Determining Tax Treatment of S Corporation Distributions: Applying Section 1368 for Optimal Tax Results

Critical to S corporation tax planning and reporting is the treatment of distributions made by the S corp to its shareholders. The rules for tax treatment of distributions from an S corporation are found in IRC Section 1368 and its accompanying regulations. Failure to follow the distribution rules can lead to serious tax consequences, up to the loss of the S election for the corporation.

Whether a distribution from an S corporation is taxable is dependent upon shareholder-level attributes, specifically the distributee’s basis and accumulated adjustment account balance. Additionally, if an S corporation has accumulated earnings and profits—either because the entity was a C corporation prior to an S election, or the S corporation acquired the stock of an existing C corporation that has its own earnings and profits. The existence of accumulated E&P also creates an additional consideration in determining whether an S corp distribution is taxable.

Advisers with appropriate knowledge of the S corporation distribution rules and ordering requirements will not only be able to report distributions accurately, but also to provide proactive distribution planning for S corporation clients.

Listen as our experienced panel provides a thorough and practical guide to the S corporation distribution rules.

1. S corporation distribution rules of IRC 1368
2. Interrelationship of basis, accumulated E&P, and accumulated adjustments account (AAA)
3. Key shareholder attributes in determining character and taxability of distributions
4. Distributions made from S corp without accumulated E&P
5. Distributions made from S corp with accumulated E&P
6. Planning opportunities

The panel will discuss these and other important issues:

• What are the Section 1368 rules covering distributions from S corporations to shareholders
• Ordering rules for adjustments to AAA and stock basis needed prior to determining taxability of distributions
• What is the treatment of distributions by S corporations which have accumulated E&P due to prior C corporation entity status (or through acquisition)
• Distributions of real or tangible property (as opposed to cash)

Learning Objectives

After completing this course, you will be able to:

• Identify the intent and application of IRC 1368 and its governing regulations on distributions from S corporations
• Recognize the significance of net negative and net positive adjustments to AAA
• Determine the ordering rules for AAA and basis adjustments
• Pinpoint concepts of tax tier treatment of distributions to a shareholder in varying AAA and basis scenarios

• Field of Study: Taxes
• Level of Knowledge: Intermediate
• Advance Preparation: None
• Teaching Method: Seminar/Lecture
• Delivery Method: Group-Internet (via computer)
• Attendance Monitoring Method: Attendance is monitored electronically via a participant's PIN and through a series of attendance verification prompts displayed throughout the program
• Prerequisite: Basic knowledge of taxation.

Strafford Publications, Inc. is registered with the National Association of State Boards of Accountancy (NASBA) as a sponsor of continuing professional education on the National Registry of CPE Sponsors. State boards of Accountancy have final authority on the acceptance of individual courses for CPE Credits. Complaints regarding registered sponsons may be submitted to NASBA through its website: www.nasbaregistry.org.

IRS Approved Provider

Strafford is an IRS-approved continuing education provider offering certified courses for Enrolled Agents (EA) and Tax Return Preparers (RTRP).