S Corp Dividends

Today TaxMama hears from Dawn in North Carolina, who is puzzled. “My husband and I recently opened a business as a S-Corp. We each own 50% of the stock. My question is this, if we have a profit at the end of the year of $30,000 and we take cash of $10,000 from the company (in the form of dividends), won’t we be double taxed on our K-1? Once as ordinary business income of $30,000; and then as ordinary dividends of $10,000. Is there some other way to take money from the S-Corp?”

Dear Dawn,

You’re thinking of dividends from a regular C corp. Those are taxed as dividend income.

And herein lies the beauty of S-Corp. Dividends drawn from an S-Corp are
not reported as ‘dividends’ on your Schedule B.

They simply reduce the balance in your capital account.

So you will still only report the $30,000 profit that passes through to you on your K-1. You will only pay tax on that money, not on the dividends.

And remember, you’ll find answers to questions about S Corporations and all kinds of tax issues, free. Where? Where else? At TaxMama.com

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