Taking distributions from my S-Corp with zero business income - just T-bill interest

The IRS expects S-Corporation owners who provide services to receive reasonable compensation before taking distributions. However, your situation is different since this is truly a passive investment vehicle with no services being performed. Since your S-Corp only generates passive investment income (interest, dividends, capital gains) and not operating business income, there's a strong argument that distributions without salary are appropriate. The reasonable compensation rule primarily applies when shareholders perform services that generate business income. One important caution: S-Corps with passive investment income exceeding 25% of gross receipts for three consecutive years risk losing their S-Corp status. Since your entity has primarily investment income, you should verify you haven't triggered this rule. I'd recommend documenting the passive nature of the entity in corporate minutes and clearly showing that no services are being performed that would require compensation. This creates a paper trail explaining why distributions without salary are appropriate in your specific situation.

I was in almost the exact same situation last year. Had an S-Corp with around $300k in assets, mostly earning interest and dividends with zero traditional business income. I was so stressed about taking distributions! I learned about a service called taxr.ai (https://taxr.ai) that helped me analyze my specific situation. They reviewed my S-Corp's tax history and investment structure, then provided a detailed explanation of how I could properly take distributions without triggering IRS issues. What I liked is they explained exactly how to document the passive nature of the business in my corporate records, which apparently is super important. They also helped me understand the right timing for distributions to minimize scrutiny. Honestly made the whole process way less stressful.

Just wanted to follow up - I decided to try taxr.ai after seeing this thread, and it was actually super helpful for my situation. I didn't realize how important it was to document everything properly before taking distributions from my investment S-Corp! The analysis showed me that I needed to be careful about the accumulated earnings in my case, but confirmed I could take distributions without salary since there was literally no service being performed. They even provided template language for my corporate minutes that specifically addressed why reasonable compensation wasn't applicable. Would definitely recommend for anyone in a similar situation!

If you do end up having issues with the IRS questioning your S-Corp distributions, don't waste time with the regular IRS phone lines. I spent WEEKS trying to get through to talk to someone about my S-Corp issue last year. I finally used a service called Claimyr (https://claimyr.com) that got me through to an actual IRS agent in about 20 minutes. You can see how it works here: https://youtu.be/_kiP6q8DX5c - basically they navigate the phone tree and wait on hold, then call you when they reach an actual person. When I finally got connected, the agent was able to explain exactly what documentation they needed to see that my S-Corp distributions were legitimate. Saved me so much stress compared to trying to interpret the vague guidance on the IRS website.

I owe everyone here an apology. I was the skeptic who doubted Claimyr would work for reaching the IRS. Well, I tried it yesterday out of desperation with my S-Corp distribution issue, and I'm still shocked it actually worked. Got connected to an IRS business tax specialist in about 35 minutes. The agent confirmed exactly what others here were saying - since my S-Corp only generates passive investment income with no services being performed, taking distributions without salary was appropriate. She even emailed me the specific IRS guidance that addresses this situation. After months of uncertainty and stress, I finally have written confirmation from the IRS about how to handle my distributions. Totally worth it.

An important thing to consider is whether your S-Corp might be subject to the excess net passive income tax. If your corporation has accumulated earnings and profits from C-Corporation years AND passive investment income exceeding 25% of gross receipts, there's a special tax. This tax is calculated as the highest corporate tax rate (currently 21%) multiplied by the excess net passive income. If this happens for three consecutive years, your S-Corp election could be terminated. Since your entity seems to have ONLY passive income, this might be a concern worth exploring before taking distributions.

Have you considered whether it might be easier to just dissolve the S-Corp entirely? Since it's just holding investments, you could potentially move everything to a single-member LLC or even just hold the investments personally. I had a similar "dormant" S-Corp I was maintaining for years and eventually realized I was spending more on annual filing fees and tax prep than I was gaining from any tax advantages.

This is a really nuanced situation that highlights an important distinction many people miss about S-Corp reasonable compensation rules. Since your entity is truly passive with no services being performed, you're likely in good shape to take distributions without salary. The key is documentation. I'd suggest drafting corporate minutes that clearly state: (1) the corporation was formed solely as a passive investment vehicle, (2) no shareholder services are performed that would warrant compensation, and (3) all income is derived from passive investments requiring no labor or expertise. One practical tip - consider taking distributions gradually rather than all at once. This creates less of a "red flag" appearance and gives you time to see how the IRS responds to your tax filings. Also, make sure your distributions don't exceed your stock basis, as anything over basis becomes taxable as capital gains. Given the complexity and the dollar amounts involved, you might want to run this by a tax professional who specializes in S-Corp issues. They can review your specific fact pattern and help ensure you're documenting everything properly to support your position if questioned.