Discussion:Distribution greater than AAA, so Cap Gain but another Question

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Discussion Forum Index --> Tax Questions --> Distribution greater than AAA, so Cap Gain but another Question

Stephanie1 (talk|edits) said:

24 June 2006
Can anyone help me out here because I am second guessing myself:

S-Corp shareholder took a distribution in excess of AAA. Here are the details:

Ordinary Income from S-Corp was $ 3,500 S-Corp is partner in several LLC's. Rental RE Income from LLC k-1's 5,000 Section 1231 gain from LLC's k-1's 14,000 Unrecaptured Section 1250 gain from LLC's k-1's 7,000 S-Corp Non-Deductible Expenses (50% M & E, etc.) 1,000 Distribution taken by shareholder 80,000

So to figure out the amount of the distribution that is taxable as a capital gain, would I take:

Ordinary Income from S-Corp was $ 3,500 S-Corp is partner in several LLC's. Rental RE Income from LLC k-1's 5,000 Section 1231 gain from LLC's k-1's 14,000 Unrecaptured Section 1250 gain from LLC's k-1's 7,000 S-Corp Non-Deductible Expenses (50% M & E, etc.) (1,000) Total $28,500

Less Distribution $(80,000) 

                                                                      $51,500

Would the $51,500 be the capital gain or do I leave out the Unrecaptured Section 1250 gain of $7,000 from the equation above?

I appreciate any help on this! Return has obviously been extended, but need to get it out ASAP

Scot1 (talk|edits) said:

24 June 2006
S Corp distributions in excess of the shareholders basis in the S Corp (AAA does not often equal basis) are taxable as a capital gain. Basis includes original capitalization by the shareholder + share of income - share of losses through out the years + any direct shareholder loans made to the S Corp. If there are direct SH loans to the S Corp, treat the distribution as first a repayment of the loan, then as a distribution.

Stephanie1 (talk|edits) said:

24 June 2006
Would the Unrecaptured Section 1250 gain be considered in share of income?

Thanks!

Riley2 (talk|edits) said:

24 June 2006
First of all, you need to determine beginning stock basis. If there is only one shareholder, AAA may be an approximate indicator of basis – but not always. Since I don’t know what beginning basis is, I will assume that it is zero for purposes of illustration, and I will also assume that the shareholder has no loans to the corporation.


Assuming that beginning stock basis was zero, the ordering rules require us to increase this amount by the shareholder’s share of income items before calculating distributions in excess of basis. For example, if the beginning basis of the stock is zero, we would add to that amount income items of $22,500, equaling $22,500. Thus, the distributions in excess of basis in this example would be $80,000 minus $22,500, resulting in a capital gain of $57,500. The nondeductible expenses of $1,000 will not enter into the formula this year. The $7,000 of unrecaptured 1250 gain is aleady included in the 1231 gain.

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