S-Corp: how to compute the amount of profit distribution?

How to compute the amount you can reditribute as profit sharing and not throw a red flag to the IRS?

If I get it right, profit ditributions are not taxable.
The correct way to pay employees is to pay a salary so you can pay all the usual taxes on it (federal and state for unemployment, medicare,....)
At the end of the year you may end up with some profit that still haven't been distributed.
I feel like the IRS will not be happy if I put 100% of this remaining amount as profit distribution on the K1 (and thus would end up paying personal taxes only on the salary portion)

Let's take a simple case:

A S-corporation with only one shareholder makes $100k in 2010.
$60k of it have been paid during 2010 as salary, with both federal and state taxes (unemployment, medicare,...) included.
$10k are claimed as expenses (car, office supplies,....)

This leaves $30k on the company account that would be reported to the company K1.

What is the rule of thumb to redistribute these $30k?
And how to apply it to real world examples (would the rule of thumb be a percentage of the gross income? the remaining profit? before or after expenses?...)

If those $30k were to be claimed as profit distribution, they would not appear on the shareholder's personal K1 (bonus question: how come the company K1 would show $30k while the sharholder's personal K1 filed with his personal taxes show $0 as 100% of the $30k have been redistributed? Is that how it's supposed to be?),
thus no taxes would be paid on it (pretty sure it's something Uncle Sam doesn't like).

Thanks a lot
    My first long answer just poofed and disappeared.  I will give a a shorter one.

    We have an S corp with sales of $100,000 and total expenses of $70,000 leaving a profit of $30,000.  With a sole shareholder, the $30,000 would both be reported on the main K-1 attached to the return and the shareholders K-1.  The $30,000 profit flows-through to the shareholders return and ends up on Schedule E, page 2.  There is no option not to report it at the shareholder level as the S-Corp does not pay tax at the corporate level but at the shareholder level.   I have no idea what you mean by redistributing the $30K.  All the profit would flow through to the 100% shareholder (even though he didn't get the cash---the cash remains in the corporation) but he does receive an increase in his basis...a very important component of S-Corp shareholder activity.    So the S corp return will show a $30,000 profit on its K-1 and the sole shareholders K-1 will show the $30,000 also which he is required to report.   Put another way, the sole shareholder has to declare his share of the profit, in this case 100%, on his personal return and pay tax on it at the personal return level.  S corporations were created to avoid double taxation.....C corporations pay a tax at the corporate level and then the dividiends they pay from earnings are also taxed at the personal level.

    Let's say in your example there were 3 equal shareholders. they would each get a K-1 with $10,000 of income in Box 1 but those totaled up would come back to the corporate K-1 of $30,000.  Each shareholder has to declare their share of profits or losses each year.  If you want to know how basis affects how much is reported and how cash distributions to shareholders (not salary) can be nontaxable, let me know.
    • Thanks MItaxthoughts for your answer.

      1/ Your answer seems logical (please correct me if I'm wrong): the sum of all shareholder K1s should match the company K1.
      My confusion comes from several years ago when my accountant filed $10k on the company K1 (only one shareholder at the time), asked me to cut myself a $4k check called "profit distribution" and filed my personal K1 with only $6k. How was that possible? (probably how to make cash distribution non taxable as you talk about, see 2/ below)

      2/ I would love it if you could explain more your last sentence on how to make cash distribution non taxable.
      That's actually what I was trying to do here, and seems like that's how the accountant made those $4k above non taxable.

    • You are correct; my answer was logical. Laughing.   Your accountant made an error when he advised you that you could do that years ago.  The company K-1 must agree with the shareholder K-1's and the amount of income in box 1 of the shareholder K-1 must be reported in full on Schedule E, page 2.  

      Now, here is the rest of the story.  As an S-Corp. shareholder, you have a "basis" in your shareholder interest.  So, let's take a simple example;   You invest $10,000 to start the business by buying stock in the corporation.  Then in year one, your share of the corporate profits is $30,000 which you declare in full on your return.  Your basis is now $40,000 at the shareholder level. Now, you decide that you want to take a $20,000 cash distribution out of the corporation for your personal needs.  That "distribution" is not taxable to you because you have enough "basis" to cover it.  After the distribution, your new basis is $20,000 going into year 2.   In year 2, the corporation has a $20,000 loss (all allocated to you as 100% shareholder) AND you take a $10,000 cash distribution in year 2.   Cash distributions are deducted from basis first.  So, you started year 2 with $20,000 in basis, minus the $10,000 cash distribution, you have a $10,000 basis.  Now here's the tricky part.  Even though your K-1 will report your share of the loss that year of $20,000, you can only DEDUCT $10,000 for a loss on your return because that's all the basis you have left.  This is why the shareholder must keep a side record of his personal basis.   The $10,000 loss you didn't get to deduct in year 2 is "suspended" and carried over to future years and can be deducted once your basis has been restored by future profits OR you contribute additonal paid in capital to the company (buy more shares).  The $10,000 you took in year two as a distribution would not be taxable but it does reduce your basis and ultimately it reduced the amount of Loss you could deduct in year 2.  There is no free lunch.
    • @MItaxthoughts

      Many thanks again for your precious help.
      It does make everything clear now.
      Seems like one more reason that justifies dumping the accountants and use turbo tax instead.


      PS: The forum is weird: wanted to mark your first answer as helpful and the second as answer to the question but once the first one was marked I couldn't mark the second comment as answer.

      If any turbo tax guy reads this, please make the forum so that you can mark anything as answers.
      And your 2 buttons "submit an answer" and "comment" are just confusing, why not just one "reply" button and each reply can be marked as answer/helpful/not helpful like on the majority of forums out there?
      Also once you flagged an answer you cannot change it: I wanted to change from Helpful to Answer to give more kudos to MItaxthoughts but I could not.
    • Quick question... if you have a loss from an SCorp, can the loss be distributed differently.  For instance, I have an Scorp with my daughter.  We have a loss because of an expansion.  I would like to take a greater proportion of the loss since her income is much lower... can I do this??  If so, how do I represent that on a K1?  Or, does the K1 issued have to match the company profit/loss regardless of the % of distribution?

    • No.  You cannot arbitrarily assign the losses to the shareholders after the year has concluded based on the individual shareholder needs or tax situation.  The loss reported to each shareholder on their K-1 is based on their percentage of ownership in the corporation during the year.  You must report your share of the loss based on your share of ownership which will be reflected on your K-1 if done correctly.  In 2011, you buy additional shares in the S-Corp to give you a larger ownership going forward or buy shares from your daughter which will have the same effect.    If you report a different amount of loss on your Form 1040 than appears on your K-1, it will be flagged.   Remember, too, that your deductible pass-through losses cannot exceed your basis (or investment) in the S - corp.   Very simple example:   if you invested $10,000 in the corporation to buy shares and your allocable loss in 2010 is $20,000, you can only deduct up to your basis ($10,000) and the remaining loss is carried over to subsequent years so that may also prevent you from deducting 100% of your share of the losses in 2010.    If the corporation has been going awhile and has had profits, your share of prior year profits add to basis and prior year losses lower your basis.
    " If you want to know how basis affects how much is reported and how cash distributions to shareholders (not salary) can be nontaxable, let me know."

    Yes please!
    If I understand the question correctly he wants to know if he can take some or all of the $30k listed on his sole shareholder K1 at the end of the year out of the S corp as a cash distribution. Something I would like to know also. If we do that as sole shareholders does Turbotax automatically record that distribution some where else other than the K1.

    One important question I have is it better or worse to take the corp profits as salary or distribution?
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