Reporting K-1 16D Distribution in Turbo Tax

[rtw33]

I have an S-Corp, of which I'm the only employee, that has paid me W2 wages as well as a distribution of some of the surplus funds.  My basis is 0, so I expect I need to pay taxes on the distribution.  There are no follow-up questions related to field 16D field in the K-1 form in Turbo Tax, which I've filled out with the distribution, that allow me to indicate that I have no basis.

Do I need to pay additional taxes on the distribution?  If so, how do I enter this in turbo tax?

[Mike9241]

I have a question.  if basis is $0 where did the money come from to make the distribution? it's not impossible but doesn't happen often. 

Turbotax does not do basis calculations so if your basis was truly $0 before the distribution you need to enter the amount on form 1099-B worksheet. describe as (s corp name) distribution in excess of basis.  type would be C  -held stock short term - proceeds and cost basis not reported to IRS or type F if you held the stock long-term. 

[rtw33]

My understanding of basis held in an S-Corp is the amount of money that I have personally invested.  Maybe I understand the concept incorrectly.

The S-Corp is the entity that is paid for consulting work that I do, so didn't really need any significant seed funding (only enough to get the business license and initial insurance premiums, which were paid back after revenue started coming in).  And the distribution was surplus funds that the S-Corp collected from my clients that weren't paid to me as W-2 wages.

Would the distribution in this case be more like a qualified dividend than capital gain?  I hold 100% ownership of the S-Corp.

[DanielV01 · Accepted solution]

@rtw33  Basis in an S-Corp is not strictly what you invest into the company.  Rather, basis is also affected by gains and losses by the company (and other factors, but we'll keep this simple).

For example, you didn't but any money into the company at the beginning of the year, but the company earned $60000 in income.  You paid yourself reasonable compensation of $40000, and you distributed the remaining $20,000 to yourself at the end of the year.  How is this reported?

The $40,000 of compensation is considered a company expense, so the remaining $20,000 is the company's net income.  This net income is passed through to you via Schedule K-1, and you report that as taxable income on your personal return.  Since you must claim this income as taxable, this 20,000 now gets added to your basis.  So you now do not have a basis of $0, but rather $20,000.  You could choose to leave that money "in the company" as it were, but you choose instead to receive it as a distribution at the end of the year.  This distribution is also reported on the K-1 (Box 16, code D).  As long as your adjusted basis is equal to or greater than the amount of distribution you receive, you will pay $0 tax on the distribution itself (it is a return of capital:  you paid the tax on the company income you claimed on your tax return).

However, the IRS is not going to assume that the distribution is non-taxable.  They will want proof.  So you will look through your K-1 for a sheet that reports your "Shareholder Basis".  That form will report that you started off the year with $0 basis, that you received $20,000 of company income, and had $20,000 of distributions for a final end-of-year basis of $0.  This document is attached to your tax return (usually as a PDF copy), and you may still e-file.  

Based on what you describe above, this sounds like your situation.  But go through your records to be sure, and if you see something different, feel free to post so we can provide further clarification.