How do S Corporations generally handle taxation and distribution of profits?

Question

I know that in S Corporations profits are distributed to the shareholders and the shareholders pay taxes on them. This suggests that all profits need to be distributed so the goverment can get its money but obviously you don't want to deplete the corporations bank account and start the new year with nothing so how do S Corportions handle this?

Answer 1

Actual profits & losses & cash distributions are two different things. Shareholder of S corp has to pay taxes on all of the P&L earned in the year earned no matter whether the actual CASH is distributed or not. That means, iif you distibute cash out in a loss year and you have enough basis, no taxes is due. Or, taxes will be due if you have profits even no distibrutions have been made.

Answer 2

S-Corporations are taxed as a partnership. Each year a form K-1 is issued to all shareholders for the profit or loss. Keep in mind that this is issued whether or not any money is given to shareholders. S stands for sub-chapter s. It is only a IRS taxation option. In reality an legally, it is a full fledged corporation with all the rights that go with that. The K-1 profit or loss that is given to each shareholder is reported on their form 1040 personal income tax report. Hope this helps

Answer 3

The key thing about S Corps is that you CAN distribute profits and losses directly to the shareholder...You don't have to but you can.

You can have the company retain everything and distribute nothing...But the idea is that in the beginning there are mostly losses and that helps the taxation of the early shareholders...It also avoids the double taxation that occurs.