Are Distributions From an S-Corp Taxable? (With Examples) + FAQs

S-Corp distributions get taxed in a way that confuses many business owners. The answer depends on where the money comes from and how much each owner has invested in the business. Unlike a regular C-Corporation, S-Corps pass income directly to owners without the company paying corporate taxes first.

According to the IRS S-Corporation rules, owners must know that not all distributions create tax bills. Some distributions are completely tax-free. Others trigger taxes based on earnings the company already reported.

What You’ll Learn From This Article

🎯 Why S-Corp distributions work differently from other business types and what that means for your money.

💰 Which distributions cost you nothing in taxes and which ones create immediate tax bills.

📊 How to track your stock basis (your investment amount) to know exactly when distributions become taxable.

⚠️ The specific mistakes owners make that trigger surprise tax bills and audit problems.

🔧 Step-by-step examples showing real dollar amounts so you see exactly how the math works.

How S-Corp Distributions Differ From Other Business Structures

An S-Corp exists in a special tax category. The company itself does not pay federal income taxes. Instead, all income flows to the owners’ personal tax returns through documents called Schedule K-1s. This pass-through structure changes how distributions get taxed.

When you own a regular C-Corporation, the company pays taxes first, then distributes money to owners who pay taxes again. This creates double taxation. S-Corps avoid this problem because taxes happen only once—at the owner level. However, this tax advantage comes with strict rules about what counts as a “distribution.”

The key difference lies in basis. Basis means your total investment in the company. Think of it as how much “skin in the game” you have. When the S-Corp makes money, basis goes up by the earnings amount. When the company loses money, basis goes down by the loss amount. Distributions reduce basis dollar-for-dollar.

The Core Rule: Distributions Only Tax You If They Exceed Your Basis

A tax-free distribution happens when the amount you receive stays below or equals your basis. The IRS allows this because it treats distributions as a return of your own money that you already invested or earned through the company’s profits.

Your basis starts with what you personally invested in the S-Corp stock. If you put in $50,000 cash, your starting basis is $50,000. Each year, the company’s net income gets added to your basis automatically. If the company earns $20,000 profit in year one, your basis jumps to $70,000. This happens even if the company does not distribute the money to you.

Once basis reaches a certain level, distributions pull money out tax-free until the amount you receive exceeds that basis number. Only the excess portion gets taxed. This rule applies to each individual shareholder separately. If you own 40% of the S-Corp and your brother owns 60%, you each track your own basis independently.

Understanding Stock Basis: The Foundation of Distribution Taxation

Stock basis determines everything about distribution taxation. The IRS requires you to increase basis by three things each year: your share of the company’s net income, tax-exempt income, and any additional cash you invest. You must decrease basis by distributions you receive, losses you claim, and deductions for business expenses.

The math works like this for a simple example. You start with $100,000 basis from your initial investment. The S-Corp earns $30,000 profit in year one. Your share of profit gets added to your basis, making it $130,000. The company distributes $40,000 to you at year-end. This distribution reduces your basis by $40,000, leaving $90,000.

According to IRS Publication 589, shareholders cannot receive distributions above basis without triggering capital gains taxes. Capital gains tax rates apply, which often run lower than ordinary income tax rates. However, you still owe taxes on the excess portion, and you must report it correctly to avoid penalties.

When you receive a distribution exceeding your basis, the excess amount counts as long-term capital gains. The IRS treats this as selling part of your ownership stake to the company. Long-term capital gains currently receive preferential tax rates, typically 15% or 20% depending on your total income level. This matters because capital gains rates beat the ordinary income tax rates many S-Corp owners pay.

How Earnings and Losses Affect Distribution Taxation

S-Corp earnings automatically increase your basis without any action required. This happens on the last day of the company’s tax year. The company’s accountant will calculate your share of net income and add it to your basis records. You report this on Schedule K-1, which the S-Corp sends to you by March 15th each year.

Losses work the opposite way. If the S-Corp loses money, your basis decreases by your share of the loss. Important rule: you can only claim a loss up to your basis amount. If you have $50,000 basis and the company loses $75,000, you can only deduct $50,000 of the loss. The remaining $25,000 loss cannot be used until you have additional basis available in future years.

This basis limitation rule prevents losses from exceeding your actual investment. The IRS wants to stop people from claiming huge business losses that exceed what they actually put into the company. If you paid $100,000 for your stock but the company loses $500,000, you cannot claim losses beyond your investment amount. Excess losses carry forward to future years when you increase your basis again.

