Question

Distributions from a S Corporation: Dart Company, a calendar year corporation was formed in 1998 and made a proper S election in 2010 that is valid today. Its books and records for 2018 reflect the following information: Accumulated adjustments account at 1-1-18 $30,000 Ordinary income for 2018 $120,000 Accumulated earnings profits at 1-1-18 $60,000 Dart is solely owned by Robert, who basis in his Dart stock was $80,000 on 1-1-18. Answer the following independent questions: 1. If Dart distributed $20,000 to Robert, how much is taxable as a dividend? 2. If Dart distributed $130,000 to Robert, how much is taxable as a dividend? 3. If Dart distributed $180,000 to Robert, how much is taxable as a dividend? 4. If Dart distributed $230,000 to Robert, how much is taxable as a dividend Dividend: and how much is taxable at a capital gain? Capital Gain: 5. Is Dart distributed $280,000 to Robert how much is taxable as a dividend and how much is taxable at a capital gain? Dividend: Capital Gain:

Answer 1

Answer 1.

Distribution of S Corporation is treated as first coming from Accumulated adjustments account (AAA) and then treated as coming from coming from its Accumulated earnings profits (AEP). Distributions coming from AEP must be reported as dividend.

Given:

Accumulated adjustments account at 1-1-18 = $30,000

Ordinary income for 2018 = $120,000

This ordinary income will increase the AAA balance to ($30,000 + $120,000) = $150,000

Accumulated earnings profits (AEP) at 1-1-18 = $60,000

Answer 1:

If Dart distributed $20,000 to Robert, how much is taxable as a dividend?

When $20,000 is distributed to Robert the whole amount of $20,000 comes from AAA, as such no amount is taxable as dividend.

Answer 2:

If Dart distributed $130,000 to Robert, the entire amount can come from AAA balance ( ($30,000 + $120,000 = $150,000), as such no amount is taxable as dividend.

Answer 3:

If Dart distributed $180,000 to Robert, $150,000 comes from AAA (reducing AAA balance to zero) and balance $30,000 comes from AEP and is taxable as dividend.

Hence $30,000 is taxable as a dividend.

Answer 4:

If Dart distributed $230,000 to Robert:

$150,000 comes from AAA and reduces AAA balance to zero.

$60,000 comes from AEP which is taxable as dividend.

Stock Basis:

Robert's basis in his Dart stock on 1-1-18 = $80,000

Add, Ordinary income for 2018 =$120,000

Robert's basis in his Dart stock = $200,000

As Robert's stock basis = $200,000, non-dividend distribution upto $200,000 will not lead to capital gain.

As such balance distribution of ($230,000 - $150,000 - $60,000=) $20,000 will be treated as return of capital and no amount is taxable at a capital gain.

As such when Dart distributed $230,000 to Robert, $60,000 is taxable as a dividend and no amount is taxable as capital gain.

Answer 5:

If Dart distributed $280,000 to Robert:

$150,000 comes from AAA and reduces AAA balance to zero and Robert's stock basis to ($200,000 -$150,000=) $50,000

next, $60,000 comes from AEP which is taxable as dividend.

next, $50,000 ( to the extent of stock basis of Robert) will be treated as return of capital and this will reduce Robert's stock basis to zero.

and balance $20,000 will be treated as capital gain.

As such, if Dart distributed $280,000 to Robert:

Dividend = $60,000

Capital Gain = $20,000