Jeff, a 52% owner of an S corporation, has a stock basis of zero at the beginning of the year. Jeff's basis in a $10,000 loan made to the corporation and evidenced by a corporate note has been reduced to zero by pass-through losses. During the year, his net share of the corporate taxable income is $8,000 and there is no cash distribution. The corporation repays the $10,000 loan principal to Jeff. Discuss the tax effects of the distribution. Beginning Basis 0
Add Taxable Corporate Income 11,000
Basis for Distribution 11,000
Less Distributions ($11,000 or $15,000 whichever is less) 11,000
Ending Stock Basis 0
A non-dividend disruption in excess of the stock basis is to be treated and reported as capital gain on the person's personal return of the shareholder. So here there is a $11,000 of cash distributions will have no related tax effects. The remaining balance though if $4,000 (15,000-11,000) will have to be reported as capital gain and taxed accordingly.