Are S Corporation Distributions Taxable?

"I am on payroll and receive a paycheck but also take out distributions. Are distributions from my S-Corporation taxable?" Generally, no.

Let me explain. You are taxed on the net profit of the business in any given year. Whether you take it out as distributions or leave it in the company, you will be taxed on the actual profit in the year that you made it.

Let's apply some numbers to this. Let's say in 2014 you made $100,000 income and had $75,000 in expenses. Your net profit (income minus expenses) is $25,000. This is the business income that you will be taxed on in 2014. You can leave it in the business bank account or take it out as distributions, but that $25,000 is taxable income either way.

In addition, let's say you took $15,000 out as distributions in 2014 leaving $10,000 in the business bank account.

Moving to the next year: In 2015, your net income was only $10,000. You proceeded to take out $15,000 in distributions. This is over what you made in 2015! Are you taxed on this? The answer is NO. Why not? You still have $10,000 from 2014 in "retained earnings". You have already been taxed on that number in 2014.

Instead of thinking of distributions alone, think of it more in terms of financial statements – specifically, the Profit and Loss Statement. What allows you to be able to take distributions? If it was profit, you are taxed on the actual profit in the year in which you made it. What you do with that profit is up to you. This is a complex topic that tends to confuse business owners. If you have any questions or need further guidance, it's best to contact us for help.