There are several steps involved in determining taxable income on nonliquidating distributions for an S corporation.

• Determine whether the distribution is in cash or property by determining the type of distribution. Property distributions have a simpler nature, so they require more calculations than cash distributions.
• To assess the corporation's basis in property, calculate the adjusted basis of the property in the corporation's possession.
• Calculate the fair market value (FMV) of the property before it's distributed.
• When the FMV of the property exceeds its adjusted basis, the corporation is able to calculate realized and recognized gain as if it sold the property at FMV. This profit is distributed to shareholders.
• Investors adjust their stock basis based on the distribution received. The shareholder's basis decreases when they receive cash distributions, but when they receive property distributions, there may be additional adjustments required.
• If the distribution exceeds the shareholder's stock basis, the excess will be taxable income, usually as a capital gain.

This is an explanation for a corporation distribution during non-liquidation:

• A $10,000 cash distribution was made to 'J', the stockholder of 'N' corporation, an S corporation.
• In S Corporation, "J" starts off with a beginning balance of $50,000.
• A $60,000 loss was sustained by the 'N' corporation.
• How much tax is taxable on the cash distribution to 'J' in the current year?

Answer: There is no distribution is taxable due to the following reasons:

• Before applying the loss limitation for the year, the basis adjustments made by an S corporation during the year are taken into account.
• Accordingly, distributions reduce the adjusted basis for determining the allowable loss for the year, but the loss does not reduce the adjusted basis for purposes of determining the tax status of the distributions.
• Jimmy first reduced his basis by the amount of distribution.
• The distribution is a return of capital that is not subject to tax, and he has a basis of $40,000 for purposes of the loss limitation.
• The loss deduction for the current year is limited to $40,000, out of the $60,000 loss.