Discussion:Are distributions from S corp(converted from C) taxable?
From TaxAlmanac
Discussion Forum Index --> Advanced Tax Questions --> Are distributions from S corp(converted from C) taxable?
Discussion Forum Index --> Tax Questions --> Are distributions from S corp(converted from C) taxable?
| 28 May 2008 | |
| An S corp, originally a C corp, with excessive retained earnings, and stockholders have never taken out any dividends before electing as S corp. What is the tax treatment for the stockholders' distributions for these prior retained earnings? Do we need to file form 1099-DIV? | |
| 28 May 2008 | |
| Retained earnings accumulated before the S election ("Accumulated earnings and profits" is the correct terminology) remain as C corp RE, i.e., AE&P. When a distribution from RE is made subsequent to making the S election, the distribution comes first from S earnings (referred to as AAA, which stands for Accumulated Adjustment Account), then from C earnings. But you can make an election to reverse that order so that C corp RE, i.e. AE&P, are paid out ahead of AAA.
So, lets assume AE&P of $1000 prior to the election and $50 earnings the year after the election and a distribution of $75. With no election to pay out AE&P first, you have a distribution of $50 from AAA for which no 1099-DIV is required and a distribution of $25 from AE&P for which a 1099-DIV should be issued. If the distribution is under $50 and no election is made, no 1099-DIV will be necessary. | |
| 28 May 2008 | |
| I thought this treatment was available only for the first year after rescinding the S election. | |
| 28 May 2008 | |
| I agree with Jdugancpa. This is something that I have always wanted clarity on. What is the difference between Retained Earnings and Accumulated Earnings and Profits? Where is the authority that discusses this? | |
| 28 May 2008 | |
| Generally, accumulated E&P and retained earnings (or "earned surplus") are pretty much the same thing. However, there are some special tax rules for calculating E&P for purposes of determining whether a distribution to stockholders with respect to their stock is taxable to them as a dividend or a nontaxable return of capital. A C corp that has made an S election needs to determine its accumulated E&P as of the date of conversion in order to know how to treat distributions that exceed the AA account (AAA account is redundant <G>).
The rules for calculating E&P are in IRC Sec. 312 and the regulations thereunder. There is also some guidance in IRS Pub 542 and in Rev. Proc. 75-17, 1975-1 CB 344. IRS Form 5452 provides a worksheet for calculating current year E&P. In order to calculate accumulated E&P, of course, you have to go back to the beginning of the corporation and build it year by year. | |
| 28 May 2008 | |
| AAA account may be redudant but makes as much sense as calling it "accumulated adjustments" in the first place!
Marcilio, the election to distribute ae&p first is from Sect 1368(e)(3) | |
| 28 May 2008 | |
| It depends on your line of business and the types of assets you have, but AE&P can be quite different from retained earnings. Depreciation is calculated using the Alternative Depreciation System, which uses straight-line over the class life (40 years for real property). Sec. 162(g)(2) And the amount of any Section 179 deduction taken is spread over 5 years. See Sec. 312(k)(3) | |
| May 28, 2008 | |
| All that to say, yes, Waylon, pay the dividends out now before the next election when everything is back on the table and who knows what goes next. | |