The Three Distribution Scenarios That Determine Taxability

Scenario One: Distributions Below Basis (Completely Tax-Free)

You own 50% of an S-Corp and have $100,000 basis. The company distributes $60,000 to you. You receive $60,000 completely tax-free. Your new basis becomes $40,000. This distribution does not appear as income on your personal tax return because you are simply getting back a portion of your investment.

Situation	Result
Basis before distribution	$100,000
Distribution received	$60,000
New basis after distribution	$40,000
Taxable amount	$0

Scenario Two: Distributions Exceeding Basis (Partially Taxable)

Same company, but now your basis stands at $40,000. The company distributes $90,000. The first $40,000 comes out tax-free because it stays within basis. The excess $50,000 triggers capital gains tax. You report the $50,000 as long-term capital gain on your personal return.

Situation	Result
Basis before distribution	$40,000
Distribution received	$90,000
Tax-free portion	$40,000
Taxable portion	$50,000

Scenario Three: Multiple Shareholders With Different Basis Amounts

Two partners own an S-Corp equally. Partner A invested $150,000 and has $180,000 basis (including profits). Partner B invested $50,000 and has $70,000 basis. The company distributes $100,000 to each partner. Partner A takes the entire amount tax-free. Partner B must pay tax on $30,000 of the distribution. Their different investments created different basis amounts, triggering different tax outcomes.

Item	Partner A
Basis amount	$180,000
Distribution received	$100,000
Taxable portion	$0

Item	Partner B
Basis amount	$70,000
Distribution received	$100,000
Taxable portion	$30,000

Breaking Down The Accumulated Adjustments Account (AAA)

The Accumulated Adjustments Account (AAA) tracks the company’s earnings that have not been distributed yet. This account increases when the S-Corp makes money and decreases when distributions happen. It represents the pool of profits available to distribute tax-free (up to each shareholder’s basis).

Think of AAA as the company’s “retained earnings” from its S-Corp years. If the company earned $100,000 total since becoming an S-Corp and distributed $30,000, the AAA balance would be $70,000. This account matters most when the company was previously a C-Corporation before converting to S-Corp status.

According to IRS regulations on AAA, the order of distribution matters significantly. The company must distribute AAA first before touching other accounts. This means tax-free distributions come from AAA money before any distributions create immediate tax liability. Tracking AAA requires careful record-keeping and attention to the rules.

When an S-Corp distributes money, it pulls from AAA first (assuming it has a balance). Once AAA runs out, further distributions may come from the Earnings and Profits (E&P) account if the company was ever a C-Corporation. Distributions from E&P get taxed as dividends to shareholders. This order prevents companies from manipulating which profits get distributed first.

Loan Basis: How Shareholder Loans Affect Distributions

Many S-Corp owners lend money to their companies beyond their initial stock investment. These loans create debt basis, which differs from stock basis. Debt basis increases your total loss deduction potential. Distributions can only reduce stock basis, never debt basis.

The distinction matters because you can claim more losses with debt basis available. If you have $100,000 stock basis and $50,000 debt basis (total $150,000), you can deduct $150,000 of company losses. However, when the company distributes cash, distributions only reduce stock basis. Debt basis stays untouched unless the company forgives the loan.

Shareholder loans must follow specific rules to maintain valid debt basis. The loan must be a genuine debt obligation with a note, interest rate, and repayment schedule. The IRS scrutinizes loans that look like hidden distributions. If the company never actually intends to repay the loan, the IRS will reclassify it as a distribution or contribution.

What Happens When Basis Goes Negative

Basis cannot go negative under IRS rules for S-corporations. When distributions exceed your basis, the excess becomes taxable immediately. Your basis drops to zero, and any additional distributions in that year are also taxable capital gains.

If the company continues distributing money after basis reaches zero, you keep paying capital gains tax on each additional dollar. Many owners find themselves in this position when a profitable S-Corp distributes heavily to shareholders without reinvesting enough to maintain basis. This happens often in mature businesses that generate steady profits but pay out most income.

Negative basis cannot occur because shareholders get taxed on the excess. Instead, you carry forward unused losses to future years when basis increases again. Once basis climbs back up through profitable years, you can deduct previously disallowed losses. The system prevents losses but requires patience to use them.

