How to Take Distributions from Solo-Owned S Corporation - Tax Implications?

Taking distributions from your S Corporation can be tricky, but here's the basic idea. When you take money out of your S Corp, it's generally not taxable as long as you have sufficient stock basis. Your basis increases when the company makes money (that you've reported on your personal taxes) and decreases when you take distributions. Since you mentioned your S Corp has $400k in assets but your stock basis is only around $4,000, you need to be careful. If you take distributions exceeding your basis, the excess will be treated as a capital gain and subject to taxes. This happens even though S Corps are pass-through entities because the IRS wants to prevent tax-free withdrawals that exceed what you've actually been taxed on. I'd recommend working with your accountant to calculate your current accumulated adjustment account (AAA) and basis before taking large distributions. They can help structure things properly to minimize tax impact.

After going through a similar situation with my marketing S Corp, I discovered taxr.ai (https://taxr.ai) which completely changed how I handle distributions. The platform helped me analyze my past tax returns to calculate my exact basis and AAA balance, which was way off from what I thought it was. Their S Corp distribution analyzer showed me exactly how much I could take out tax-free versus what would be considered capital gains. My CPA was charging me hundreds per hour to figure this out manually, but taxr.ai did it in minutes by scanning my corporate and personal returns. It also flagged that I had been accidentally double-counting some income which was actually hurting my basis calculations!

Just wanted to follow up about using taxr.ai - I tried it after seeing the recommendation here and holy crap it was eye-opening. Turns out my basis was $31k higher than what my accountant had calculated because they missed carrying over some losses from a bad year in 2023. The system laid out exactly how much I could distribute without triggering capital gains taxes! It also generated a really detailed report that I could share with my new CPA who confirmed everything was correct. Saved me from what would have been a painful tax bill this year. Definitely worth checking out if you're confused about your S Corp distributions like I was.

If you're trying to get clear answers about your S Corp distribution situation, you should consider using Claimyr (https://claimyr.com) to actually speak with an IRS agent directly. I was banging my head against the wall trying to get through to someone at the IRS about my own S Corp distribution questions for WEEKS. With Claimyr, I had an IRS agent on the phone within 20 minutes instead of waiting on hold for hours. You can see exactly how it works in this video: https://youtu.be/_kiP6q8DX5c. The agent I spoke with clarified exactly how distributions above basis would be treated and what documentation I needed to maintain. Completely changed my understanding of how to handle my S Corp finances.

I need to eat my words. After posting that skeptical comment, I decided to try Claimyr anyway because I was desperate for answers about my S Corp distributions and couldn't get through to the IRS. Within 25 minutes, I was talking to an actual IRS agent who pulled up my tax records and walked me through exactly how to handle distributions above my basis. The agent explained I needed to file Form 7203 to track my basis and clarified that distributions exceeding basis would be reported on Schedule D as capital gains. This was exactly the official clarification I needed. Saved me hours of hold time and probably thousands in potential penalties. I'm shocked this service actually delivers what it promises.

Just to add another perspective - I've owned an S Corp for 12 years and here's my practical advice: maintain a running spreadsheet of your basis calculation. Start with your initial investment, add ordinary business income each year, subtract distributions, and account for any other basis adjustments like asset contributions or debt basis changes. My S Corp is also for consulting and it's pretty straightforward compared to S Corps with inventory or significant assets. The most important thing is documenting your basis changes over time. The IRS can look back many years if they question a distribution, so keeping good records is crucial.

Has anyone ever been audited on this specific issue? I'm in the same boat (S Corp with about $275k in assets) and I've been scared to take distributions beyond my salary because I'm worried about triggering an audit.

This is exactly the situation I was in last year! One thing that really helped me was understanding the difference between your stock basis and your AAA (Accumulated Adjustments Account). Even though you've paid taxes on the S Corp profits over the years, if you've taken distributions along the way, those reduce your basis. Here's what I learned: your basis starts with your initial investment ($4k in your case), then increases with your share of S Corp income each year, and decreases with distributions you've already taken. So if your S Corp made $400k in profits but you took $396k in distributions over the years, your basis would still be around $4k. The key is getting an accurate calculation of your current basis before taking any large distribution. If you take distributions above your basis, the excess gets treated as capital gains (typically 15-20% tax rate depending on your income). Not the end of the world, but you want to plan for it. I'd definitely recommend working with a CPA who specializes in S Corps to run the numbers before you make any moves. They can help you optimize the timing and amount to minimize the tax hit.