Let’s say I have a company and it’s an 1120s right.
My salary is 65k and I issue myself a w2 for that. I pay the 7.65% of taxes for it every paycheck and the s corp takes care of the rest.
My profit for the business came out to be $150k and since there’s 3 officers/shareholders I get 33% of that which is $50k. That’s reflected on my k1.
This is where I get confused
Let’s assume my basis is as follows
Beginning $45k
APIC $11k
Net Income $50k
Distributions $0k
Ending $116k
I haven’t actually received $50k. Does that mean I should distribute 50k to myself since my shareholder basis would remain positive?
Explain K1 income and distributions/contributions like I’m 5? Please?
byu/CoolProfessor449 intax
Posted by CoolProfessor449
5 Comments
You shouldn’t do anything. But yes, on paper your business is worth 50k more. You and your partners could withdraw that or let it grow.
You wouldn’t owe additional taxes ok that 116k, as its already been taxed
This is a pet peeve of mine, but s corp shouldn’t have apic.
The benefit of having an s corp is the distributions are only taxed once.
Basis is pretty much what you can distribute tax free, either because you contributed it with after-tax dollars from contributions, or you picked up the income on your K1 already. Say you contributed $10k and the your share of the business makes $10k. You pay tax on $10k regardless of what you do with the cash.
Basis is $20k. Now next year, you make another $10k and take out $20k. You only pay tax on the 10k in income, the 20k reduces your basis so you start with 20+10-20 and your ending basis for Yr 2 is 10k
Next year you lose $5k and take losses. You deduct those losses and your basis is $5k.
Only time taking money out becomes taxable is if your distribution is greater than your basis. You’re taxed on your share of income, not your distributions as long as you have sufficient basis.
You can’t have negative basis (in theory) so any negative basis ends up being capital gain to bring basis to zero if you distribute to much. Losses in excess of basis aren’t deductible.
Distributions have to be made pro rata in an s-corp, so one thing you definitely SHOULDN’T do is distribute $50k to yourself. If you and your fellow shareholders (or whoever has the authority to make distribution decisions) want to make a $150k distribution pro rata, you could do that and you wouldn’t owe an additional tax on your $50k share of it.
You don’t have to distribute $50k to yourself if you don’t want to, but if you do it would not be taxable. You’re taxed in the year it’s earned, and then your basis increases until you withdraw that