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TaxConnections Blogger post Unless you elect different treatment, for shareholder income tax purposes S corporation distributions are applied in the following order:

1. To reduce the Accumulated Adjustment Account (AAA) determined without regard to any net negative adjustment for the tax year but not below zero.

According to IRC 1368 if distributions during the tax year exceed the AAA at the close of the tax year determined without regard to any net negative adjustment for the tax year the AAA is allocated pro rata to each distribution made during the tax year.

2. If applicable – as in pre 1983 – to reduce shareholders’ Previously Taxed Income (PTI) account for any IRC section 1375(d) distributions associated with tax imposed when passive investment income of the corporation has accumulated earnings and profits in excess of 25% of the gross receipts.

A distribution from the PTI account is tax free to the extent of a shareholder’s basis in his or her stock in the corporation. This is rarely seen any more as there are few S Corps with pre 1983 PTI remaining. Read More

Written by John Dundon | Posted in Corporate • IRS

“V” is for venture capital. Venture capital is a way for small businesses to get needed funding. Venture capital comes in many different ways, but generally a deep pocket invests a bunch of money in a growing company that needs cash to keep expanding. If that sounds like the setup of Shark Tank, well it is. Shark Tank is basically venture capitalists trying to strike a deal with promising companies.

Venture capital is really a financing mechanism but it can have some important tax ramifications. When venture capitalists contribute their money, they normally receive shares of the company in exchange. That purchase is not a taxable transaction, but down the road if they sell, it will be a capital gain or loss. Holding the shares of the company will normally entitle the venture capitalist to a share of the distributions of the business. In partnerships and S corps the distributions are a reduction of basis but not taxable. For C corps, distributions are normally dividends which are taxable when received.

Venture capital can be set up a number of ways, but understanding the tax impact is obviously very important for both the venture capitalist and the business that is seeking the investment. When you get into more complicated royalties or payback models, it’s good for both sides to have a clear understanding of the taxes so you don’t run into problems in the future.

Taxes A to Z – still randomly meandering through tax topics, but at least for 26 posts in an alphabetical order.

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Written by Advertorial | Posted in United States