apple32 is correct in regards to C corp distributions. Soon2BCPA you need to make sure you know the difference between C corp and S corp distributions.
Ex: C corp distributes 50,000 to a shareholder with a basis of 30,000. The C corp has current E&P of 10,000 and accumulated E&P of 15,000. Here is how the distribution is treated:
25,000 (10,000 current E&P + 15,000 accumulated E&P) is a taxable dividend to the shareholder
25,000 is a return of capital and is nontaxable to shareholder but reduces their basis to 5,000 (30,000-25,000)
If all else is the same but the distribution was 60,000 then this would be the case:
25,000 taxable dividend
30,000 nontaxable return on capital
5,000 capital gain, and basis would be 0, not negative
If an S corp the distributions are nontaxable (shareholder already paid tax on the income of the S corp in the year earned), so if you take the first example and change it to an S corp it would look like this:
30,000 nontaxable distribution
20,000 capital gain, basis is now 0
Hope this helps clarify.
FAR - 81 (8/31/12)
AUD - 93 (10/19/12)
BEC - 79 (11/27/12)
REG - 92 (2/8/13) DONE! All 1st attempt!
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