How to Take Distributions from My Solo S Corp - Tax Implications?

Wait, so if I've been filing my taxes correctly for my S Corp for the past 3 years but haven't been tracking my "basis" specifically, how do I figure out what my current basis is? Is this something my accountant should know or is there a form I can look at from previous years?

Your basis can be determined by looking at your past tax returns. Start with your initial investment into the company. Then add the ordinary business income that was allocated to you on your Schedule K-1 (Form 1120-S) for each year you've owned the business. Subtract any losses, previous distributions, and nondeductible expenses. Your tax accountant should definitely be able to calculate this for you if you provide them with your past returns. They might already have this information if they've been preparing your taxes all along. Form 1120-S and the accompanying K-1s are what you'll need to review.

How exactly does this work? Do you just upload your tax returns and it figures everything out? My S Corp situation is more complicated because I've had some losses in previous years and I'm worried about accidentally taking too much out.

Sounds interesting but I'm a bit skeptical about uploading my sensitive tax documents to some random website. How secure is it? And does it actually give you advice or just do calculations you could probably do yourself with enough time?

The process is pretty straightforward - you upload your past returns and K-1s, and it analyzes everything to calculate your current basis. It handles previous losses too by properly reducing your basis as required by the tax code. It even flags potential issues like when you might be approaching the limits of your basis. Regarding security, I completely understand the concern - I was hesitant at first too. They use bank-level encryption and their privacy policy states they don't share your data. The documents are actually processed by their AI without human review. Plus, you can delete everything after getting your analysis. The real value is in the time saved and peace of mind knowing a system has methodically checked all the calculations.

Wait, this actually gets you through to the IRS? How does that even work? The wait times when I've called have been 2+ hours and I usually just give up.

Yeah right. Sounds like a scam to me. The IRS phone system is specifically designed to be impenetrable. I seriously doubt this service does anything you couldn't do yourself with enough persistence and a couple hours to waste.

It uses a system that navigates the IRS phone tree and waits on hold for you. When an actual agent comes on the line, you get a call connecting you directly to them. I was connected in about 15 minutes while working on other things instead of sitting on hold myself. The time savings was huge for me. Instead of repeatedly calling and getting disconnected or waiting for hours, I was able to get through on my first attempt. And talking to an actual IRS agent gave me definitive answers about my S corp distribution questions that online research couldn't clearly resolve. Definitely not something I could have done myself without the service - I had already tried for weeks.

Thanks for bringing this up! I did have a small operating loss in 2023 (about $15k), and I've occasionally lent money to the business for short-term cash flow needs. Would the loans I made TO the business actually increase my basis? Or are you talking about if I had borrowed FROM the business?

When you lend money TO your S Corporation, it actually increases your debt basis (which is separate from but works alongside your stock basis). This can be beneficial since distributions can come from either stock or debt basis. So yes, those loans would generally increase your overall basis assuming they're properly documented as loans. If you had borrowed FROM the business, that would be considered a distribution for tax purposes, which could reduce your basis. But it doesn't sound like that's your situation. The operating loss would have reduced your basis though, so it's good you're aware of that component.

Yes, you can take a distribution in the form of assets rather than cash. However, the company must recognize gain as if it sold the equipment at fair market value, and that gain or loss flows through to you as the shareholder. The distribution amount would be the fair market value of the equipment, which would reduce your basis accordingly.

This is really helpful advice about timing! I hadn't considered how the current year's income allocation would affect my basis calculation. Since I'm planning to take the distribution in the next month or two, should I wait until I get my K-1 for this year to know exactly where my basis stands? Or can I estimate it based on the business income so far this year? Also, you're absolutely right about the home renovation expenses - I wasn't expecting any deductions from that, but good to have it confirmed. The regular distribution schedule idea is interesting too, especially since the business has been consistently profitable. Might be worth setting up quarterly distributions to smooth out the tax impact.

You can definitely estimate your current year basis by calculating your year-to-date business income, but I'd recommend being conservative with your estimate since there could be year-end adjustments or unexpected expenses that affect the final K-1 numbers. If you're taking a $50k distribution and your estimated basis comfortably exceeds that amount, you're probably safe to proceed. The quarterly distribution approach is smart - it helps with personal cash flow planning and can prevent you from accidentally taking more than your basis in any given period. Just make sure to document everything properly and maybe set up a simple spreadsheet to track your basis changes throughout the year so you're never caught off guard. One thing I learned the hard way - if your business income varies significantly month to month (which is common in consulting), consider taking distributions after your stronger revenue months to ensure you have sufficient basis built up.

These are excellent points about loan covenants and business cash flow management! I hadn't even thought about how the distribution might affect any existing credit agreements. You're absolutely right about the cyclical nature of IT consulting - having that cash cushion has definitely helped me weather some slower periods and take advantage of opportunities when they come up. Maybe I should reconsider the amount or timing. The idea of spreading it across multiple distributions is appealing. Perhaps I could do $20k now for the most urgent renovations, then reassess in a few months based on how business is going. That would let me test the waters with the tax implications on a smaller scale while keeping more flexibility for the business. Do you know if there's a minimum time period I should wait between distributions, or any other best practices for spacing them out?