Question

# During the year, Chelsie, the sole shareholder of a calendar year S corporation, received a distribution...

During the year, Chelsie, the sole shareholder of a calendar year S corporation, received a distribution from the S-corp of \$33,000 in cash. At the end of last year, her stock basis was \$9,000. The corporation earned \$11,000 ordinary income during the year. The corporation has no accumulated E & P, from prior years, but does have a beginning of the year balance in AAA of \$3,000. How is the distribution to Chelsie taxed on her federal income tax return?

Distribution is \$33,000

Basis in stock before distribution = \$9,000 beginning + \$11,000 income = \$20,000

Distribution is taxable as dividend to the extent of \$3,000 AAA balance.

Distribution is not taxable to the extent of \$20,000 basis in stock.

Remaining distribution = \$33,000 - \$3,000 - \$20,000 = \$10,000 is taxable as capital gain.

Thus, total distribution is taxable as:

\$3,000 dividend

\$20,000 non-taxable return of basis in stock

\$10,000 long-term capital gain

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