Assume all 20 Students in Income Tax II Class at Metro get together and form an

Question

Assume all 20 Students in Income Tax II Class at Metro get together and form an S Corporation named “Taxes R US” in year 2018 and contribute $10,000 each. Assume there are no non–resident aliens in this corporation. In the year 2018, Rachel and Stephanie, start taking distributions of $5,000 each without receiving any compensation. Both-Rachel and Stephanie are shareholders and devote almost 100% of their time to this business. Please describe in detail, the tax implications on this distribution to the company and to the shareholders. Assume the business made money and has positive E&P.

Explanation / Answer

The distributions received by the shareholders and owners of S corporations are taxable in the hands of the recipient of the distributions. Even if the owners invest 100% of their time in S corporations yet the distributions will be taxable. Thus, $5,000 each received by Rachel and Stephanie will be included in the calculation of the taxable income of Rachel and Stephanie charge income tax on the amount of distributions.       

This is also because the S Corporations have made profit that the distributions will be liable to income tax.

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