Question

Tamra is the sole shareholder of a calendar year s corporation. this year, she received a cash distribution of $17,000. at that time, her stock basis was $15,500. corporate-level accounts at the end of the year were as follows. how will tamara be taxed on the distribution?

AAA $6000
OAA 9000
accumulated E&P $600

Answer 1

Tamra will be taxed on the $17,000 distribution she received from her S corporation based on her stock basis. Since her basis was $15,500, the amount above this ($1,500) is subject to capital gains tax. The corporate-level AAA and OAA accounts don't affect the tax treatment since there's no accumulated E&P.

Step-by-step explanation:

The question relates to how Tamra will be taxed on a distribution she received from her S corporation, where she is the sole shareholder. In tax terms, Tamra received a distribution greater than her stock basis. The key elements to consider are the Accumulated Adjustments Account (AAA), Other Adjustments Account (OAA), and Accumulated Earnings and Profits (E&P).

Tamra received a cash distribution of $17,000, but her stock basis was only $15,500. The distribution will first reduce her stock basis to zero, with the excess amount of $1,500 being treated as a capital gain.

The S corporation's corporate-level accounts at the end of the year show an AAA of $6,000 and an OAA of $9,000 with no mention of Accumulated E&P. Normally if the S corporation has accumulated E&P, distributions are taxed as dividends to the extent of these earnings and profits. However, without sufficient accumulated E&P, the excess distribution over Tamra's stock basis would be taxed as a long-term capital gain provided she held the stock for more than one year.