topic S Corporation distribution in Business & farm

S Corporation distribution

OmarFl — Thu, 12 Dec 2019 02:33:40 GMT

Hi me and my brother have an S corporation and this year we will make some good profit, so we would like to take a clean check of $500,000 each besides what we already pay each other with is $150,000 each, whats the best way to do this and should we do before end of year or after? Thank you

Re: S Corporation distribution

Anonymous_ — Thu, 12 Dec 2019 02:46:55 GMT

You should probably retain legal counsel and/or professional tax advice in this regard.

For your services, the corporation is required to pay you and your brother reasonable compensation for your services.

See https://www.irs.gov/businesses/small-businesses-self-employed/s-corporation-compensation-and-medical-insurance-issues#Reasonable%20Compensation

Moreover, calendar year S corporations pass through net profit to their shareholders each calendar year so you and your brother will be taxed on the $500,000 each even if the corporation does not actually distribute it.

Re: S Corporation distribution

Rick19744 — Thu, 12 Dec 2019 14:25:40 GMT

In addition to @Anonymous_ comment and advice, keep the following in mind as well:

As noted by @Anonymous_, the S corporation is a pass-through entity and as such does not pay tax on the earnings. These earnings flow out to the shareholder(s) who then pay the appropriate federal and state tax.
Distributions are certainly a large component in the S corp environment and are used to provide cash for shareholder(s) to pay their tax and also provide a return on their investment.
Distributions are a high focus area with the IRS. In particular where there are significant distributions and no "reasonable" salary. Based on your initial facts, it appears that you are paying salaries. The key is, are those salaries reasonable; which is always a question of facts in each situation.
Distributions will be tax-free as long as the shareholder has sufficient basis in their S corp investment. These rules become a little more difficult if the S corp was a previous C corporation. Additionally, you need to make sure you understand the relationship between AAA (accumulated adjustment account) and distributions. So while a shareholder may have basis to take the distributions, distributions cannot make the AAA negative.
If you aren't already, make sure you are maintaining your basis in the S corp investment.
It appears you are having a successful year. It may be worthwhile to spend a few $$ with a tax professional to make sure you handle everything correctly.