Reasonable Salary: The Hidden Distribution Tax Issue

S-Corp owners cannot simply distribute all company profits as distributions. According to the IRS safe harbor rules, owners must pay themselves a reasonable salary for work they perform. This is one of the most misunderstood rules in S-Corp taxation.

Reasonable salary means what the position would earn in the marketplace if someone else filled the role. A software developer who owns an S-Corp development company must pay themselves the salary a non-owner developer would earn in the same market. The IRS does not allow owners to pay themselves $10,000 salary and take $200,000 distributions if the work justifies higher compensation.

The IRS audits this constantly. Owners who take minimal salaries and huge distributions face payroll tax reclassification. This means the IRS reclassifies distributions as wages, which triggers both income tax and self-employment tax on the amount. Self-employment tax runs roughly 15.3%, making this a costly mistake. Back taxes, penalties, and interest can add up quickly.

Your reasonable salary requirement affects basis calculation because salary payments do not affect basis at all. Only distributions and earnings affect basis. If you take $100,000 salary and the company earns $50,000 profit, your basis increases by only $50,000 from earnings. The salary payment comes from company earnings but does not touch basis.

Tracking Basis Throughout Multiple Tax Years

Basis tracking becomes complex in year two and beyond. You must monitor basis changes year-to-year to know when distributions trigger taxes. The company should provide you with basis statements, though many do not. Responsible owners request basis reconciliation from their accountants.

Start with beginning basis. Add your share of company net income. Add any additional investments you made. Subtract distributions you received. Subtract your share of company losses. The result is your ending basis, which becomes the beginning basis for next year. This annual rollover means errors compound over time if not caught.

Keep personal records of all distributions received. Ask for year-end basis statements from your accountant showing beginning basis, year additions, distributions, losses, and ending basis. Verify the math yourself. Many disputes with the IRS start because owners did not track basis carefully over multiple years. A simple spreadsheet prevents massive headaches later.

Real-World Examples: Putting It All Together

Example One: Simple Distribution With Positive Basis

Sarah owns 100% of a consulting S-Corp. She invested $200,000 in stock three years ago. Year one earnings added $80,000 to basis, making it $280,000. Year two earnings added $75,000, bringing basis to $355,000. Year three earnings added $90,000, bringing basis to $445,000. In year three, Sarah took a $150,000 distribution.

The entire $150,000 comes out tax-free because her basis of $445,000 far exceeds the distribution amount. Her ending basis becomes $295,000. She receives a Schedule K-1 showing her share of income, but no distribution creates any taxable event on her personal return beyond the income already reported from company earnings.

Example Two: Distribution That Exceeds Basis

Marcus owns 100% of a real estate brokerage S-Corp. His original investment was $100,000. Over five years, company earnings totaled $180,000, bringing his basis to $280,000. He took distributions of $150,000 in year two and another $150,000 in year four, dropping his basis to $130,000 going into year five. The company had a break-even year five but distributed $200,000 to Marcus.

Of the $200,000 distribution, $130,000 comes out tax-free. The excess $70,000 triggers capital gains tax at his long-term rate (likely 15%). Marcus must report the $70,000 as long-term capital gain on his Schedule D (Capital Gains and Losses). His basis after this distribution drops to zero. If he takes further distributions in year six, all of them become taxable until basis increases again.

Example Three: Partners With Different Basis Amounts

Two partners, Jennifer and David, own equal shares of a marketing S-Corp. Jennifer invested $75,000 four years ago. Company profits over four years totaled $240,000. Jennifer’s share is $120,000, bringing her basis to $195,000. David invested $75,000 but joined two years later. His share of profits is $60,000, bringing his basis to $135,000.

The company distributes $160,000 to each partner. Jennifer takes it completely tax-free because $160,000 stays within her $195,000 basis. David must pay tax on $25,000 ($160,000 distribution minus $135,000 basis). The difference in investment timing and profit participation created different basis amounts, leading to different tax outcomes for identical distributions. Jennifer’s basis drops to $35,000, while David’s drops to zero.

Example Four: Losses Limiting Deductions Due to Basis Constraints

Kevin owns 75% of a restaurant S-Corp. He invested $120,000 and earned $50,000 in profits over three years, bringing his basis to $170,000. Year four brought bad luck. The company lost $300,000. Kevin’s share of the loss is $225,000 (75% of $300,000). However, he can only deduct $170,000 because basis cannot go negative.

