Distributing Assets to Shareholders Circumstances may arise in which your company wishes to distribute assets to shareholders as well as, or instead of, dividends. Assets such as properties and separate businesses can be transferred to shareholders either by way of a non-cash dividend or as a form of demerger.
How are distributions of property other than cash from corporations taxed?
When a corporation makes a nonliquidating distribution of corporate property other than cash (including a distribution to redeem stock), the corporation recognizes gain if the property’s fair market value (FMV) exceeds its adjusted tax basis in the corporation’s hands (Sec. 1231 property) is capital gain.
Is the stock and debt basis of a corporation taxable?
The taxable amount of a distribution is contingent on the shareholder’s stock basis. It is not the corporation’s responsibility to track a shareholder’s stock and debt basis but rather it is the shareholder’s responsibility.
When is the stock basis of a S corporation adjusted?
Stock basis is adjusted annually, as of the last day of the S corporation year, in the following order: Decreased for items of loss and deduction. When determining the taxability of a non-dividend distribution, the shareholder looks solely to his/her stock basis (debt basis is not considered).
How are stock basis and AAA affected by SEC 1367?
Because Sec. 1367 (a) (2) (D) requires that stock basis and AAA be reduced by corporate expenses and losses that are neither deductible nor capitalizable, the corporation’s AAA is evidently reduced by the $5,000 unrecognized loss. In addition, each 50% shareholder evidently reduces stock basis by $2,500.
Is the amount of a shareholder’s stock and debt basis important?
The amount of a shareholder’s stock and debt basis is very important. Shareholder Loss Limitations An S corporation is a corporation with a valid “S” election in effect. The impact of the election is that the S corporation’s items of income, loss, deductions and credits flow to the shareholder and are taxed on the shareholder’s personal return.
