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Let's say a friend of a friend has been the sole owner and employee of an S Corp for five years. Some of the past K-1s have reported a loss, and some years have reported a profit. The business owner had filed these K-1s as part of his personal income tax and paid the appropriate income tax.

The owner has never taken a distribution from the corporation, but now realizes that he can/should. Given that some years have incurred a loss on the K-1, and some years a profit, what is the correct way to calculate the amount of money the owner can take out of the corporation as a distribution?

I recognize that distributions are based on basis, but this question is specifically asking about calculating an amount to distribute based on five years' worth of past K-1s. For example:

  • Year 1: (1000)
  • Year 2: (1000)
  • Year 3: 2000
  • Year 4: 20000
  • Year 5: 30000

Should the total sum of profit and loss be calculated, meaning the owner can receive $50,000? Or do the losses not affect this, leaving the owner to receive $52,000? (The IRS description about debt basis is confusing.)

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Phil's answer is correct. Just to add to his response:

Distributions are not taxable events -- you already paid your taxes, so you can take out $50k or $52k and the IRS is not concerned. You can simply write yourself a check for any amount you choose!

To answer your specific question: to match your K1 losses and profit exactly, you could take out $50k. But that might leave the business strapped for cash.

One way to decide how much to take out is to use your balance sheet. Look at your retained earnings (or just look at the business bank account balance), subtract however much cash you think you need to keep on hand for operations, and write yourself a check for the rest.

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Disclaimer: I'm not a tax professional, or an expert on S-Corps.

However, I do have my own S-Corp, and my decision process for taking a distribution has nothing (directly) to do with K-1 past or present, or profit and loss. If I have "extra" cash in my S-Corp, I take a distribution. Assuming I do my taxes correctly, the money will be taxed whether I take a distribution or leave it in the business.

So it really comes down to how much cash the business requires to continue operating and meeting its expenses.

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