The $55,000 excess loss carries forward to year five. In year five, if the company earns $80,000 profit, Kevin’s share is $60,000. His basis increases to $60,000 (from zero, plus his share of profit). Now he can deduct the $55,000 carryforward loss, reducing his year five basis by that amount. This creates $5,000 basis available for distributions or future loss deductions.

Mistakes to Avoid When Taking Distributions

Mistake One: Ignoring Basis and Assuming All Distributions Are Tax-Free

Owners sometimes believe distributions never create taxes because the money already earned income tax. This is wrong. Distributions above basis trigger capital gains tax. Ignoring your basis until the IRS audits you creates penalties and back-tax bills. Track basis every single year.

Mistake Two: Confusing Salary With Distributions

The IRS requires reasonable salary payments separate from distributions. Many owners try to minimize salary to reduce payroll taxes. The IRS fights back by reclassifying distributions as wage payments and imposing both income and self-employment taxes retroactively. Taking $50,000 salary and $250,000 in distributions as an owner gets scrutinized heavily.

Mistake Three: Not Tracking Debt Basis Separately

Shareholder loans create debt basis, which remains separate from stock basis. Distributions do not reduce debt basis. Some owners forget this and incorrectly assume distributions reduce their ability to deduct losses on future debt. This creates phantom basis problems and false loss limitation calculations.

Mistake Four: Distributing Money in the Wrong Year

Taking distributions in December instead of January matters for basis timing. Distributions reduce basis immediately when received. If you take a large December distribution, your basis for that year shrinks. If the company has unexpected losses that year, you might not be able to deduct all of them because basis is too low. Plan distribution timing carefully with your accountant.

Mistake Five: Not Getting Written Documentation of Distribution Elections

The company must formally declare distributions through board meetings or shareholder agreements. Some owners simply take money from the company bank account assuming it counts as a distribution. The IRS treats undocumented money transfers as something else—perhaps loans, perhaps unauthorized removals. Always document distributions formally.

Do’s and Don’ts for S-Corp Distribution Management

Action	Reason
DO request a basis statement from your accountant annually	You need accurate beginning basis for each year to calculate tax liability on distributions
DO document all distributions through formal company resolutions	Written proof protects you during audits and prevents disputes about distribution classification
DO take reasonable salary payments for services you perform	The IRS expects owner-employees to pay themselves market wages separate from distributions
DO coordinate distribution timing with your accountant carefully	Taking distributions at the right time maximizes basis and minimizes loss limitation problems
DO track debt basis separately from stock basis	Shareholder loans create debt basis that never gets reduced by distributions taken
DO keep annual basis reconciliation documents from your accountant	Annual documentation prevents compounding errors and protects you during IRS examination
DO verify your company tracks AAA if converted from C-Corp	Former C-Corp companies must track AAA and E&P separately for correct distribution tax treatment
DO ask your accountant about your specific state tax rules	State tax treatment varies significantly and may create additional tax liability on distributions
DON’T assume distributions never create taxes	Distributions above basis trigger capital gains tax even when company income already generated tax
DON’T take distributions before confirming your basis amount	Taking distributions blindly leads to surprise capital gains taxes and penalty assessments
DON’T skip payroll tax documentation for shareholder loans	Loans must be properly documented or the IRS will reclassify them as distributions or contributions
DON’T mix personal and business accounts for distribution withdrawals	Commingled funds create audit risk and make distributions harder to document and prove
DON’T overlook state tax consequences of distributions taken	Some states tax distributions differently than federal law, creating additional state tax bills
DON’T ignore AAA requirements if your company was previously a C-Corp	AAA order rules affect which account distributions pull from, changing your tax treatment
DON’T distribute all company profits without maintaining reasonable basis	Large distributions that eliminate basis create future problems when losses cannot be deducted

Pros and Cons of S-Corp Distributions vs. Alternative Structures

Aspect	Benefit (+) or Drawback (-)
Tax treatment of distributions allows potential tax-free amounts	+ Distributions avoid double taxation that C-Corporations face
Must track basis amount carefully and annually	– Owners must monitor basis to avoid surprise tax bills
Income passes through to owners only once	+ Avoids corporate-level tax that reduces what shareholders receive
Must pay market-rate wages as reasonable salary	– Cannot minimize salaries to maximize distribution tax benefits
Loss deductions limited to basis investment amount	– Cannot deduct losses exceeding actual investment in poor years
IRS enforces reasonable salary requirements strictly	– Violations trigger payroll tax reclassification and penalty assessments
Owners control cash flow and distribution timing	+ Can take distributions in any amounts unlike corporate dividend requirements
AAA ordering rules protect favorable tax treatment	+ Distributions pull from AAA first when basis is limited
Distribution flexibility provides owner cash management options	+ Distributions work independently without shareholder voting requirements
Complex basis tracking creates administrative burden	– Multiple years of incorrect basis calculations compound tax problems

How State Taxes Affect S-Corp Distributions

Each state handles S-Corp distribution taxation differently. Some states follow federal tax treatment exactly. Others impose additional taxes on distributions. A few states do not tax S-Corp income at all but still tax distributions. Understanding your specific state matters.

