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Instead of paying a dividend (in the case of a C corporation) or a distribution (for an S corporation) in cash, you may be tempted to distribute property (car, computer, etc.) out of the corporation. If an S corporation distributes appreciated property to its shareholders, the difference between the fair market value and the property's basis will result in a gain that will be passed through to the shareholders. (an S corporation) owns a truck that was purchased for $20,000.
As a shareholder/owner you may think it's your property, but it's not. In addition, a distribution can affect your basis in the corporation.
A $50,000 distribution from Green to its sole shareholder will be treated as a dividend because total earnings and profits is a positive $100,000. The term “earnings and profits” is well defined in the Internal Revenue Code. Only income and deductions included on a corporation’s income tax return are included in the computation of current earnings and profits. Cedar Corporation incurs a net capital loss of $20,000 in 20X3 that cannot be deducted on its income tax return but must be carried forward to 20X4. Packard Corporation reported taxable income of $1,000,000 in 20X3 and paid federal income taxes of $340,000. Included in the computation of the loss was regular depreciation of $100,000 (E&P depreciation is $40,000), first year expensing under Â§179 of $50,000, and a dividends received deduction of $10,000. The corporation’s current earnings and profits for 20X3 would be: A. The shareholder’s tax basis in her stock in Husker is $50,000. $100,000 dividend, $50,000 tax-free return of basis, and $50,000 capital gain C.
Cedar will deduct the net capital loss in the computation of current earnings and profits for 20X3. Terrapin Corporation incurs federal income taxes of $250,000 in 20X3. Oakland Corporation reported a net operating loss of $500,000 in 20X3 and elected to carry the loss forward to 20X4. Included in the taxable income computation was a dividends received deduction of $5,000, a net capital loss carryover from 20X2 of $10,000, and gain of $50,000 from an installment sale that took place in 20X1. The corporation’s current earnings and profits for 20X3 would be: A. How is the distribution treated by the shareholder in 20X3? $100,000 dividend and $100,000 tax-free return of basis D.
In that case the gain is income to the other shareholders as well, based on share ownership.