What are S corporation distributions?

Distributions from an S corporation occur when a corporation makes a payment of cash or property to its shareholders based on their stock ownership. Because S corporations serve as conduit (pass-through) entities, distributions from S corporations more closely resemble partnership distributions than C corporation distributions. C corporation distributions, of course, usually take the form of taxable dividends.

To determine the tax consequences of distributions from an S corporation, it is important to know first whether or not the S corporation has accumulated earnings and profit (AE&P). AE&P is important because a distribution from AE&P will result in a taxable dividend to a shareholder. An S corporation does not generate earnings and profit as such and will not have AE&P unless the company existed originally as a C corporation or acquired a C corporation. To simplify matters, this discussion will presume that there is no AE&P. If there is a possibility that your C corporation will make an S election, contact an accountant or tax attorney to learn more about AE&P.

What is an S corporation and how is it taxed?

In effect, an S corporation conducts business as a regular corporation but is essentially taxed as a partnership. Unlike a C corporation, the S corporation generally does not pay a corporate tax on income. Rather, the S corporation passes income, losses, deductions, and credits through to its shareholders, who report the items and calculate the tax on their individual returns.