Business Owner Pays Tax On SCorporation Distribution

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Are you a business owner who operates as an S corporation? If so, you may be familiar with the concept of distribution taxes, which are additional taxes that S corp owners may have to pay on top of their regular income tax. In this video, we'll explore what distribution taxes are, why they exist, and how they can impact your bottom line.

First, let's define what we mean by distribution taxes. When an S corporation makes a profit, it can distribute that profit to its shareholders in the form of dividends. Unlike regular C corporations, which are taxed on their profits at the corporate level, S corporations are "passthrough" entities that don't pay federal income tax on their profits. Instead, the profits flow through to the shareholders, who report the income on their personal tax returns and pay taxes on it at their individual tax rates.

However, S corporation shareholders may also have to pay additional taxes on their share of the profits in the form of distribution taxes. They are intended to prevent S corporations from being used as a tax shelter for passive income.

So, why do distribution taxes exist? The idea is that if an S corporation has built up a large amount of passive income over time, such as from investments or real estate holdings, the shareholders should pay taxes on that income as if it were earned at the corporate level. This helps to level the playing field between S corporations and C corporations, which are subject to corporate income tax on their profits.

In summary, distribution taxes are an additional tax that S corporation owners may have to pay on their share of the profits, without proper tax planning. While they can add complexity to your tax situation, understanding how they work and planning for them can help you minimize their impact on your bottom line.

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0:00 Business Owner Pays Tax On SCorporation Distribution
01:40 How do SCorporation distributions work?
04:07 Taxes on the excess distribution
10:41 Loan to shareholder strategy

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