Question

Bart has been the sole shareholder of a calendar year S-Corporation since its inception. Bart’s stock basis is $35,000, his debt basis is $15,000 and he receives a cash distribution of $65,000. There are no special elections made. What is the tax impact of the distribution if:

The S-Corporation has AAA of $30,000, AEP of $20,000 and $0 OAA before the distribution.

The S-Corporation has AAA of $30,000, $0 AEP and $0 OAA before the distribution.

Answer 1

a) When there is AEP exists :

The tax implication of cash distribution will differ based up on AEP.

If there is AEP exists , cash distribution will be tax free upto the extent of amount carrying in accumulated adjustment account (AAA).

AEP will be taxed as dividend which is a payment from cash distribution and the remaining amount of cash distribution will be tax free to the extent of reduced stock basis.

The amount in excess of reduced stock basis will be taxed as capital gain.

stock basis is $35,000 which is tax free.

Taxable amount as dividend is $20,000

reduced stock basis is $5,000 ($35,000-$30,000). Beacuse $30000 has been apportioned to AAA from stock basis.

Amount to be recognized as capital gain = (cash distribution - AAA - AEP - reduced stock basis)

= ($65,000 - $30,000 - $20,000 - $5,000) = $10,000

b)

When there is no AEP :

If a shareholder receives a non-dividend distribution from an S corporation, the distribution is tax-free to the extent it does not exceed the shareholder's stock basis.

Amount to be taxed = ($65,000 - $35,000) = $30,000

Debt basis is not considered when determining the taxability of a distribution.