution will reduce my ending year stock basis to $0.

$20,000 as excess distributions and loan repayments, which are considered taxable long-term capital gains.

Could you please guide me on the appropriate way to handle these entries or classifications?

[Mike9241]

the info you provided is not clear. so if  

basis BOY $15K

ordinary income after salary $50K

basis now $65 K

distributions $35K

basis now $30K

179 deduction $15K

basis end of year $15K

based on this distributions up to $50K would reduce basis to zero and be tax free

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on the other hand if the $15K basis includes the $50K income (this could imply negative basis at the end of the prior year, unless in the current year you put additional money into the corp, which presents its own problems as basis should never be negative) but not the $15K 179 

distributions of up to $15K would be tax free reducing basis to zero (distrubtions reduce basis before the 179 deduction under the Code's ordering rules) 

if you in fact distributed $35K in the current tax year you have $20K of capital gain 

the $15K 179 loss would not be allowred as a current year tax deduction due to no basis so would be a carryforward to use against future income

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use the IRS form 7203 (you'll need to submit it when you file your 1040) to compute your basis. read the instructions for the applicable lines. 

https://www.irs.gov/site-index-search?search=7203&field_pup_historical_1=1&field_pup_historical=1 

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also note that if this is for 2022 but the distributipns occurred in 2023 they have no effect on your 2022 basis. they'll be taken into account when doing your 2023 returns.  

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if you did not take a salary for the year that would present a tax issue that could be raised by the iRS separate and apart from the basis issues.

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distributions are not reported on for 1099-DIV only on the k-1

the exception would be if it was once a C-Corporation with accumulated profits and those were being distributed. 

[tagteam]

An S corporation does not actually pay dividends as does a C corporation, so an S corporation would not issue a 1099-DIV unless it were liquidating. Distributions would be reported on your K-1 (1120-S).

From the first line in your question, if your ordinary income (as shown on Line 1 of your K-1) is $50,000 and your Section 179 deduction is $15,000 (as shown on Line 11 of your K-1), then, barring any further relevant figures and only taking those two figures into account, your basis at the end of the year would be $50,000 ($15,000 beginning of the year basis PLUS $50,000 ordinary income on Line 1 LESS $15,000 Section 179 deduction).

[Le Duc]

@Mike9241 Thank you for providing your valuable insights. As this is my first year filing 1120S, I want to ensure that I adhere to the guidelines appropriately to avoid any potential issues by year-end. These distributions are for 2023.

Regarding the distribution, I have another query: Is it permissible for owners to take distributions that exceed their basis? To illustrate, please refer to the example below:

Scenario #1

Basis Beginning of Year (BOY): $0K

Ordinary Income after Salary: $50K

Basis Now: $50K

Distributions: $65K

Basis Now: $0K

Excess Distributions: $15K

179 Deduction: $15K

Basis End of Year: $0K

Based on these figures, I understand that the 179 deduction will be carried forward to the subsequent year since my basis is $0. However, I am uncertain about where to report the Excess Distributions and Loan Repayments of $15K? Should they be considered as Long-Term Capital Gains, given that I have held stock in the company for 5+ years?

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Additionally, in Scenario #2:

Basis BOY: $0K

Ordinary Income after Salary: $50K

Basis Now: $50K

Distributions: $0K

Basis Now: $50K

179 Deductions: $15K

Basis End of Year: $35K

Since there have been no distributions in this scenario, I am curious if this could potentially lead to any complications, considering that S corporations do not pay taxes on retained earnings.

[Rick19744]

A couple of follow-up comments:

• A 1099-DIV is only used for liquidating distributions as noted by @tagteam 
• When adjusting your stock basis, a shareholder needs to determine whether the overall adjustment to basis is a net positive or net negative before determining the sequence of basis adjustments.  It is possible for distributions to reduce basis first and have ordinary losses carried over.  Just depends on what the net adjustment is. 
• Bullet number 2 is important to understand when completing form 7203.
• If you aren’t clear on how S corps work, I recommend meeting with a tax professional.  There can be many traps for the unwary.