A non-dividend distribution in excess of stock basis is taxed as a capital gain on the shareholder’s personal return. A shareholder is not allowed to claim loss and deduction items in excess of stock and/or debt basis.
Is a loan to a shareholder a distribution?
the loan can be reclassified as a distribution to the shareholder. If the shareholder does not have enough tax basis in their stock, taxable gain will result when the loan is reclassified as a distribution.
What happens when you take excess distributions from a S corporation?
Shareholders of an S corporation need to know the consequences of taking excess distributions. Distributions that exceed the stock basis will be generally taxed as long-term capital gains on the personal tax returns of shareholders.
What do excess distributions in excess of basis mean?
Excess Distributions Updated October 15, 2020: S corp distributions in excess of basis are distributions that exceed the stock basis of shareholders in an S corporation. Unlike a C corporation, an S corp enables its shareholders to report corporate income taxes on their personal income tax returns.
Can a shareholder distribution be considered a loan?
Whether the parties executed notes. While a formal note is evidence that a shareholder distribution is a loan, the lack of such a note or certificate of debt is not a determinative factor. The true substance of the transaction is the key factor. Whether interest was paid or accrued.
What happens when a loan is reclassified as a distribution?
If the shareholder does not have enough tax basis in their stock, taxable gain will result when the loan is reclassified as a distribution. Further, it is important to note that if a loan is reclassified as a distribution and there are multiple shareholders, the distribution could create disproportionate distributions amongst the shareholders.
