In its first year of operation as an S Corp the corporation had ordinary business income of $8,000. It also has tax exempt income of $1,000. The corporation had $2,000 of C Corp earnings and profits accumulated prior to the S Corp election. The shareholder basis in the shares at the beginning of that first S Corp year was $3,000. At the end of that year The corporation distributes $8,500 to its sole shareholder. How is the distribution treated for tax purposes? Include in your answer the basis of the shares in the S Corp at the beginning of the year. following the year of the distribution.
Balance in AAA at the end of the year before distribution = $8000
C corp earnings and profit = $2,000
The tax exempt earning of $1000 shall increase the OAA
therefore the distribution of $8500 would be treated as follows:
Thus the shareholder will reduce its basis in the shares by $8000 and also recognize a dividend income of $500.
SHareholder's basis at the beginning of the year following the year of distribution = $3000 +$8000 - $8000 = $3000
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