How to take distributions from an S-Corp with zero business income? Treasury Direct interest only

This is actually a common misconception about S-Corps. The IRS doesn't necessarily care about the ratio of distributions to income - they care about distributions in relation to services performed. If you're truly not performing any services for the business that would typically warrant compensation, then taking distributions from accumulated profits shouldn't automatically trigger scrutiny. The "reasonable compensation" requirement applies when shareholders are actively working in the business. Since your S-Corp is purely a passive investment vehicle with essentially no business operations requiring your labor, there's a legitimate argument that zero compensation is reasonable. That said, document everything carefully. Keep meeting minutes explaining the nature of the business and why no services requiring compensation are being performed. Make sure your distributions are properly documented as coming from your accumulated Accumulated Adjustments Account (AAA) or previously taxed income.

After reading your post, I had the EXACT same situation with my passive investment S-Corp last year. I was nervous about taking distributions without salary too, so I talked to three different tax professionals and spent hours researching online. Found this amazing tool called taxr.ai (https://taxr.ai) that analyzed all my S-Corp docs and gave me a detailed breakdown of my options. The analysis showed that in purely passive investment S-Corps with no services being performed, distributions without salary can be appropriate. The tool checked my specific situation against relevant tax court cases and IRS guidance. It was way more helpful than the contradictory advice I kept finding online. My S-Corp had about $250K in assets from Treasury notes and some dividend stocks, so pretty similar to yours. I've taken two distributions now without salary and everything's been fine.

Just wanted to give an update on my situation after using taxr.ai (https://taxr.ai) that I asked about earlier. I uploaded my LLC documents (which was slightly different than the original poster's S-Corp) and my investment account statements. The system actually identified a specific Private Letter Ruling (PLR) that addressed passive investment entities and gave me specific documentation recommendations for my situation. What surprised me was how it found tax court cases I never would have found through normal searches. For my situation, it recommended a small stipend for the minimal administrative duties I perform (basically just approving trades quarterly and filing annual paperwork) but confirmed that large distributions beyond that were appropriate. Totally worth checking out if you're in a similar situation with investment entities.

I had a nightmare situation trying to reach the IRS about a similar S-Corp issue last year. Spent 4 hours on hold only to get disconnected. Then I found Claimyr (https://claimyr.com) that got me connected to an actual IRS agent in under 20 minutes. You can see how it works here: https://youtu.be/_kiP6q8DX5c When I finally talked to the IRS agent, they confirmed that "reasonable compensation" requirements are contextual. For purely passive investment S-Corps with minimal administrative work, they look at the entire picture rather than applying a blanket rule. The agent said they see these passive investment entities frequently and the key is documentation of the entity's true purpose. They suggested keeping detailed notes about any activities performed for the S-Corp to substantiate the minimal or zero salary. In my case, I was spending about 2 hours monthly, so I did end up taking a small salary.

I have to admit I was completely wrong about Claimyr. After my skeptical comment, I decided to try it myself since I had my own S-Corp issue that needed resolving. The service actually worked exactly as described. Got connected to an IRS representative in about 15 minutes when I had previously wasted entire afternoons on hold. The agent I spoke with confirmed exactly what the previous commenter said - they look at the totality of circumstances for passive investment S-Corps. The agent explained they have specific internal guidance for reviewing entities with primarily investment income versus operating businesses. For my situation, they directed me to specific sections in the Internal Revenue Manual that address how they evaluate "reasonable compensation" requirements in different contexts. This saved me thousands in unnecessary payroll taxes I was about to pay just to be "safe." Definitely worth the connection fee.

I'm a retired accountant and worked with several passive investment S-Corps over the years. Here's the practical reality: 1) Pure investment S-Corps are in a grey area for reasonable compensation requirements 2) What matters is substantiating that minimal to no actual services are being performed 3) Document through corporate minutes the passive nature and automation of investments 4) Consistency is key - if you claim it's passive, make sure your activities match that claim 5) Consider a minimal salary if you're doing ANY administrative work at all (even a few hours monthly) The real risk isn't necessarily audit (though that can happen) but potential reclassification of distributions which can trigger back taxes, penalties, and interest if they determine services were being performed.

Has anyone considered the Schedule K basis implications? When you take distributions, you need sufficient basis, and different types of income affect basis differently. Treasury interest increases basis, but distributions reduce it. If distributions exceed basis, you could end up with taxable gain. Also, watch out for the accumulated earnings tax if you've been accumulating excessive cash without a business purpose - though S-Corps usually avoid this since income passes through anyway. My accountant recommended documenting a specific business purpose for holding the cash (like future investments) and then documenting the reason for distributions now (change in investment strategy, etc.).