Shareholder Distribution

What is a shareholder distribution?

A shareholder distribution is a payment from an S corporation to its shareholders from accumulated earnings. Unlike wages, distributions are not subject to payroll taxes. They reduce your basis in the company stock. Distributions are generally tax-free to the extent of your basis and the corporation's accumulated adjustments account. Understanding distributions helps optimize your overall tax situation.

Distribution vs salary balance

S corporation shareholders who work in the business must take reasonable salary before distributions. The IRS watches for shareholders who pay minimal salary to avoid payroll taxes. Once reasonable compensation is paid, additional profits can be distributed without employment taxes. Finding the right balance requires considering payroll tax savings against retirement contribution limits and other factors.

Timing and documentation

Distributions should be proportional to ownership unless your operating agreement allows otherwise. Document distributions with corporate resolutions. Track cumulative distributions against basis to avoid taxable events. Distributions exceeding basis are taxable as capital gains. Your accountant should maintain basis schedules showing how distributions affect your tax position each year.