High-income states like California and New York tax distributions as ordinary income to residents. If you live in California and take a $200,000 distribution from an S-Corp, you might owe California income tax on that amount, even if it comes out completely tax-free federally. State rates reach as high as 13.3% in California, making state tax treatment crucial to overall tax planning.

Some states like Texas and Florida do not impose income tax but may still require S-Corp returns. Distributions in these states typically avoid both state and federal tax if they fall within basis. However, you must verify your specific state’s S-Corp treatment because rules vary significantly. One state’s distribution might be completely tax-free while another imposes significant tax.

Professional guidance matters for multi-state S-Corp owners. If you operate in multiple states or have owners in different states, tax treatment becomes complex. State distribution rules, state tax residency rules, and nexus requirements all affect what you owe. Consulting a CPA familiar with your specific states prevents costly mistakes.

When Distributions Become Problematic: Red Flags for Audits

The IRS watches S-Corp distributions carefully. Certain patterns trigger automatic audit flags. Taking extremely small salaries paired with huge distributions catches the IRS’s attention immediately. If you own an S-Corp, work full-time in the business, but pay yourself $25,000 salary while taking $500,000 in distributions, expect scrutiny.

Related-party transactions involving distributions also draw audit interest. If you borrow money from the company and later take a distribution, the IRS examines whether the loan was real or disguised. Circular arrangements where you borrow, then distribute, then repay create audit red flags. Keep loans and distributions completely separate and properly documented.

Distributions that far exceed industry norms for similar companies draw attention. If your industry typically distributes 40% of profits and you distribute 90%, the IRS may question whether distributions include hidden compensation for services or disguised expenses. Comparative industry analysis helps identify when your distribution pattern stands out.

Timing distributions immediately before loan forgiveness or before the company takes write-offs looks suspicious. The IRS looks for owners manipulating distribution timing to convert wages to capital gains or avoid payroll taxes. Take distributions as part of normal business practice, not as tax-avoidance strategy.

The Role of Form 1120-S in Distribution Taxation

The Form 1120-S is the official S-Corporation tax return. This return reports all company income, expenses, and distributions for the year. Schedule K-1 attachments break down each shareholder’s individual share of income, losses, credits, and distribution amounts.

The company must file Form 1120-S by March 15th (or six months later with extension). Your portion of company income appears on the form whether or not the company distributes money. This is crucial: you pay tax on earnings even if distributions do not cover them. The company might earn $100,000, but you get a $50,000 distribution. You still owe tax on your share of the $100,000 earnings.

Schedule K-1 shows your individual share of company income, credits, and losses. It also shows distributions received. You use Schedule K-1 information to prepare your personal tax return. The company sends you a copy by March 15th. If you do not receive it on time, contact the company or your accountant because you need it to file your personal return.

The company is responsible for calculating and reporting distributions correctly. If the company makes mistakes on Form 1120-S, those errors flow to your personal return. When the IRS audits the S-Corp, they often examine whether distributions match what the form reports. Mismatches create additional tax bills and penalties.

Important IRS Guidance and Regulations on Distributions

The IRS S-Corporation page provides official guidance on distribution rules. IRS Publication 589 covers S-Corporation distributions specifically. Revenue Rulings and Private Letter Rulings also provide guidance on specific distribution situations.

Treasury Regulation 1.1368-1 governs AAA ordering rules for distributions. This regulation explains how distributions pull from different accounts and when distributions become taxable. Understanding this regulation helps explain why the order of accounts matters and how it affects your tax outcome.

IRS Publication 15-A covers guidance on reasonable salaries for S-Corp shareholder-employees. This publication discusses IRS enforcement expectations for reasonable compensation. Many audit challenges focus on whether owners met this reasonable salary requirement.

