Discussion:S-Corp Return of Investment
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Discussion Forum Index --> Basic Tax Questions --> S-Corp Return of Investment
Discussion Forum Index --> Tax Questions --> S-Corp Return of Investment
| 16 February 2008 | |
| I am doing a return for an S-Corp and the owner wants to know if he can get a return on his investment tax free? He purchased the company for $100,000 and last year, there were $12,000 in profits last year. If he takes a $12,000 distribution, the profit from the corporation is still taxed and the basis would stay the same. Can he get a return on his investment and reduce his basis in the company without paying taxes? Or can this only be done if the corporation has enough other deductions to post a loss or if he sells the company? | |
Michaelstar (talk|edits) said: | 16 February 2008 |
| He needs to report his line 1 K-1 income as taxable.
He can take his $12k and invest in tax free muni's and have a tax free return. If income less decuctions = zero he has a zero income tax free investment! | |
RoyDaleOne (talk|edits) said: | 16 February 2008 |
| See the ordering rules on S Corp distributions. If he takes more than $12,000 it will reduce his basis in the Company's stock.
The return of capital is "tax-free". | |
| 16 February 2008 | |
| $12K ain't much, but is this mere investment or are services as officer provided by this controlling S/H? If so, is a salary being taken? | |
| 16 February 2008 | |
| He does earn a salary in addition to the $12,000. I think what he was looking ot do was to take a return of capital except how can you take out more money than the busines has | |
| 16 February 2008 | |
| If he takes out more than the $12,000, it will just reduce his basis in the stock. No tax effect otherwise. Whether the corporation has the funds to make such a distribution is another question, but any distribution of cash or property will just reduce his basis without other tax effect, until basis is reduced to zero -- after that it would be capital gain. But it's all academic if the corporation doesn't have cash or property to distribute without hampering the business.
If he's asking whether he can characterize the $12,000 as a return of capital rather than as a flowthrough of income from the S corp, the answer is no. | |
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