An S corporation may make many different types of payments to shareholders: salaries, dividends, reimbursement of expenses, loan repayments and distribution of profits. Care must be taken to report each type of payment correctly on the corporation's income tax return so that the shareholder is taxed correctly, depending on the type of distribution. Shareholder distributions are properly reported as a distribution of accumulated earnings -- or capital.
S Corporation Shareholder Distributions
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S corporation shareholder distributions are payments of corporate earnings that have previously been reported as income to the shareholders. The total distributions (except for dividends) -- including cash -- made to each shareholder and reported on line 17c of Schedule K should be reported on line 16d of Form 1120S, U.S. Income Tax Return for an S Corporation.
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Individual Shareholders' Distributions
Each shareholder's distribution amount for the corporation's fiscal year should be reported on Schedule K-1, Line 16, with a reference code of "D." When the shareholder follows the IRS instructions for Schedule K-1, this amount will not flow through to his income tax return as ordinary taxable income. The shareholder is instructed to reduce his basis in the stock of the S corporation unless the distributions exceed the shareholder's basis in the stock, in which case the excess is reported on Schedule D and Form 8949 of the shareholder's individual income tax return.
Other Payments to Shareholders of S Corporations
Salaries paid to shareholders of an S corporation are reported on Form W-2, as are all wages and salaries, and on Line 7 or 8 of Form 1120S. Dividend distributions paid to shareholders of an S corporation are reported on Form 1099-DIV, and on Schedule K, Line 17c Loan repayments to shareholders are reported on Schedule K, Line 16e, and on each individual shareholder's Schedule K-1, line 16, with a reference code of "E.". Payments to shareholders for reimbursement of expenses should be reported on the appropriate expense line.
Financial Reporting
For financial reporting, S corporation distributions to shareholders should be reported in the "Equity" section of the balance sheet as a reduction of undistributed accumulated earnings.