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Liquidating vs nonliquidating distributions

Note that these rules differ from the ordinary rules applicable to distributions from S corporations.

The amount of the tax basis determines the tax treatment of such items as flow-through losses and corporate distributions.

Many S shareholders have two investments in the corporation - the investment in corporate stock and loans made to the corporation.

This effectively gives the shareholder a credit to apply against the earned income when it is ultimately distributed to the shareholder, ensuring that the income is only taxed once.

The shareholder’s basis is decreased (but not below zero) by the shareholder’s share of the S corporation’s items of loss and deduction, nondeductible expenses (except expenses that are not chargeable to the capital account), depletion deduction for oil and gas property, and distributions to the shareholder that are not made from accumulated earnings and profits.

In other words, if the S corporation is making a liquidating distribution, the shareholder is treated as having sold her stock for the amount of the distribution.

The shareholder will recognize gain or loss equal to the difference between the amount of the distribution and the shareholder’s basis in the S corporation stock.

The tax consequences of distributions by an S corporation to a shareholder depend on the shareholder’s basis in the S corporation stock.

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30-Mar-2020 17:44