1120S and Dividends

[cathe]

An 1120S ditributes a dividend and produces a 1099-DIV to an owner shareholder. Where on the 1120S is that dividend delt with? The company doesn't have that money anymore, doesn't it need to show as an expense somewhere?

Cathe

[Bees Knees]

The only reason an S corporation would distribute a dividend is because the S corporation was at one time a C corporation with earnings and profits, or it acquired an interest or assets of a C corporation with earnings and profits. If the corporation has always been an S corporation, then it cannot distribute any dividends. Distributions out of S corporation accumulated earnings are simply reported as distributions to the shareholder on Schedule K and K-1, and the shareholder determines at the shareholder level whether he/she has basis left to avoid paying tax on the distribution. No deduction is taken on the S corporation return.

If the distribution is in fact a dividend (meaning it came from C corporation earnings and profits), then the S corporation must issue the shareholder a 1099-DIV reporting that amount as taxable income to the shareholder. There is no deduction on the S corporation return because dividends distributed are not deductible by corporations. Instead, the retained earnings account that tracks C corporation E&P is reduced by the distribution on the corporation balance sheet.

[Roberts]

The only reason an S corporation would distribute a dividend is because the S corporation was at one time a C corporation with earnings and profits, or it acquired an interest or assets of a C corporation with earnings and profits. If the corporation has always been an S corporation, then it cannot distribute any dividends. Distributions out of S corporation accumulated earnings are simply reported as distributions to the shareholder on Schedule K and K-1, and the shareholder determines at the shareholder level whether he/she has basis left to avoid paying tax on the distribution. No deduction is taken on the S corporation return.

If the distribution is in fact a dividend (meaning it came from C corporation earnings and profits), then the S corporation must issue the shareholder a 1099-DIV reporting that amount as taxable income to the shareholder. There is no deduction on the S corporation return because dividends distributed are not deductible by corporations. Instead, the retained earnings account that tracks C corporation E&P is reduced by the distribution on the corporation balance sheet.

If you didn't cut and paste this - that's an impressive explanation.

[cathe]

Thanks!

Yes, that is an awesome answer! Thanks, that has bugged me for years. Thankfully I have never had to deal with it with my few S Corps, but I was always waiting for it to happen. I will print this out.

Cathe

[geekgirldany]

At my first job in preparing taxes, my employer would often do 1099-Div for S-Corps when there was distributions. After I started learning a little more, I finally convenience him that he did not have to do this if the corp had never been a C-Corp. He also never did balance sheets for S-Corps either So I had to relearn alot when I started my biz.

[Bees Knees]

At my first job in preparing taxes, my employer would often do 1099-Div for S-Corps when there was distributions.

If your employer issued a 1099-DIV for S corp distributions (profits earned while the corporation was an S corp), then he caused the shareholder to be double taxed: Once when the profits were passed through to the shareholder via the K-1, and once when the profits were distributed to the shareholder using a 1099-DIV.