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
*A reminder that posts in a forum such as this do not constitute tax advice.
Also keep in mind the date of replies, as tax law changes.
