What do I need to do in Turbo Tax to get the capital-gain tax break from cash/property distribution (i.e. box 16d of Schedule K1)?

[cchienskuo]

Using Turbo Tax Premiere, I see that the tax rate on my distribution (box 16d) is much higher than the typical capital gain rate (15-20%). TT seems to be treating all of box 1 as normal income and did not split it into income and distribution. How to tell TT that part of box 1 is distribution and get the capital gain rate on that portion?

[TaxGuyBill]

All of box 1 *IS* normal taxable income.  Distributions are NOT taxable unless the distributions are more than your "basis" (which is unusual for most people).

Why do you think something is a capital gain?

[Rick19744 · Accepted solution]

I believe you are not understanding the tax impact of the various boxes on your schedule K-1.

As TGB pointed out, on a properly prepared schedule k-1, box 1 is ordinary income and taxed at ordinary income tax rates.

Box 16 with a code D, is generally not taxable.  This is generally just a distribution of cash to you on income you have already paid tax on (such as box 1).  

As a shareholder in an S corporation, you should be tracking your basis in your investment.  The only time box 16 with a code D is taxable to you, is if you receive a cash distribution in excess of your basis; i.e. your basis cannot go below zero.  If you do receive a distribution that exceeds your basis, this amount is taxable as a capital gain and is reported on Schedule D and the applicable form 8949 of your personal tax return form 1040.

If you believe that all of your k-1 box 1 is not ordinary income, then that means the 1120S and the schedule K-1(s) are incorrectly prepared and an amended corporate tax return needs to be prepared.

If you complete your tax return with information that does not match the K-1, you will at some point receive a matching notice from the IRS.