Court cases also shape distribution law. The Supreme Court and lower federal courts have issued rulings affecting S-Corp distributions. Understanding case law helps predict how the IRS might treat unusual distribution situations. Your accountant or tax attorney can reference specific cases that apply to your situation.

FAQs: Your Distribution Questions Answered

Q: If I have positive basis, can I always take distributions completely tax-free?

A: Yes. Distributions up to your basis amount create zero federal tax liability. Only distributions exceeding basis trigger capital gains tax on the excess portion.

Q: Does the company pay tax on distributions?

A: No. S-Corporations do not pay tax on distributions. Tax liability falls entirely on shareholders receiving the distributions based on their personal situation and basis.

Q: What happens if I take a distribution and then the company has losses?

A: Losses reduce basis going forward. If you took a $100,000 distribution reducing your basis to $50,000, and the company then loses $80,000, you can only deduct $50,000 of losses. The remaining $30,000 carries forward.

Q: Can I deduct losses exceeding my investment in the company?

A: No. Loss deductions cannot exceed your basis amount (stock basis plus any debt basis). Excess losses carry forward to future years when your basis increases.

Q: Does my state tax S-Corp distributions differently than federal?

A: Possibly. Each state sets its own tax rules. Some states follow federal treatment. Others tax distributions as ordinary income or do not tax them at all. Verify your specific state’s rules.

Q: If I paid reasonable salary, can I take unlimited distributions?

A: No. Reasonable salary is separate from distributions. Even with market-rate salary, distributions still reduce basis and may trigger taxes above basis. The company must earn enough to support both.

Q: What documents should I keep to prove distributions?

A: Keep board resolutions, shareholder agreements, and bank statements. Documentation proves distributions were formal, authorized decisions. Bank statements show when money actually left the company account.

Q: Can I distribute property instead of cash?

A: Yes, with care. Distributions of property trigger basis reduction and possible gain or loss. The property value on the distribution date becomes the basis reduction amount. Consult your accountant before distributing property.

Q: How do I calculate my basis if I bought into an existing S-Corp?

A: Your basis starts with your purchase price. Add your share of profits after purchase. Subtract distributions received. Request a basis statement from the company accountant showing your beginning basis upon entry.

Q: Does a distribution reduce my basis if the company has losses?

A: Yes. Distributions reduce basis regardless of company profitability. However, losses already reduced basis for that year. The company processes losses and distributions in Schedule K-1 order, which affects your final basis.

Q: Can I borrow money from my S-Corp instead of taking distributions?

A: Yes, if properly documented. Loans create debt basis and do not trigger immediate tax. However, unpaid loans may be reclassified as distributions or excess contributions. The loan must be real with a proper note and repayment schedule.

Q: What if my S-Corp was previously a C-Corporation?

A: Watch the E&P account carefully. Distributions pull from AAA first (tax-free), then E&P (taxable as dividends). Verify the company tracked these accounts correctly during the conversion to avoid incorrect basis calculations.

Q: How does a distribution affect my ability to claim business losses?

A: Distributions reduce basis, which limits loss deductions. Large distributions can drop basis below your loss share amount. When that happens, you cannot deduct the full loss and must carry excess forward to future years.

Q: Does taking a distribution require company approval?

A: Formal distributions should. Board resolutions or shareholder agreements should authorize distributions. Informal cash withdrawals without documentation create audit risk and may be treated as something other than authorized distributions.

Q: What is the difference between a distribution and a salary?

A: Salaries trigger payroll taxes. Distributions do not. Salaries are payment for services. Distributions are returns of profits. The IRS requires reasonable salary before distributions to prevent tax manipulation.

Q: Can distributions be made at any time during the year?

A: Yes, generally. Companies can distribute money throughout the year or in lump sums. However, basis is calculated annually as of December 31st. Distributions taken before year-end may affect loss deduction limits.

Q: What if the company distributes more than earnings?

A: It reduces basis from prior year profits. Distributions pull from cumulative profits first (AAA), then from shareholder basis. Only after basis runs out do distributions trigger capital gains tax.

Q: Are retirement plan distributions from S-Corp owners taxable?

A: No, those are different. Retirement plan distributions follow retirement account rules, not S-Corp distribution rules. S-Corp distributions are separate from qualified retirement plan distributions.

Q: What happens to distributions if an owner dies?

A: Heirs inherit basis at fair market value. When ownership transfers at death, heirs receive stepped-up basis equal to the date-of-death value. Future distributions receive favorable basis treatment.