As shareholder's in an S corporation you should be taking reasonable salaries. This is a hot button with the IRS and you more than likely have exposure should you win the IRS audit lottery. Having said that, it is too late to change at this point in time. I recommend you correct this for 2018. As shareholder's in an S corporation you should be maintaining basis schedules of your investment in the S corporation. This begins with your initial capital contribution and is updated annually for the applicable lines on the K-1. Once you have an updated basis schedule you will then know whether or not your distributions are taxable as income. If after reducing your basis by the distributions you still have basis, then the distributions are not taxable. If your distributions exceed your basis, then you have a capital gain to the extent of the excess. Your basis cannot go below zero, so in essence this gain gets you back to zero. If you have gain, then this just gets reported on the applicable form 8949 and Sch D. Your basis schedule is very important and until you know what this is you cannot determine the tax impact of the distributions. Attached is a link to provide some guidance in this area. While it references a 2015 K-1 line, not much has changed and you can just change as necessary if the line numbers changed.
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