Taxation of liquidating dividends orcad updating all instances
Because the income of S corporations is taxed to the owners when the income is earned, a mechanism is needed to ensure that the shareholder is not taxed again when the earnings are distributed.This is done through a system of rules that track and adjust the shareholder’s stock basis.Like C corporations, S corporations recognize no gain or loss on a distribution of cash to its shareholders.
The corporation will recognize gain or loss if the amount realized (or the property’s value) differs from the corporation’s basis in the distributed asset.
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.
This helps ensure that the shareholder only benefits once from reductions in income earned by the S corporation.
While there are differences, the S corporation basis system is similar to the rules that apply to partnerships.
The tax consequences of distributions by an S corporation to a shareholder depend on the shareholder’s basis in the S corporation stock.